Reality of the Venture World

Jeff and I have been hitting a few VCs that I know to pitch our idea to assess the viability of our product and company. I told Jeff in advance that the chances for us getting funds from VC was slim, specially the amount Jeff was looking for. After talking to a few, Jeff found out that what I was saying is true. Consumer electronic companies are not usually funded by VCs. Why is this? It’s simple, it’s all about risks.

What VCs are looking for is to get their investment return of 10 times the original amount in next 3-5 years. That way they can afford to have 8-9 of 10 of their investment fail during that time and as long as 1 or 2 are home runs, then they get their money back plus a nice return.  Unfortunately, anything in a consumer market is too much of a risk since the growth in consumer based companies are very rarely astronomical. Even companies who succeeded, such as Slingmedia who was lucky to get funding right away, it took them a few years to get to where they are starting to get traction. Typically, it would be more than 5 years for the return on investment would be good enough for VCs.

We can always look for angel funding but now day, most of the angels behave just like VCs, just smaller amount of investment and willingness to do Convertible Notes.

It’s the same kind of catch-22 situation. The VCs avoid consumer market because they don’t believe that they can bring the return they want. Because no VCs will touch that market, very few companies get funding and more of them fail.

So, what are we to do? I don’t know. I think we are going to try viral growth and see if that works. We don’t have much choice.