An inflection point has two meanings: mathematical and strategic.

The mathematical term dates back to the first half of the 18th century—used in almost all disciplines where mathematics plays an important role, such as physics, engineering, and economics. The mathematical inflection point means "a point on a curve at which the curvature changes from convex to concave or vice versa" (dictionary.com).

The strategic concept refers to "a critical point at which a major or decisive change occurs." That's what this post is about. The concept was developed in 2006 by Intel co-founder Andrew Grove, "the guy who drove the growth phase of Silicon Valley," as venture capitalist (VC) Earl Floyd Kvamme praised him.

According to Grove:

A strategic inflection point is an event that changes the way we think and act. There is at least one point in the history of any company when it must change, dramatically, to rise to the next level of performance: Miss that point and it starts to decline. Source

Understanding such an event is the very essence of what VCs should do. VCs are there not only to locate promising start-ups and accelerate trends but more importantly to understand strategic inflection points and invest in companies that create new industries. Michael Eisenberg, a partner at Aleph VC, calls them "pre-industries":

Venture capital (as distinct from growth capital) has never been about “the model,” “pulling the model forward,” or accelerating the winner. Venture capital has thrived in uncertainty: uncertain technologies, uncertain market trends and uncertain capital availability. […] “newness” observation certainly applies to new industries, or what I call “pre-industries,” which is either an industry not yet created (think private space exploration before SpaceX) or an existing full-stack industry still unspoiled by tech innovation (think Airbnb, Daisy in building management or Lemonade in insurance). Source

Whether a founder or VC, understanding strategic inflection points is part of your core business.

What it looks like

Inflection points can have many different graphical representations (concave-convex, convex-concave, linear change), but they always have two characteristic features:

1. A history of a few years (say five) that can be used as a reference before the change.

2. A smooth but lasting deviation from the historical trend that creates a new strategic context.

About anticipation, recognition, and creation

An investor who anticipates an inflection point can make money from it by investing in or selling related assets—before the inflection point occurs. Similarly, entrepreneurs who recognize that an inflection point is imminent can make strategic decisions before competitors do—realigning the business model, entering a new market, changing the organization, and so on. If you cannot anticipate it, try to recognize it.

When the inflection point results from a crisis, it is easy to recognize because the onset of the crisis marks the inflection point. The COVID crisis was so global and profound that it became an obvious inflection point for many industries, a positive one for the digital economy and a negative one for the traditional economy. Both VCs and traditional investors have made a fortune by investing (during COVID) in the technology companies driving the digital economy.

Most of the time, however, inflection points are insidious and can be mistaken for insignificant market fluctuations. For this reason, astute observers focus not so much on the consequences but the causes of inflection: social, industrial, and technological changes. They use one of the following three main approaches to outwit competitors.

1-Analyze the metrics

Metrics analysis is the most systematic and unbiased way to predict inflection points. Metrics can be helpful to detect early and weak signals that go unnoticed by a large audience. Economists use them at different levels: the macro-level (e.g., inflation, unemployment, debt, etc.), the meso-level (e.g., specific industry metrics), or the micro-level (company metrics). This approach requires market and business intelligence at every level.

2-Connect with visionary leaders

Visionary people can predict inflection points without sophisticated analytics. They often use inside information (about an industry or technology) to connect the dots and imagine counter-trend scenarios. These people constantly challenge trends by asking what might change, what could be next, or how to do things differently. Bold entrepreneurs manage to go even beyond by creating ex-nihilo inflections: Tim Berners-Lee (W3C) invented the web, Matthew Mullenweg (WordPress) created a platform that powers 40% of all websites, Steve Jobs (Apple) reinvented the smartphone with the App Store, Marc Benioff (Salesforce) pioneered the SaaS movement and the way we consume software, Mark Zuckerberg (Facebook/Meta) made social networking a global phenomenon and is now working on the Metaverse. Connecting with visionary entrepreneurs is a good way to predict or create inflection points.

3-Follow the money

On the investor side, funds that invest in companies can signal and even amplify inflection points. When investors pour hundreds of millions, and sometimes billions, over a few years in innovative companies like Epic Games ($4.4 billion), Airbnb ($5.8 billion), or Uber ($24.5 billion), their goal is to reinforce existing inflection points and create artificial moats. That is why investment trends change all the time; they follow possible new inflection points. At this moment, food delivery services are getting a lot of attention because investors expect a societal shift in the way people buy and consume food. Crypto funds are flourishing because investors expect cryptocurrencies to become widely adopted shortly. Clean technology is also gaining traction, with leaders promoting it: Bill Gates says climate tech will produce 8 to 10 Teslas, a Google, an Amazon, and a Microsoft. Following the money is a way to find inflection points.

An attempt to model inflection

To model a business inflection, one must model the function that covers the period before and after the inflection. Therefore, the choice of time frame is critical and affects the function. For successful start-ups, inflection can be exponential in the medium term (e.g., five years) but likely polynomial in the longer term (e.g., 20 years). Context and starting point also matter; the function may be more linear for mature firms, while it may be more geometric for early-stage firms.

SaaS use case: a perfect scenario

Let us start with a perfect but theoretical scenario for a SaaS start-up. I used the annual revenue metric because it is common for start-ups, and I assumed that the company generated an initial $75,000 in revenue. That's the baseline. Then I applied the T2D3 path coined by Neeraj Agrawal, General Partner at Battery: Triple, triple, then double, double, double. In its fifth year, the start-up is reaching $10 million in revenue. It would be logical to expect a lower growth rate at this stage, as it is quite rare for a company to double every year over a long period. This is the point where an inflection could occur with three possible scenarios:

• False-positive: The initial success is not confirmed. The company declines dangerously. Assumption: CAGR −30%

• Linear growth: The company continues to grow but at a rate much lower than expected. Assumption: CAGR +15%.

