This one is longer than usual and you may want to skip past the first 30 minutes where we talk EU vs US business dynamics. But later on we get to the good stuff: how VC works, why their incentives are misaligned, how AI is still developing and where the real value is, and finally the underserved market for downloadable software.
Again, longer than the usual episode but there are a few good insights so I hope you’ll stick with it.
The way VC funds kind of work is they convince other investors to give them money. They then invest that money in companies and take an equity stake in return. They hope that 1 of X companies they invest in will go on to become unicorns (valued at over a billion dollars). This way they make their money back and then some.
They usually get paid by their LPs (limited partners) in some form of a management fee. It’s pretty standard to see 2% annually of the total fund size + 20% of the profits.
The truth though is that most startups fail miserably… And most VC funds fail too… So the VC managers can be pretty sure that they’ll get their management fee, but usually not much more.
Which tends to make them focused on “how do we deploy more capital?“. That creates a cycle where they fund a startup and their interest is for it to grow in revenue (i.e. evaluation metric) & spend all of the money. Thus they can justify funding it again at a higher valuation. The more a startup grows, the more successful they can say they are to their LPs, the more money they can dump into it and the more money they can raise.
If you’re looking to raise money, angel investors not only provide more hands-on support… But also are incentivized to help you succeed since they’re betting their own money. A non billion dollar exit is still a good exit for them, just like it is for you. They may be a more suitable option if you’re looking for a long-term partner.
It’s interesting to note though, that the VCs having a “mandate to spend money” makes them an interesting target market for service providers. So, maybe look into that?
Wesam brought up an interesting point about the potential for downloadable software, particularly desktop applications targeting laptop users. This market, just like self-hosted software, seems to be underserved in our current cloud-obsessed tech landscape.
Think about it - downloadable software has some key advantages:
Vendor lock-in: Once a user downloads and starts using your software, they’re less likely to switch to a competitor. The friction of downloading and setting up a new app works in your favor.
Offline access: In a world where we’re constantly connected, it’s easy to forget the value of offline functionality. But for travelers, remote workers, or anyone dealing with spotty internet, being able to use software without a connection is huge.
Enhanced security: With increasing concerns about data privacy and security, local software that doesn’t constantly ping servers or store data in the cloud can be very appealing to certain users and industries.
You can argue against it. For example, SaaS is recurring revenue, desktop apps are not.
Fair enough. But with a one time payment you know the customer’s LTV (lifetime value) upfront & you don’t have to deal with churn. You also don’t need to deal with the headaches of hosting, scaling, and the technical debt that comes with it. And, while it’s not “recurring” income, it still has repeat buyers because some 20 million new MacBooks are sold every year. And that’s just MacBooks.
There’s definitely room for innovation here. While everyone’s chasing the next big SaaS idea, maybe the real opportunity is in good old-fashioned desktop apps. Just something to think about if you’re brainstorming startup ideas.