Why Community Software Backed by Venture Capital Isn’t the Answer

We’ve had a few cases lately where competitors tried to use our lack of venture capital financing to put fear into buyer’s minds that we’re not “stable.” If they had done their homework, they would know the opposite is true. 

I’ve written a book that I expect to come out by the end of the year, the working title of which is Fighting Shape: Getting Startups Unstuck. It’s what I do, what I love and what I think a lot of startups will need in this recession. 

Why? Venture capital is what’s called a “hits business,” which means that firms achieve the bulk of their returns on investment (ROI) from 10% to 15% of their investments – the outlier startups that “crack the code” and build huge valuations in the process (like Uber, Airbnb, etc.). 

This model works well and has produced great outcomes for VCs for many years. But it’s not so great for the companies who aren’t in that top tier. They have to recap, sell or dissolve. And it’s often messy. 

I’m not against venture capital at all. It’s a needed service for a healthy entrepreneurial ecosystem. If you’re one of the lucky companies with smart teams, large markets and well-differentiated products that scale naturally, it would be irresponsible not to raise investment capital. There’s probably another 30 percent who would do well with some venture capital. The challenge is when they believe their business will keep scaling and raise too much. They dig a hole they can’t escape from. 

On top of that, there’s too much money being invested. When I started my professional life in 1995 (a healthy economy) there was $8B invested per year, in 2021 it was $319B. Each investor used to invest $3M annually on average. Today it’s about ten times that amount. It’s not sustainable and it seems to be hitting its first wall.

We actually raised a small amount of venture capital when I bought Mobilize. The company had very little revenue at the time, so it wasn’t viable to make it profitable. But I told those investors that if we didn’t find a breakout play (the aforementioned 10% of companies), I would get the business profitable, grow it thoughtfully, and ultimately achieve a good return on their investment. Go big or get profitable. 

I ultimately chose the latter. I didn’t want to “double down” by raising more money, and the company was doing fine. I could also see the downturn coming. So we restructured the business where the investors are silent partners – along for the ride but not driving a specific outcome. Everyone is happy and the company is in a strong financial position to continue focusing on what matters: our customers. 

We believe that vibrant communities are a process, not a product. So we partner with our clients on outcomes. By not raising venture capital, we maintain our independence, which allows us to serve our customers over growth or profits. For instance, we can invest in services to help our customers, where our venture-backed counterparts would be encouraged not to because that negatively affects their gross margins. 

In the next 12 – 24 months, many companies will get stuck. Some will go out of business, and some will get acquired (where usually the product will likely be killed). Maybe some can transform into a profitable healthy business. I hope so. 

The unfortunate side effect is that customers will suffer. Having made a decision to go with a venture-backed community platform translates into a high likelihood of having to replace that platform soon. 

So to our competitors: good luck. And call me when you get stuck. 

Work with experts who build successful communities

Mobilize is made up of community experts who have launched communities for the likes of Dropbox, United Nations’ SDSN, Dermalogica, and more. We work with you to align your business goals with a tailored community strategy to ensure its success.

Whether you’re just getting started or are looking to improve outcomes with your existing community — we have strategies and industry-tailored programs to help you get things done. Schedule a demo for a personalized walk-through of our technology and learn about our expert-led strategy services.