• Escape velocity: The company experiences hyper-growth and creates an escape velocity effect. Assumption: CAGR +50%

If we create the same graph, but over 20 years (instead of 10), we see the compounding effect of the escape velocity scenario (CAGR +50%). It is so big that the two other scenarios become insignificant. But while this exponential curve looks promising, it is also highly improbable. With time, the company will hardly sustain such a growth rate (market size limitation, new competition, higher marketing costs, etc.).

The Zoom case

Zoom Video Communications is an excellent example of this exponential growth. Founded in 2011, the company has gone from zero to $2.6 billion in annual revenue in less than ten years. The chart below shows the last five years; we see impressive exponential growth in revenue with an inflection point in 2018/2019 due to the COVID crisis and the global remote work movement. Within this period, an exponential function represents well the growth of the company.

However, unlike our theoretical and perfect scenario, the exponential function will not hold for 20 years. After COVID times, much of the market will have switched to telecommuting, and new competition will have emerged. If the company does not innovate or add something new, it will likely face a negative inflection point with a logarithmic growth from 2022 or 2023.

Generalization

I created similar graphs for two other tech companies: UiPath and Tesla Motors. These graphs show that over ten years, with a baseline near zero, a polynomial function (of order 3) is a better fit than the exponential function in green. A polynomial function is more realistic because a hyper-growth cannot be sustained for too long and each company can face short-term downturns, like Tesla during COVID.

The game

An inflection point is like a game. The first player to identify a possible inflection wins because he or she has the opportunity to optimize his return-risk ratio (more return, less risk, or both). It's like investing when the price is still low or selling when it's still high. In other words, it's an arbitrage game.

An entrepreneur's interest involves selling a positive inflection point to attract investors and better negotiate their share price. An investor's interest involves generating outstanding returns at moderate risk. When the inflection point is positive and is detected early, both can win.

Meeting Antonio Gambardella is always a joyful experience, not only because he is Italian and communicates in a cheerful tone but also because he is one of the best observers of and contributors to the tech community in Switzerland. Having been both VC (General Partner of MyQube) and an investor with active roles in different companies, he knows the business-investment side and the entrepreneurial side. Since 2014, he has been the Managing Director of FONGIT, "the leading innovation incubator in Switzerland," which has more than 100 start-ups and projects in ICT, advanced engineering, and life sciences to its name. FONGIT has supported several successful ventures, including Anteis (sold to Merz Pharma in 2013), Selexis (sold to JSR Life Sciences in 2017), and Proton Technologies (global leader today in encrypted messaging service with more than 60 million users). Even more interesting, however, is how FONGIT departs from the purely hypercapitalist Silicon Valley model. In fact, many FONGIT companies have silently managed to grow and break even with a relatively limited injection of venture capital. That's something I asked Antonio to elaborate on.

Tribute to Silicon Valley

Our conversation started with Antonio's acknowledging Silicon Valley's significant contribution to society: "It has made possible the rapid development and introduction of new technologies. It has accelerated everything, and we all benefit from it."

According to Antonio, this model is prosperous thanks to its supportive community. "Silicon Valley is like a club. Everyone knows everyone else. They talk to each other frequently and support each other," he said. Founders know that they can have access to capital and excellent support at every stage of their project. On the investment side, VCs actively cover the entire value chain from zero to IPO. "If the investment stage is deemed too early for institutional funding, angels intervene, and sometimes general partners can even invest personally. Then VCs take over before later stage, and private equity funds come into play. Once a company has managed to partner with a Tier 1 fund, effortless fundraising is almost guaranteed until exit," Antonio said.

"For some companies that are capital intensive (e.g., deep tech) or with a high-risk profile (e.g., life science), there is no other choice," he said. These entrepreneurs have to approach VCs, raise a lot of money, and meet investor expectations. But this model has severe limitations and is not optimal for all projects. "One of my roles at FONGIT is to make sure that founders know the pros and cons of the model and are aware of the alternatives," Antonio told me.

The Unicorn Trap

To explain one of the limitations of the Silicon Valley model, Antonio refers to Jeffrey Funk, a technology consultant who wrote The Crisis of Venture Capital: Fixing America's Broken Start-Up System. This article describes how a new generation of start-ups backed by VCs is a financial disaster. Here is an extract of this must-read article:

The most significant problem for today’s start-ups is that there have been few if any new technologies to exploit. The internet, which was a breakthrough technology thirty years ago, has matured. As a result, many of today’s start-up unicorns are comparatively low-tech, even with the advent of the smartphone—per­haps the biggest technological breakthrough of the twenty-first century—fourteen years ago. […] This lack of revolutionary technology has made it hard for uni­corns to create value at a scale necessary to be profitable. [...] University engineering and science programs are also failing us, because they are not creating the breakthrough technologies that America and its start-ups need. 

Venture capital is no longer necessarily a synonym for building reliable and profitable companies in the digital sector. Instead, it's meant to shorten the time to market, quickly create moats, and trigger what Antonio calls the "Escape Velocity": the minimum distance and speed a company needs to outpace the competition and escape potential threats. "If the company can do that, it becomes a standard and can accelerate further. Spotify, which has defeated Deezer and now dominates the music industry, is a good example," Antonio said.

But if that scenario fails, companies can fall into the "Unicorn Trap." A VC-backed company is stuck between two realities: On the one hand, there is some pressure from investors who expect a sharp increase in valuation every year, and on the other hand, there is an economic reality that does not justify such an increase in value. "A gap is created between the market price (too high) and the actual value of the company," Antonio said.

In the real world (a restaurant, a factory, or a company producing a good), revenue multiples rarely exceed 5x. In the SaaS world, for a company with recurring revenues, an EBITDA margin of 30%, and strong growth, the market would normally expect multiples of 20 to 30 times the revenue. But in the US, valuations can be 2 to 4 times higher, with a range of 50x to 100x sales (e.g., Snowflakes). Such assumptions can be unrealistic considering the size of the market and its growth rate.

