Do you match the pattern?
On paper, venture capital is largely agnostic about who generates the returns LPs are looking for. In practice, non-pattern-matching founders have always had to hustle harder and struggle longer to turn their pitch decks into dealbooks. By the looks of it, 2024 is the year these founders will truly need to up the ante if they are going to turn the odds in their favor.
The venture capital deceleration reached new lows in 2023 with deal counts dropping for the third consecutive year and deal values falling to their lowest level in four years in Q4/2023. The market has not been this skewed for as long as NVCA has kept track of the metric, leaving little room for error for the hopeful entrepreneurs.
This is particularly true for founders that fail to match the pattern, whether that be due to gender, race, age or any other feature of the founding team that doesn’t gel with what VCs have seen succeed in the past.
For example, all-female teams and teams with minority members are booking fewer meetings and raising less capital than their all-male and all-majority counterparts according to DocSend’s extensive research on VC engagement with founders. In our recent conversation, Justin Izzo, DocSend’s Lead Data and Trends Analyst, noted that the gains historically underrepresented founders had made have now been largely pared away with all-female teams booking 51% fewer meetings than before.
The insights from DocSend’s research don’t stop there. VCs spent 19% less time reviewing pitch decks in 2023 than they did a year before at the pre-seed stage. When it comes to diverse teams, VCs spend more time poring over the product, market size, competition and team constitution when compared to all-white teams. With each dollar being more expensive than the one before, it's no surprise that VCs are tightening up their review. However, the topics on which they choose to spend their time is telling.
We should not hold it against VCs that they are susceptible to biases such as recency, pattern matching and stereotype threat which plague every one of us. Familiarity is a powerful catalyst for decision-making in risky and ambiguous settings, and we all lean on it when the context so requires.
However, there are distinct downsides to falling back on past patterns. As Justin Izzo noted, “some excellent ideas might fall through the cracks and when the fundraising space becomes structurally less diverse than it was it bodes ill for the number of good ideas in the marketplace.”
Indeed, the reason why we should all care about the disproportionate impact that the venture deceleration has on non-pattern-matching founders is that great founders with great ideas can come from anywhere. Many VCs themselves acknowledge the point, with some going so far as to set up dedicated funds for underrepresented founders like a16z’s Talent x Opportunity fund. That said, funds with DEI investment mandates account for 1.87% of total AUM with smaller and earlier rounds based on Diversity VC’s research, leaving the ball firmly on the founder's side of the court.
In the end, if non-pattern-matching founders hope to win on a tilted field they need to step up their game, and the below actionable insights from our conversations with VCs will help them do just that.
Persistence and Resilience Pays Off
There’s much the founders themselves can do to overcome the odds that have become stacked against them, beginning with the simple act of persistence.
In a world where even AirBnB’s founders had to persist through numerous rejections before getting their first VC check, bouncing back from rejection is paramount. This is particularly true for non-pattern-matching founders who might need to knock on more doors than others.
For those looking for proof of the power of resilience and commitment, Backstage Capital’s Arlan Hamilton offers plenty. From overcoming homelessness to building her own VC firm that has now invested in more than 200 companies, her story serves as irrefutable evidence of how far a great idea can go when it is chased with persistence.
Go To Those Who Get You
Apart from persistence, perhaps the most powerful tool non-pattern-matching founders can lean on is finding VCs who are likely to resonate with their background and experience. As Justin Izzo noted, "finding people who 'get you' and allowing weak links and early connections to snowball into larger opportunities is exactly what non-pattern-matching founders should prioritize.”
Building your network with those who appreciate unique perspectives and challenges faced by non-pattern-matching founders is not about finding an empathetic ear. Finding people who get you should be oriented around discovering allies, mentors, and other relationships upon which investment opportunities are ultimately built. Pattern-breaking VC outfits like Kapor Capital, Harlem Capital and Backstage Capital and initiatives like TxO are great places to start, with a proactive attitude to identifying investors with an eye for diversity being all that’s needed to land that one meeting that could change everything.
Showcase Traction Through Metrics
Even when you're engaging with someone who may not fully grasp your community and experience, there's a universal language that transcends all barriers: metrics.
For non-pattern-matching founders, mastering this language is crucial, not only as a means of validating your business model but also as a way of leveling the playing field. Expert VCs such as Maximilian Fleitmann argue that getting one’s financial metrics right as early as possible is exactly what non-pattern-matching founders should focus on in order to even things out.
“In 2024 the industry is swinging back to the essential economics of building a business. In the long run a business can only work if it is making money, and VCs want to see that path to profitability be fleshed out with more details than before”, Maximilian added. It’s no wonder that DocSend’s research shows that VCs spent 48% and 25% more time on business model and traction sections in 2023 than they did a year before.
As a result, understanding and confidently representing concepts such as top-line growth, annual recurring revenue, customer acquisition costs, churn rates, headcounts, and profit projections will undoubtedly be a common denominator across successful pitches in 2024.
Build A Team That Compensates For Known Weaknesses
Building a strong, cohesive team that complements the founder's strengths and compensates for their weaknesses is paramount for non-pattern-matching founders navigating the venture capital landscape.
As Jeff Erickson, Angel Investor and Director of Strategic Partnerships at Forecastr, points out, “Most investors won’t fund a solo-entrepreneur. Instead what they want to see is founders building and managing a team that creates a sum that is bigger than its parts."
For non-pattern-matching founders, this means getting strategic about selecting co-founders and advisors who bring to the table what they lack, be it industry experience, technical skills, business acumen, youthful passion or the wisdom of age. Knowing what we know of the year ahead, having teammates who are native in the language of numbers and metrics is a no-brainer for non-pattern-matching founders in particular.
Remember, VC checks Aren’t Everything
One recurring theme across all of the VCs who contributed their insights to this article on record and background was that VC funding isn’t everything.
Iynna Halilou, partner at The MBA Fund, reflected on how not all businesses worth bringing to life are VC-backable. “Sometimes it is more important to build a $10M business that has a direct positive impact on you and your community instead of trying to build a business that will generate $100M where your ownership is in the single digits”, Iyanna added.
Maximilian Fleitmann shared similar views, noting that “raising a round is not a sign of success and you should do so only when you need to in order to succeed.” Today if ever it's time to think carefully about whether VC backing is truly helpful to your business. VC funding is a unique phenomenon that confers both financial resources as well as social validation in ways that can be hard to untangle.
For some founders, independently creating the pattern that others will come to recognize might be the greatest accomplishment they could imagine.
