Breaking the paradigm of startup investment

I’ve been writing and talking for years about how “California Capitalism” is the wrong answer for 99.9% of all startups. I expect I’ll be talking about this for at least another decade, maybe two, before the investment world comes around to see what they are doing wrong.

I don’t blame investors. They are simply stuck in a paradigm, and if you go back and learn what that term originally meant, Kuhn’s definition included the fact that people in a paradigm ignore evidence that they are wrong.

But you don’t have to. Sit back, relax, open your mind, and you can shift the paradigm with me and make a whole lot of money investing in companies that others think are “uninvestable”.

Below are recordings of two of many times I’ve talked about this topic at a conference. The first is from SOCAP 365 PNW in 2018 and the second from Sankalp Global in 2020.

Need more proof that this is how venture capitalists really think? Fred Wilson is the most prolific VC blogger, and The “Doubling Model” For Fundraising is so far inside the current paradigm it never even questions a limit to growth or a chance of failure.

Download a copy of the Revenue-based Analysis Spreadsheet, and if you have any questions either ask them below, or better-yet, ask them on Quora so that many more people will see the questions and answers.

The Book

The Next Step for Investors: Revenue-based investing explains an alternative style of investing, one that doesn’t need the exceedingly rare 10x return to make money for investors, introducing a set of structures for investing in revenues rather than exits. Structures that span debt, equity, and forms in-between. Structures that benefit both entrepreneurs and investors alike. Structures that don’t follow the historic norms, but which work for entrepreneurs and investors alike.

Slides

I’ve given this talk dozens of times around the world. Each time I add a bit more to the story. The latest version of the slides are downloadable here.

Other people, see things and . . . say ‘Why?’ . . . But I dream things that never were– and I say: ‘Why not?’ – George Bernard Shaw This has shown in my 30+ year career repeatedly. Most recently a few months ago, when pondering the “Missing Middle” of capital for startups in general, and SMEs in Africa specifically. Why? Why is it taking so long for...

Venture capital funds often tout cash-on-cash returns of 2x-3x over 10 years. That is the supposed “norm” for successful funds. But despite the industry being tracked investment by investment in detail, the industry as a whole is notoriously opaque when it comes to the returns of the funds. Thank you to Dan Gray (@credistick) who tweeted the following table, with data from 1981...

Is every investee at Africa Eats and Africa Trees an SME? Are they all small. Are any big enough to be medium? Did the biggest grow beyond SME status last year? Where are the edges to these categories? There is no global authority to answer those questions, but the EU does have a definition that they’ve not only published, but have updated at least once. The boundaries between...

Why did New York need another stock exchange in 1968? Why was the New York Stock Exchange, American Stock Exchange, and Pacific Stock Exchange insufficient? An unprecedented bull market coupled with paper-based systems. I’m in my 50’s and don’t remember “Wall Street” not having both the NYSE and NASDAQ as the two main exchanges. I am old enough to remember the AMEX...

Ars Technia published a lovely history of the changes in market leadership in computers, tables, and smartphones. My takeaway is another reminder of how much more difficult foresight is than hindsight. Especially when I was reading the prospectus to the Apple IPO, where the risks were about the TRS-80, Atari 400, Commodore PET, and other competitors of the day. We all think of Apple today as a...