As long as the company is still private and supported by the VC and Private Equity community, this price-value disparity can be hidden. In reality, however, "It's like a pyramid scheme built upon the subsequent phases of private financing rounds," said Antonio. And once the public markets are called on (for IPO exit), this phenomen may stop as traditional investors will not buy the deal. The risk for the company is that it remains private for a long time and then can neither raise additional funds nor exit, hence the trap.

Factors of change

"Society is changing. We are more aware that it takes time to build things and that it's okay to wait," Antonio said. He gave a personal example: "My 10-year-old daughter does not drive, and that's totally fine as she is not ready yet." Antonio sees the pace of time as a natural process: "Nature has its own pace of building things, and society should follow it." Similarly, it takes time to build long-term sustainable companies, and tech innovation is a long-haul endeavor.

The logic of Silicon Valley is different because it is designed to speed everything up. "Once you receive capital from a VC, your enemy is time," Antonio said. The clock is ticking, which creates increasing pressure. This pressure, combined with other constraints related to governance, can lead to a loss of independence. "If founders lose their independence, they may not achieve their vision."

To avoid this situation, some entrepreneurs deliberately choose a different path to regain control of their time and ownership. "It's not so much about avoiding dilution; true entrepreneurs are not interested in getting rich. It's about staying independent and changing the world at a realistic pace," Antonio said.

The siren songs of VCs do not seduce these entrepreneurs easily. "They have a different mindset: They think in economic terms, not financial terms," Antonio said. They develop their company so that it can create value without the financial obligation to increase its capital. "In the end, all that matters is the customer and the ability to generate revenue organically. It allows entrepreneurs to be financially independent and not be forced to accept money from VCs," Antonio said. That is his definition of bootstrapping.

Bootstrapping redefined

Bootstrapping is not about growing businesses without raising any capital or without any VC support. Bootstrapping is about creating an environment that gives founders a choice to raise capital or not, and when they do, they have more options to select the partner, the timing, and the terms. This is strategic.

For example, Gmelius, a collaboration platform for Gmail, is a bootstrapped company. They started without a VC. Then, Florian Bersier, CEO and founder, decided to accelerate its growth with Y Combinator and a VC in the US (Fyrfly). This was not a financial decision but a strategic one. They chose their time and their VC with a purpose: to grow the US market. That's bootstrapping.

Proton Technologies, the developer of ProtonMail, the secure communications platform, is another case. They initially chose to partner with a Tier 1 US company VC (CRV), but they had to dissolve that partnership due to the particular nature of their business (see blog post here). In the early years, Andy Yen, CEO and co-founder, restructured the product portfolio to pursue a strategy without VC. Now, they have many options—including the option to partner with a VC. This is bootstrapping, too.

Bootstrapping works exceptionally well for tech-entrepreneurs in one of these contexts:

• The company is a pioneer and has the first-mover advantage. That's the case with Proton Technologies, which pioneered Internet privacy. There are many examples of this in the US: Dell, Apple, Microsoft, GitHub, Mailchimp, and Craigslist. Their founders have had time to build a lasting business without massive venture capital. Even Facebook somehow bootstrapped because Mark Zuckerberg always kept control of its business.

• The company sells enterprise software that does not depend on an extensive community but the needs of businesses. Alohi, which offers advanced online fax solutions and legally binding electronic signatures, fits into that category. It is similar for SaaS with a B2B audience. They need a few happy customers to start generating revenues and develop further organically.

• The company positions itself in a niche with the option to sell high-priced services. Cleverdist, founded by industrial IoT experts from CERN, made a name for itself in system control and monitoring. This strategy has enabled the company to grow and break even without external funding. Their current challenge is to transition from services to products.

• The company is a university spin-off where much of the research and development was supported by the university. Plair, a hard-tech company that monitors real-time microbial levels in the air, worked with the University of Geneva to develop their prototype and then arranged the technology transfer. Much of the initial technical R&D was developed—and therefore funded—within the university.

All these FONGIT companies have benefited from some of Switzerland's specific advantages for businesses: a first-class data protection law (for ProtonMail, Gmelius, and Alohi), partnerships with universities (for Plair), and CERN top-notch expertise (for Cleverdist).

Hence my question: "Is FONGIT the showcase for a Swiss Valley model?"

Toward a Swiss Valley model

"I see an opportunity for Switzerland and Europe to integrate the best of the Silicon Valley model into a more conscious and sustainable way of growing and funding companies. In Switzerland, we have the proper infrastructure and support system to do this," Antonio said.

"We are also exactly on the path that Jeffrey Funk suggests, which is to focus on creating breakthrough technologies, not just improvements. Innosuisse, the Swiss innovation agency, plays a key role in developing these technologies with a unique approach: it puts science at the heart of the innovation strategy with massive funding for universities and schools that help entrepreneurs," Antonio explained.

Another pillar is the role that both Switzerland and Europe can have in a context of economic polarization—between the US and China. "We should continue developing, protecting, and leveraging the critical infrastructures necessary to develop technology/industry leaders in the most strategic areas such as cybersecurity. This is a matter of sovereignty," Antonio said.

Combined, all the above arguments pave the way for a solid and efficient Swiss Valley model that can influence entrepreneurs and benefit societies worldwide.

Imagine a game that is presented as friendly and in which every player can hope to win big. This game is made popularized by the media, which tells numerous nice stories about it daily—encouraging others to play. It is so popular that there is no room for everyone, but those with the opportunity to play can gain a strong sense of empowerment and hope.

Would you play this game? Most likely, yes, if you are unaware of the hidden rules.

First, the game is very challenging. If you decide to play, you must devote a large part of your life to it. Second, it takes years to know the result, meaning you must be very patient and persistent. Third, if you give up too early, you'll probably lose all your stakes. Fourth, it's not a zero-sum game. The winnings are divided among the players; some players are likely to end up with nothing. Fifth, your playing partner is much more experienced, and his or her chances of winning are also higher.

