Venture Fundable Businesses

In Venture Capital, it’s about the big winners. And almost always usually winners take all markets where the two leaders have most of the market share in the category. I’ve met thousands of founders over the 7–8 years, evaluated countless businesses and reality is most of these startups are probably not VC fundable business models. I learned this the hard way in my first 1.5 years as a VC. I found out that it’s not just a market size issue but a business model one too. Ie. Venture scale.

There are 4 business models at a broad level that could be Venture fundable. I fully attribute this framework to my friend and investor James Currier over at NFX, a top tier VC firm.

  1. Embed Model: This business model is almost always in the enterprise software space. You build a sales team or figure out an effective Product Led Growth motion, sell into the Fortune 500 and lock them in. Once you are locked in, it’s very hard to rip your technology out. Some examples are SAP, Salesforce, Adobe or really any major Enterprise software company
  2. NetWork Effects: Usually platform driven. At a basic level, the more buyers you have, the more sellers you get. The more sellers you have, the more buyers you get. A virtually hard to break virtuous cycle once you get going. Some examples are Craigslist, EBay, Facebook, Google.
  3. Economies of Scale: Growing to a stage when you can use your mass size and volume for discounts and scale to outgrow. Amazon is to me the most obvious example here.
  4. Brand: Building a brand to distinguish yourself and be the main choice of your buyer. DTC brands like Warby Parker are recent examples. Older examples could be IBM.

I actually think it’s really only the Embed Model and Network Effects that truly are Venture fundable where first mover advantage supercharged by VC $$ gets you lock in of customers. Yes, Brand and Economies of Scale are very powerful but can be replicated or decay faster than Embed and Network Effects.

You can even point to some examples that exemplify most if not all of these attributes. Amazon: they have Amazon Web Services which exemplifies Embed model but they also have network effects through their 3rd party selling platform, Economies of scale from their logistics and buying power, and through all of this, their immense Brand strength.

I’ve probably oversimplified these concepts but i think they are illustrative of what a venture capitalist (should) look for. I think any investor who does not look at startups in this lens is making a big mistake. And I also believe this is a good guide for founders trying to decide whether VC is the right path for them.

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Ever curious: Tsundoku, Reader, Aspiring Shokunin, World traveller, Investor & Tech/Media exec interested in almost everything! www.marvinliao.com

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