Lick your finger and hold to the wind. Go on, I’ll wait. Can you feel it?! 2021 is poised to be a banner year for startups.
The venture capital world appears bullish. A report from PWC and CB Insights notes that, despite the pandemic’s climate of uncertainty, VC firms invested more in 2020 than they did the previous year – $130 billion in the U.S. alone. 2020’s record number of IPOs and the 200+ “unicorn” companies floating around out there (also a record number) is further evidence that this corner of the business world is booming. The venture community is likely eager to keep pouring fuel on this fire.
That said, getting funded as a startup is still a major undertaking – and rather less glamorous than they make it seem in the movies. If most of what you “know” about venture capital comes from pop culture, you might be surprised to learn that freestanding VC firms aren’t your only option, or that it’s not just tech startups who get to play in this space. (Not all surprises will be pleasant, though. More on that later.)
I spoke to the team behind Atlassian Ventures, the $50 million venture fund we launched in 2020, to find out how venture funding has changed recently and where it’s headed. Turns out, it’s time to leave these seven misconceptions behind.
1. The whole funding thing is bogus because the money just goes into ping-pong tables for the office and sports cars for the founders
Yeah, no. Although it’s easy to understand why many people think that. (Lookin’ at you, movies and TV.) In reality, entrepreneurs spend most of the money they raise on practical things that will help the company grow: staffing, facilities, and marketing. There’s not much more to say here. Just needed to get this one out of the way. Moving on!
2. You have to be in Silicon Valley to access the best funders
First, the whole idea of big-name funders being objectively better is false. Second, the need to be physically present in Silicon Valley was fading even before the pandemic. Now that we’ve all had a collective crash course in doing business virtually, physical location hardly matters.
Consider the fact that the U.S. ranks only tenth in terms of startups per capita, with Israel topping the list. And Canada’s startup scene powered the creation of more tech jobs last year in Toronto alone than Seattle, the Bay Area, and the Washington D.C. area (which includes super-lit Alexandria, Virginia 🔥) combined.
Even venture capital itself is becoming less concentrated in Silicon Valley. Rana Sarkar, Canada’s consul general for San Francisco and Silicon Valley, said in a recent interview that the pandemic accelerated the diffusion of venture capital by about ten years. Part of the overall trend is due to the Valley’s notoriously low cost-of-living to quality-of-life ratio, which fewer startup founders are willing to put up with.
The other factor is that both entrepreneurs and investors alike are ready to move beyond the “move fast and break things” business model that dominates Silicon Valley. The accumulated social, personal, and regulatory fallout from two decades of breakneck growth is no joke. Now the trend is toward “intentional growth”, which fits neatly with the ethos of many Millennial and Gen-Z entrepreneurs.
3. Getting funded by an “A-list” firm is key
Again, there’s no such thing as the “best” suppliers of venture capital. At the end of the day, money is money. What matters is finding a funder who is the best fit for you, both from a values perspective (they’ll occupy a seat or two on your board) and a networking/mentoring perspective. Are there people on staff you can learn from? Organizations in their circle you could partner with? These factors matter more to your success than being funded by a legendary firm.
4. Venture capital firms are the only sources of venture funding
Fun fact: plenty of companies engage in “strategic venture funding”. Dell got into the game by launching a $300 million venture fund in 2013. Slack and Salesforce also play in this space, and Atlassian joined the party in 2020 with our launch of Atlassian Ventures.
With corporate funders, the emphasis is less on turning a profit with their venture capital arms (although nobody shies away from that) and more on shaping the marketplace. In Dell’s case, they wanted to nurture a rich ecosystem of storage and data-center providers as the company transitioned from being a maker of PCs to an enterprise services company.
Similarly, Atlassian Ventures focuses on supporting cloud-based products and services – especially those that integrate with our tools – as we shift into cloud-first mode. Plus, as Chris Hecht, Atlassian’s Head of Corporate Development, puts it, “We want to elevate the entrepreneurs who are betting big on us.”
5. Working with a corporate funder will forever taint your startup
It’s easy to understand why entrepreneurs might be wary of working with a corporate venture fund. Nobody wants their startup to be “typecast” forevermore or (heaven forbid) be seen through the lens of some future scandal that rocks their corporate backer.
But Hecht has a reassuring message for founders. “The industry has evolved beyond that,” he says. Corporate venture funds are now common and well respected. If your startup is part of the company’s ecosystem of add-on vendors and service providers, working with their venture fund makes perfect sense. Even if your connection is indirect, being associated with a respected corporate funder can give your new business a credibility boost.
6. Everyone has an equal shot at getting funded
Yeah… about that. 😬 As much as the VC world has styled itself as a pure meritocracy, the reality is quite different. It does matter who you know. Your background and educational pedigree do matter. Not because there’s a deliberate effort to exclude certain groups categorically, but more because of carelessness.
VC decision-makers are overwhelmingly white, straight, cis-gendered men who came up through Ivy League schools. And like most of us, their networks skew heavily toward people who share their background. Not to mention the subconscious effect of familiarity bias when they’re listening to pitches. It all adds up to alarming statistics around women, people of color, and the LGBTQ community winning venture funding.
But there’s hope. Venture capital’s diversity problem is now widely acknowledged, and a cohort of investors are finding effective ways to address it. Salesforce and 500 Startups are two examples of organizations with funds specifically dedicated to supporting minority-founded businesses. There’s also a growing list of funders that explicitly make diversity and balanced representation part of their mission.
Make no mistake: the majority of funders still have work to do here (Atlassian included). But at least what started as a niche trend is gaining mainstream momentum.
7. Only “tech things” get venture funding
It’s true that a lot of funding goes to tech startups. Four of the top five verticals to receive investment in the final quarter of 2020 were indeed tech-related (including biotech).
But do you have Lululemon pants in your closet, Dollar Shave Club razors in your bathroom, or Annie’s Organics in your cupboards? If so, then your home is living proof that venture funds don’t shun physical goods and offline services. Startups in just about any vertical have the potential to score funding, whether they’re B2B or B2C. The key is to identify a total addressable market that gives you plenty of room to grow.