Yes, you guessed it. The game is Venture Capital.

And it starts when the founders sign an investment or shareholder agreement with a venture capital (VC) firm, meaning they have completed a fundraising round. The game ends when one of the parties exits, and they sell their shares. Everything that happens in between remains fairly confidential and opaque. The public learns about each play only when there is a liquidity event (e.g., new fundraising round or exit). Only a small percentage of VC-backed founders experience a successful exit.

Because of their experience, VCs are always in the best position to mitigate their risks and reap the rewards. They make sure that in the case of defeat, the founders lose first; in the case of winning, VCs win first. At the midpoint, the venture capitalists are served first and at the expense of the founders, who can end up with nothing.

The term used by venture capitalists is "information asymmetry", which sounds more acceptable.

Scott Kupor, Managing Partner at Andreessen Horowitz, author of Secrets of Sand Hill Road, Venture Capital and how to get it wrote:

The term sheet is where information asymmetry between VCs and founders comes into play the most, and often at the expense of the founder. This is because VCs have been through this process many times and have negotiated hundreds of term sheets. By contrast, founders only get a few shots on goal in a lifetime and likely can count the number of term sheets they have negotiated on one hand.

Gigi Levy-Weiss, General Partner at NFX, author of The Non-Obvious Guide to Fundraising wrote:

Investors play this game all day, and you only do it occasionally. So don’t trust your instincts too much. The more awareness you have about the limitations of your startup fundraising experience compared to those of VCs, the more empowered you will be throughout the fundraising process and beyond.

As a founder, awareness is crucial. If you are aware, then you can break the illusion of Wonderland and do something about it.

Develop a critical mindset.

No one—certainly not venture capitalists—wants to talk about their failure. That's why the stories in the media are heavily skewed. You hear only the success stories or trending stories. Very rarely do you hear about the failures or the hardships of the entrepreneurial journey. Here is why you should try to desensitize yourself to the media's fairy tales and start thinking for yourself.

Rethink your fundraising strategy.

Do you really need to play this game? Have you considered alternative options such as bootstrapping, venture debt, crowdfunding, and sweat equity?

If you do not have a choice, try these:

• Gain time to create as much value as you can without funding. You'll be in a better position to attract and negotiate with VCs and minimize your capital dilution.

• Right-size your funding round by valuing the capital you need to reach your next milestone, plus a 30% buffer. To do this correctly, you need a clear milestone and action plan.

If you show investors that you can create value and survive without them, that's a strong plus to rebalance the odds.

Prepare seriously.

Assuming you have a strong product-market fit, team-market fit, and growth potential, you may qualify for the game. First and foremost, you should spend plenty of time learning all the tricky terms and their mechanics. An easy way to do this is to read books. Below are two references in addition to the previous ones.

Crack the funding code, How Investors Think and What They Need to Hear to Fund your Start-up, Judy Robinett, President of JRobinett Enterprises.

Venture Deals, Be Smarter than your Lawyer and Venture Capitalist, Brad Feld, Jason Mendelson, co-founders of the Foundry Group.

Hire the legal advisers working for VCs.

Legal advisors working for VC firms know this game very well. These are the ones you want on your side because they understand buy-side logic and negotiation techniques very well. Don't just choose the legal advisor you know or the cheapest firm. Choose specialists who deeply understand VC and M&A.

Do not settle for the first offer you receive.

Dealing with VCs is tough. That's why most entrepreneurs are tempted to jump at the first opportunity they get. However, your goal should be to use the initial term sheet as a hook to attract two or three more investors. Then you will be more relaxed and in a much better position to negotiate.

Follow a schedule.

Don't make the whole process too long. Give the VC enough time to do their research and due diligence and then set a deadline. You will probably lose some VCs, but the ones that stay will be more engaged and possibly less demanding.

Demonstrate your ability to negotiate professionally.

Investors will evaluate not only your company but also your ability to communicate and negotiate with them. It is a great way to differentiate from the crowd and show that you are mature, respectful, credible, and empathetic. Essentially, you want to show that you have the leadership skills to persuade your audiences.

Make reference calls.

A reference call with the portfolio founders will give you an idea of what to expect from investors when they invest. For example, what happens in downturns (which will inevitably occur); how do they deal with you if you need capital or don't reach your goal? How do they manage the exit process?

“Something you absolutely have to do when taking on investors is to make reference calls with their portfolio founders — and I don’t just mean two to three calls, but 20 or 30,” Christian Reber, CEO at Pitch.

Last but not least, don't celebrate too early.

Signing a contract with a VC is just the beginning of the game. Your goal is not to show off in the media but to play this game well in the long run and reap the financial rewards.

Reflexion Capital is a tech investment platform launched in 2019 by Meunier, formerly a partner at Hi inov. The entity, with offices in Paris, is awaiting regulation as a financial management company. The French regulator (AMF) should grant them its approval by this summer. Meanwhile, Meunier, his partner, Ivan Michal, a former partner at Newfund, and Augustin de Cambourg, an investment associate, previously a fundraiser, invest on a deal-per-deal basis using special purpose vehicles (SPV). In 2020, they made their first two investments in French companies: Crowdsec (EUR 1.5m) and Getfluence (EUR 2.6m). From 2021 onwards, they plan to make four to six investments every year across Europe.

To do that, they rely on a community of about 50 successful entrepreneurs who assess opportunities, invest in companies, and support them with expertise and connections. This group includes well-known entrepreneurs operating in various industries, including Thierry Rouquet (Arkoon/Sentryo), Julien Lopizzo (Major Corp), Christophe Courtin (Santiane), Robert Picarel (Velvet Consulting), and Didier Miraton (ex-Michelin), among others. They all share an offbeat vision of how to build and fund tech companies.

