Getting off the VC train is gaining popularity among VC-backed founders, especially those in the $1M to $10M ARR range.
At this stage, VC-backed companies have a viable product, paying customers, and a clear go-to-market strategy, but often need more key elements like a full product suite, a well-defined market category, a scalable sales process, and a complete management team.
To fill these gaps, VC-backed founders seek incremental capital. However, depending on VC funding is risky due to the volatile market and changing investor priorities over the next 12 to 24 months.
The idea of Getting off the VC train was perfectly articulated by early-stage VC Charles Hudson:
“getting off the train” means decoupling the company’s success from the need to raise future rounds of venture capital and no longer measuring their success by the ability to continue to fundraise to fuel growth.
There are many situations where a company’s interests diverge from those of its shareholders.
Leaving the VC path early can reduce risk and stabilize the business, but it also closes off the potential for venture-scale outcomes, creating a misalignment with VC shareholders’ interests.
Some VCs might accept an early exit if they have a fund returner, while others require at least a 3x return. Some can’t even consider it, especially during their fundraising when mark-ups are crucial.
This misalignment is even greater when the company needs one final round of funding to become fully autonomous, and the investors are the only ones who can provide it.
In this well-written piece, Charles Hudson provides a framework to determine if getting off the VC train is a necessity, an option, or a choice.
Credit to Charles Hudson
Reflecting on past experiences, I can now see that this framework played a crucial role in successfully reconciling board members’ interests.
Getting off the VC train triggers a liquidity event, and with almost a decade in M&A, I’ve experienced numerous different situations. Though each situation is unique, the majority tend to fall into four categories.
The Product Thesis is Wrong
At early-stage, all VC-backed founders believe their product can solve a problem that will lead to a $100M ARR business, driven by initial product-market fit around a single feature.
Together with their investors, they bet that by evolving their product from a tool to a solution, they are pursuing a venture-scale opportunity.
However, I’ve seen this bet fail because the problem being solved is either not critical enough or the approach taken doesn’t allow for scaling.
In these cases, exiting the VC model is necessary, if pivoting would require excessive capital.
The Go-to-Market Engine is Inadequate
At the early stage, sales are typically driven by founders to identify a venture-scale ICP market, establish key use cases, and develop playbooks.
VC-backed companies bet on transitioning from founder-led to sales-led growth, aiming to build a repeatable and measurable sales funnel.
However, I’ve seen companies where their ICP uses the product for vastly different use cases, making the go-to-market strategy non-repeatable, or where a 9-month sales cycle for a €15k ACV renders the strategy unprofitable.
In these situations, leaving the VC model is a choice, if the board is unwilling to bet on developing new playbooks.
Founders’ Incompatibility with a Sales-driven Organization
At some point — usually around $5m ARR — VC-backed companies shift into sales-driven organizations, where sales and marketing become the primary cost centers over R&D.
I’ve seen first-time VC-backed founders lose their drive in this phase, either struggling to manage a sales-led business or fully delegating sales responsibilities to a VP of Sales to avoid the challenges of running such an organization.
In these situations, getting off the VC train is an option, alongside bringing in a GTM-driven CEO.
Average SaaS Metrics
As a SaaS business matures, it becomes more predictable, and significant effort has gone into defining key SaaS metrics and benchmarks to represent the ideal business model.
In today’s fundraising environment, early-stage companies that don’t hit top-quartile financial milestones either struggle to secure follow-on capital or must accept harsh terms for founders and early-stage investors.
I’ve seen companies offer to stay on the VC track by accepting 2.5x participating liquidation preferences or down rounds that wiped out non-participating early investors.
In these situations, exiting the VC model is an easy choice.
I’ve compiled these situations because the ones that tend to end well always begin with founders who have a clear assessment of the state of the business.
Understanding the experiences of previous VC-backed companies that exited the VC path helps ease internal tensions among board members encountering similar challenges when reading this.
Thanks for reading!
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