A lot of the negativity VCs are feeling from entrepreneurs roots in the misunderstanding of why VCs keep telling entrepreneurs to grow really big and hence seem to be pushing for more and more, making them appear like slave drivers.
VCs also serve someone else
Even though there are many VCs who might make you feel that it’s their personal money they put into your startup (which, in all honesty, is usually partly true), it’s usually coming from a fund. Funds are composed of smaller sums of money contributed by wealthy individuals and/or institutions. These people/organizations usually get to know in which companies their money went but they care only about the return their money in the fund makes. In order to make the investor happy, a VC needs to generate quite an excessive amount of money over the lifetime of the fund (usually something between 5 to 7 years). And since the failure rate of each individual startup is very high, a VC pushes for everyone to make the most and compensate for the failure of the others.
It’s unsustainable to remain small
Many people think that it’s ok to have a business that is generating enough money to provide a living for oneself and maybe a family. While this model might still work in some areas, it is usually not true in today’s hyper-competitive internet market. With radical shifts happening every couple of years, a business can easily be leapfrogged and killed by competition every second. Hence, it is hard to make a point that you can provide a sustainable living for yourself for long with a small business in a niche.
The solution: grow!
So, the answer to this problem is growth. There’s always four ways to grow according to Ansoff:
As you may understand immediately, defending a competitive edge is something very hard to achieve for a small startup with a small customer base in the long run. Diversification can increase complexity and might create other problems (organizational, economies of scale, burn rate) at smaller companies as well. So, there is basically only one of two ways: straight up or straight right, penetrating more markets with your product or expanding in your current market with new products. And this is exactly what large enterprises are seeing: small competitors that are in a niche they have not conquered before and which are cheaper to acquire than to running the risk of failing themselves pursuing the same users.
No matter which path you choose, it will always feel like an uphill battle no matter the size or age of your company. The chances of losing connection to your target market are increasing the larger you grow because of the complexity you add with more products or more people to manage. But this is exactly why startups will always have a chance in today’s market. And this is exactly why there is still a huge supply of capital from venture capitalists to this industry.