In between bootstrapping and hypergrowth

Reflexion Capital departs from the traditional VC industry, which backs companies giving up on profitability for the sake of hyper-growth. When I asked Meunier to share his view about it, he responded at once:

As investors, we should be concerned by VC-backed companies like Uber: Twelve years after its launch, the company has raised USD 25 billion and is still losing more than USD 100k per hour, with many social protests and lawsuits, including unfair labor practices, unfair competition, or antitrust practices (as reported by the Guardian). Funding hyper-growth to hack a market at the expense of society raises questions.

According to Meunier, Uber is symptomatic of this hyper-growth capital-intensive model, often based on dumping, unreasonable (marketing) expenditures, and workers' exploitation.

On the opposite end, companies try to self-finance their business through bootstrapping but with severe limitations to reach a critical size.

Reflexion Capital lies between these two extremes, following the path of "profitable growth." They look for companies that have successfully bootstrapped until a significant post-revenue threshold (app. USD 1m in sales) generated reasonable but repeatable growth and need a capital increase to cover negative cash flows for one or two years.

It is fine to go EBITDA negative for one or two years, which is the right amount of time to build solid foundations for the future, structure the organization, hire top executives, train people, invest in the product to make it better and more attractive, and prepare the company to expand internationally. These operations contribute to building healthy tech companies.

"Growth and profit are not opposite," Meunier said. "We use profitability as a blueprint to ask the right questions and help entrepreneurs build enduring companies."

A VC alternative for grounded entrepreneurs

From his previous experience, Meunier sees two main categories of entrepreneurs.

One such category is those who want "to grow at all costs to hack a market." To succeed, they must focus on the top line (i.e., sales), fundraise continuously, accept high dilution, and hire—often exhausting—many people. Their success metrics revolve around market traction, funding, and headcount. This category of entrepreneurs fits well within the traditional VC mindset, but "if they don't meet expectations, investors will spend less time with them and more with the winners. It is a hit-or-miss bet," Meunier said.

The second category of entrepreneurs is more sensitive to their impact and dilution. They are also more suspicious towards investors. They try to bootstrap their businesses and postpone fundraising until they reach glass ceilings. When they must fundraise, they handpick their financial partners and carefully size their funding. They attribute their success to team engagement, product satisfaction, and financial autonomy. Their mindset is not so compatible with VCs. "They are afraid of VCs, and VCs think they are not ambitious," Meunier said.

The best human and financial experience we had was with the second category. We noticed that with a small amount of capital, broken down into one or two rounds, we could build solid companies and manage to exit with multiples between 1.5x and 10x within six years. To partner with these entrepreneurs, we must be there at the right time, reassure them, and advise them.

Reflexion Capital positions itself as an alternative to current VC investors by offering entrepreneurs calibrated funding, supportive relationships, bootstrapping recognition, and financial autonomy.

Entrepreneurs we back have more freedom and more independence to finance their growth. They keep the absolute majority of their company (i.e., more than 51%). For key employees holding stock options, we make sure that these stock options are worth something, that is, several years of salaries. After three to five years, they may buy us out to get complete independence or move forward with LBO investors, with cash-out opportunities.

This type of financial partnership is expected in the private equity sphere for mature companies. Reflexion Capital makes it possible at an earlier stage of maturity.

Walk the talk

This could be the core principle of Reflexion Capital, as they apply what they promote. Although the team has a track record and a supportive community, they do not have a regulated fund yet and must find creative ways to execute their plan.

To gain time pending approval, we create and administrate SPVs. Although it can be more time-consuming and limit our capacity to invest, we go through it, for the time being, because we believe in what we do and want to own our space promptly.

Their goal is to fill the "Equity Gap" between pure VC and LBO funds by mitigating risks while capturing early-stage potential.

Unlike LBO fund managers, we enjoy and know how to navigate project mode, structure growing businesses, manage transition phases, and bring tech companies to profitability. Once the company is self-sustaining, its valuation is higher, and exit opportunities are more tangible.

At the end of our discussion, I asked Meunier if we should call Reflexion Capital a VC. He hesitated and replied, "We are a VC in the sense that we finance innovative companies. We are not a VC if the goal is to hack a market. Somehow, we consider ourselves as bootstrappers."

Considering the number of decks received (204 in 2020, and almost as much in 2021 Q1), entrepreneurs seem convinced already. The next step is to onboard institutional investors. Meanwhile, Reflexion Capital proceeds with determination and endurance, as true entrepreneurs do.

Sébastien, a good friend of mine in Paris who works in the hedge fund industry, had these surprising words to say during our last chat: “I feel sorry for venture capitalists (VCs) because they are too often deceived by tech-entrepreneurs and even ripped off with wrong valuations.” Hearing this, I realized that most of my friends who work in the financial markets (as traders and asset managers) think the same way. The VC business seems cool—or at least less boring than traditional finance—but there is a price for it: a lack of transparency, very long-term maturity, no liquidity, strong human and emotional bias, high risk (near gambling), and low return on average. In the realm of traditional finance, venture capital as an asset class sucks.

This position stands in contrast to the lovely media stories we read every day in which VCs like celebrating their “partnerships with” (read “investments in”) tech companies or telling about their entrepreneurial journeys (read “nice exits”). Making us believe we live in a wonderland orchestrated by a few white knights is part of the enchantment. And it works: Observers see VCs as visionary leaders, agents of change, and gold makers; states welcome them; bankers, lawyers, and other consultants seek their favors; talent wants to work for them; and (obviously) tech founders try to "get a dance" with them.

The reality is less glamorous.

The top quartile and the rest

According to the Kauffman Foundation report (2012), “only a small number of funds generate big VC return.” By “small number,” they mean 25% of VC funds; that is the top quartile.

This number is consistent with another chart extracted from a recent Swisscom Ventures presentation. Only VCs in the top quartile are likely to be profitable; among them, only an elite few hit big numbers.

According to Morgan Stanley, August 2020, “returns for venture capital funds, and to a lesser degree buyout funds, are skewed. You earn returns much higher than the median if you are invested with funds in the top quintile (i.e. top 20%).”

