Is Venture Capital Hard (or Dead?)
Venture capital is often seen as a glamorous world of high stakes and big rewards. Usually, just high rewards. However, the reality is much grimmer. According to data from Datatistic, the odds are stacked against venture capitalists (VCs) at almost every stage of the funding process.
Before I venture into this article, I want to refer to my experience in venture finance. I started my journey into this field in 2016 as Sikhulasonke Finance, where we offered what could be labeled mezzanine finance for startups looking for pre-seed and seed capital. Out of a fund that had only R5 million, the deals between 2016 to 2018 left us with a bad unrecoverable debt book of just over R3.8 million, meaning almost 80% of the fund was wiped out. Now on with my observations from the Datatistic findings.
The Challenge of Raising Funds
The journey begins with raising capital from limited partners. The statistics reveal that only about 30% of venture capitalists succeed in this endeavor. This means that 7 out of 10 VCs fail to secure the necessary funds to move forward. The initial hurdle is daunting, reflecting the competitive and uncertain nature of the industry. According to a 2024 report by AVCA (www.avca.org) venture capital contracted by 33% in 2022 and 38% in 2023.
In a LinkedIn post from the account Venture Capital, a newsletter dedicated to all things venture finance, the founder notes that “Venture capital is confronting difficulties in securing funds, marking a departure from the “megafund” era and predicting a deceleration in startup financing in the foreseeable future”. He further states in his article that the reason for this declining appetite by limited partners of all kinds from pension funds to high-net individuals to write out checks to VCs with a pretty pitch deck and awesome Excel sheets is because, according to another research platform Pitchbook, the “lack of exits or sales”. Meaning, that the investments backed by VCs do not reach the type of maturity that allows limited partners and their general partners to cash out. In my next article, I will get into why the exit or sale model for traditional VCs has reached its sell-by date and if it is the only milestone by which profitability is realized then there will be even less and less investment in this sector and even fewer exits via sale or listing.
The Struggle for Successful Exits
For those who do manage to raise a fund, the path to a successful exit is even narrower. Of the 30% who secure funding, a staggering 80% will not achieve a profitable exit. This translates to only about 6% of all venture capitalists ultimately seeing a successful return on their investments. It is clear to see that given these odds, why more and more investors both individual and institutional would be unwilling to get involved in the startup finance scene. Perhaps we have had, at least for our generation, enough tech startups founded, and the next logical thing to do, is to mentor those we’ve already funded into growth, instead of starting new but REALLY similar ones, differentiated only by a logo. Perhaps we are experiencing a VC bubble. The amounts raised, in their billions, were not based on solid business cases but hype and riding on a train that promised its investors, that even if it does not reach its destination, at least the ride will be memorable. We call that a “bubble’. An incident or occurrence that is not likely to last (meaning not sustainable) because it is not based on, reality, facts, solid hardcore actionable business facts.
The Harsh Reality
These figures underscore the harsh reality of venture capital: it’s a field where failure is more common than success. While stories of successful startups and lucrative exits often make headlines, they represent only a small fraction of the industry. In Africa and South Africa where I am based, we are experiencing an appreciation of venture capital. While we are still figuring out how to use this alternative funding model for our unique situation properly, we are encouraged that we have not experienced a boom. We are fortunate because that means we will not have a situation where we are taking the World’s Open Checkbook without an understanding of the implications of the failures that must surely accompany every entrepreneurial endeavor.
For African-based VCs, it would be prudent and wise not to accept every check offer without a solid business case. It is unethical and indeed unAfrican to take other people’s money with no intention of paying it back. This is what has caused many limited partners to turn away from VCs. Too many people with smart talk, fancy degrees, polished decks, and confusing Excel spreadsheets have been taking investors’ money with no intention of returning it. We will only accept foreign investors checks where we are sure that the chances of success are 68% not 32%. While venture capital can indeed lead to significant rewards, it is fraught with challenges and high failure rates. Aspiring venture capitalists, especially in Africa, must be prepared for a tough journey, marked by more setbacks than triumphs.