Some estimations are even worse. Tomer Dean, contributor at TechCrunch, states: “Ninety-five percent of VCs aren’t actually returning enough money to justify the risk, fees and illiquidity their investors (LPs) are taking on by investing in their funds” (post). According to many sources (here and here), this is higher than the failure rate of start-ups, which is estimated to be around 90%.

Even that is only for professional VC firms that know what they are doing. Imagine what it is like for business angels who invest at an earlier and riskier stage, without the same level of awareness, knowledge, experience, or networking.

Nic Brisbourne, the managing partner at Forward Partners, wrote on The Equity Kicker: “Lots of people start investing, lose their shirts, and then wish they had done something else with their money. I’ve seen that happen to angels, entrepreneurs, and corporate VCs. Some people investing on AngelList lost everything 2 years only after their investment. The loss is quicker than the gain.”

Real challenges, proxy experience

Like entrepreneurs, VCs must conduct fundraising events, hustle to access deal flow, and struggle to solve critical problems. The process is similar, but the experience is different. Entrepreneurs thrive by creating meaning out of nothing; they can rely on teamwork and community support, and they continuously develop operational and transferable skills. If they fail, they receive support and a second chance. If they succeed, they gain a sense of personal achievement on top of the financial reward. Venture capitalists only get a piece of that and sweat the same or more.

Fundraising

Before investing, VCs, also called general partners (GPs), raise funds from other investors—limited partners (LPs). To get their attention, GPs must show a credible track record of previous performance. Without it, the likelihood of raising enough capital is very low. Given the usual management fee of 2%, GPs must raise at least USD 40 million to cover a small team's operating costs. Those with an outstanding track record can raise 10 or 20 times more. To raise such large amounts, most GPs conduct a roadshow for months, trying to access the proper decision-makers among LPs. These people are secretive, out of sight, busy, and mainly focused on the top-quartile segment. In case they are interested, LPs impose many constraints on GPs (financial commitment, timing, quotas, thresholds, etc.) and will rule them out if the performance falls below their expectations.

Picking

Once they have raised their funds, VCs hustle to access a good deal flow and pick the very best investment opportunities. According to Marc Andreessen, cofounder of Andreessen Horowitz, “to succeed in venture capital, you must be one of the top five firms. And to get there, you must have an amazing deal flow” (source : Why do VC firms become Platforms? by Louis Coppey, VC at Point Nine). It is a zero-sum game: Good investment opportunities are scarce, and VCs compete fiercely to secure them. When too much “dumb money” is in the market (because of low-interest rates, for example), valuations can become very high and seriously erode the overall return.

Struggling

Post-investment, VCs must do whatever they can to help their portfolio companies grow. And it is far from a vacation. Charlie O'Donnell, founder of Brooklyn Bridge Ventures, describes it well:  

Ever watch an animal get hit by a car and limp around afterwards? That's kind of like what it's like being on board with these companies after you make an early stage investment. They're all dealing with super limited resources and they'll never be able to move as fast as you'd like them to--and there's no laying on of the hands that you can do to make it all better. You just have to hope they regain their footing slowly and get on their way. You can try and alert them to other traffic, slow it down, ease pain by being calm and present, but ultimately, it's up to them to get stronger and stronger with every step and continue on down the road. Even the best and most active board members can still feel pretty helpless. Extract from Why being a VC sucks. Advice to anyone who wants to get into venture capital.

Fear & loneliness

According to Gigi Levy-Weiss, General Partner at NFX, VCs have two main psychological drivers:

“FOMO: Fear of missing out - The deals that got away come with deep personal regret… when a VC partner sees a company which could be huge – with a great team, in a field they like and a good idea – it’s tough not to invest. 

FOLS: Fear of looking stupid - VCs don’t want to invest anywhere where they can end up looking stupid. “How did you invest in an Uber competitor after Uber already raised $5BN?” is not a question you want your LPs to ask you.”

VCs have fears indeed and not so much support to deal with them.

Alex Niehenke, Partner at Scale Venture Partners explains in this interview that although it is a great job, “it’s much less team-oriented than a lot of other things, it can be quite lonely. Specifically, if you think about the job as an hourglass, it’s really lonely on the front end, and it’s really lonely on the back end, and there’s this piece in the middle where you collaborate.”

This story published by The Economic Times relates how it’s hard to be a Venture Capitalist and even tougher to be his wife. “When a startup shuts down (…), everyone sympathises with the entrepreneur. Which is fair - he lost his company. What's amusing is how no one thinks of the VC who lost all his money and got nothing in return except a certificate of “You don't know how to make a good investment”.”

In his essay A Unified Theory of VC suckage, Paul Graham, founder of the start-up accelerator Y Combinator, explains why VCs are arrogant and why many stakeholders dislike them, including other VCs: “They were the most arrogant people I've met in my life. And I've met a lot of arrogant people. I'm not alone in feeling this way, of course. Even a VC friend of mine dislikes VCs.” According to Graham, it has something to do with the VC funding model itself which forces each individual partner to invest a lot in each company: “with so much at stake, they have to be paranoid … they have to be devious.”

Toward empathy

This article is not about commiseration and is certainly not about being condescending. It is an attempt to understand what is behind the curtain, open up the human, vulnerable side of investors, and develop empathy for them, including the mighty ones who are keen to flex their muscles.

With empathy, you can change little things in your behaviors and transform your relationships with investors.

Here are a few suggestions:

1. Before meeting with a VC: Develop a deep understanding of their investment thesis, investment criteria (the visible and hidden ones), investment process, philosophy, successes, and failures. Don't pay too much attention to their marketing; be scientific about your research, and prepare well to facilitate an evaluation.

2. During the discussion phase: Try to manage their fear by showing that you are a master of the return/risk rationale. VCs must feel that you are transparent, that you play fair, and that they will look good by investing in your company. If they don't respond to your emails or return your call, don't take it personally, and do not judge them; stay professional.

3. In case a VC says no: Follow this advice from Brad Feld, co-founder of Foundry Group: “Trying to push past the no is usually pretty ineffective. Instead, recognize that they're saying no to investing in your company now. In the future, depending on what progress you make, many VCs are willing to revisit your company and potentially invest in the company downstream (Linkedin).”

4. In case a VC says yes: Set yourself the goal of getting to know them better, and develop your listening skills. You can also try to help them in their endeavor by promoting their investment thesis, showing gratitude for their good actions, locating promising investment opportunities, making qualified connections, and sharing your technical expertise.

Please do it for them, not for yourself, and see what happens.

Just try.

Venture capitalists invest based on three core elements: the team, the product, and the market. These usually combine to form two standard investment criteria: the team-market fit (or founders-market fit) and the product-market fit. If you address a large market with the right team and an awaited product, your company will likely create financial value in the short-term—which is enough to satisfy VCs. But what if you aim for a higher purpose? What if it is not enough to fulfill your life?

Introducing ideology, the 4th element.

In their book Build to Last, best-selling authors Jim Collins and Jerry Porras argue that a core ideology is an essential element of visionary companies, like Sony, Hewlett-Packard, Merck, 3M, Johnson & Johnson, Boeing, Marriott. These companies have "a sense of purpose beyond just making money" and a clear ideology to support it: "This is who we are; this is what we stand for; this is what we are all about.”

Extract from Sony's ideology (source: Build to Last):

Sony is a pioneer and never intends to follow others. Through progress, Sony wants to serve the whole world. It shall be always a seeker of the unknown … Sony has a principle of respecting and encouraging one’s ability … and always tries to bring out the best in a person. This is the vital force of Sony.

Ideology's uniqueness

Ideology includes both core values and purpose, but according to Collins and Porras, "it should not be confused with specific cultural or operating practices." It is broad, non-operational, beyond profit, and long-lasting. "Ultimately, the only thing a company should not change over time is its core ideology" (Collins & Porras). Ideology does not follow market trends, like a brand does, nor depend on organizational constraints as corporate culture. It is founders-driven more than market-driven, so it may sound unproductive, irrational, or even detestable, but that does not matter. Ideology plays its role as long it is clearly articulated.

An unfair advantage

Imagine living the creation of your legacy. Ideology can bring you this kind of advantage. It turns long-term consistency into the influence and strength required to do great things. Then, great things compound to create impact, ongoing progress, and legacy. It can take the form of an enduring company or anything else impactful and memorable (e.g., a movement, a book, a contribution). Experiencing this journey is a source of continuous satisfaction and an antidote to mental fatigue. At a more operational level, hard things—like recruiting, fundraising, or selling—are easier for ideologically driven organizations.

Entry barriers

Collins and Porras ask: "How many companies have you encountered that articulate a clear ideology at the start of the company, yet cannot articulate of what products to make?" Very few! Entry barriers to articulating an ideology are higher than creating an original product or choosing a go-to-market strategy. An ideology's expression requires some life experience, maturity, and wisdom that one rarely gets before midlife. Young founders can still work on the three core elements and develop an ideology later. "In some cases, like Sony, the ideology derives from the founding roots. In some cases, like Merck, it comes from the second generation. In other cases, like Ford, the ideology went dormant and was rekindled in later years" (Collins & Porras). It is never too late.

Message to investors

Consider adding the 4th element to your investment rationale. Make it your brand and differentiate from the crowd, as renowned VCs do: A16z focuses on the team, Founders Fund on the product, and Sequoia Capital on the market. You can choose to focus on ideology (besides the three core elements). And in case you don't encounter enough companies meeting this criterion, you can still encourage the ecosystem to develop it. A good way to do so is to support a purpose beyond profit and give space to this idea. By doing that, you will increase your chance to attract and pick visionary companies in the making.

Message to founders

Make the 4th element your primary element.

HouseTrip, the European holiday booking scale-up, was acquired by TripAdvisor in 2016, after having raised USD 60 million from top Venture Capital firms (Index Ventures, Balderton Capital, and Accel Europe). Co-founders Arnaud Bertrand and his wife, Junjun Chen, left the company eighteen months before the sale and settled down in Shanghai. Although their initial market vision was right, their main competitor, Airbnb, has progressively become the dominant leader in the industry.

"When I learned about Airbnb's IPO in December 2020, I was left with a feeling of regret—not only for us but also for Europe," Arnaud said. "This IPO reminded me that Airbnb was the clear winner of a war that only a few in Europe knew even happened." In Arnaud's mind, it was a war not only between two companies but also between two economies. "Macroeconomic factors were at play against HouseTrip and in favor of Airbnb." Despite the European ecosystem's progress over the last five years, "there is still an economic gap, and Europe should debate it."

The US propaganda

"When Airbnb arrived in Europe, they were already more popular than us. It was over. We had lost the war." With thousands of specialized blogs, newspapers, and magazines, the US is incredibly efficient at promoting its champions worldwide. "It was hard for us to compete against this continuous flow of free advertisements." He added, "It was sad that the European media were also diffusing this US propaganda rather than creating original content about European tech."

In China—a country that Arnaud and Junjun know well—the media do just the opposite. They are more "hermetic to the US propaganda" and promote their champions. Europe is still behind compared to China and, more dramatically, the US. While most European entrepreneurs see the US as an Eldorado to scale their businesses, Arnaud also sees it as "a great megaphone" for American start-ups to expand internationally. "If I had to do it all over again, I would consider going to the US just for this reason," he said.

The government’s role

After the end of the Cold War, President Clinton reportedly refocused America's intelligence agencies towards economic espionage to benefit American companies. Arnaud referred to this to assume (without proof) some invisible support from the US government: "I would not be surprised that the US economic intelligence supported Airbnb in their international expansion." He also mentioned the French law ALUR, which aimed at "weakening HouseTrip's business" (by forbidding the rental of entire properties), but with exceptions that favored Airbnb (exempting shared rooms from the law).

"In China, there are people from the Communist Party in charge of helping each company." Chinese authorities have a plan to create smart partnerships with foreign corporations and build value chains in key verticals, like the automobile (e.g., Tesla) or electronics (e.g., Apple) industries. In Europe, public authorities still lack business understanding, economic vision, and political commitment to fight on an equal footing with China or the US.

The investors' profiles

While HouseTrip raised USD 60m, Airbnb raised USD 800m in the same period—13 times more. I thought financial power matters, if only to kill the competition, but may be limited in Europe. Arnaud disagreed: "We never had problems in raising funds; successful start-ups can easily fundraise even in Europe. And if it does not work with European VCs, they can still approach American VCs". Therefore, finance is not a cause. It is a consequence.

According to Arnaud, the difference between the US and Europe is related to the investor's profiles. In Europe, the influential venture partners have a pure financial background. They mostly come from investment banks. Financiers know how to pick the right companies and make deals, but they don't support entrepreneurs in other ways. "I was naïve, as I thought we could get more than capital." On the other side, many American investors have an entrepreneurial track-record and can further help entrepreneurs with a peer-to-peer relationship.

After HouseTrip, Arnaud went on a meditative trip to Nepal for four months. There, he wrote a book to "reflect on his own mistakes," which he completed but never published. When I asked him why, he said: "Success is a public affair. Failure is a private funeral" (a quote from Rosalind Russell and an elegant way to keep secrets).

I finally asked Arnaud why they moved to Shanghai and how their life was. He told me that they wanted to offer their two daughters a dual Chinese and French education that could be found in neither France nor Switzerland. "In China, education is a religion, and Shanghai is one of the best places in the world to educate children." Businesswise, they have been active investors and entrepreneurs in various projects, but not at the same scale (see the Me & Qi project).

He finally confessed that the HouseTrip experience was "traumatic" in some aspects because it was very intense and continuously stressful for five years. Today, they have recovered, lost weight, and healed with this bonus of living a multi-cultural life.

In his famous book, Rich Dad Poor Dad (1997), Robert T. Kiyosaki wrote how his friend’s father (“Rich Dad”) managed to accumulate wealth and obtain financial security while his own father (“Poor Dad”) worked hard all his life and struggled with money. His rationale lies in the financial concepts of assets and liabilities: An asset is what puts money in your pocket even when you’re sleeping, a liability is what takes money out of your pocket even when you’re working. Rich Dad buys or creates assets and minimizes liabilities.

I see a similar pattern among the types of entrepreneurs: Those who can build a great company—an asset—and eventually succeed to become Rich Builders, and those who are exclusively focused on making an original product. The latter (Poor Makers) are more likely to fail. Brian Chesky, CEO of Airbnb, said: “it doesn’t matter how great your original idea is. If you cannot build a great company, then your product will not endure”. You build a company, and you make a product. The difference between the two is the (relative) permanence of the building.

What is a great company?

I like this definition from Jim Collins, author of the bestseller Good to Great, who explains in a video the three achievements in building a great company: “superior results, distinctive impact, and lasting endurance”. To me, the latter is certainly the most representative of success. A great company is an enduring company. It endures because it can generate superior results and make a distinctive impact.

The legendary venture capital firm, Sequoia Capital, listed eleven key elements that, according to the team, give startups the best shot at becoming enduring companies. Some of these elements seem obvious, such as addressing large markets or “choosing the first few hires wisely”. Others are more surprising but as critical such as clarity of purpose, frugality, and, my favorite one, inferno: “Start with only a little money. It forces discipline and focus. A huge market with customers yearning for a product developed by great engineers requires very little firepower”.

From a purely financial perspective, a great company is an asset that generates financial returns above investors’ expectations (e.g., they expect 15%, but the asset returns are 30%). People who build such company assets manage to capture a lot of value from the market. Their companies are like powerful magnets attracting customers who are willing to pay a higher price for their product, and investors willing to invest at a premium valuation. If you are on the selling (entrepreneur) side, you can take advantage of it by marketing yourself as an asset builder and not just as a product maker.

The two pitfalls to avoid

When you start a business, you don’t necessarily care about building a company. You just want to make an original product for solving a problem, realize your idea, showcase what you are capable of, raise seed funds, and reach the market. This process is undoubtedly central and deserves the right attention. However, making something new is addictive if you let yourself be enchanted by the journey of creation, escaping the building's harsh reality. Roelof Botha, Sequoia partner, gave a great piece of advice to entrepreneurs: “Founders should think of their company as a product and build it and shape it with the same passion and care” (source: Fred Wilson). Your product is your company.

Assuming you have taken this important step, you must be aware of another pitfall: the flywheel effect. Jim Collins used this metaphor to describe the slow, invisible, sometimes discouraging, process of creating business momentum: “In building a great company or social sector enterprise, there is no single defining action, no grand program, no one killer innovation, no solitary lucky break, no miracle moment. Rather, the process resembles relentlessly pushing a giant, heavy flywheel, turn upon turn, building momentum until a point of breakthrough, and beyond”. In other words, you must keep doing what you do with discipline and consistency. Be patient. It takes time to see results, not months, but years, and sometimes decades.

The necessary transition from making to building

What happens if you don’t transition? You keep developing an original product, but this product remains a liability. It never turns into an asset because there is no organization or business system to support it in the long run. If you don’t realize it soon enough, you may end up with one of these three unpleasant options: a bankruptcy, a product trade sale, or an acquihire by a well-established company. There is no need to mention that the lowest possible valuation would apply to the last two transactional options.

To transition, you must create both organizational and business systems. Below, I structured six principles that I think are instrumental in building these systems. The first three principles relate to intangible elements and human capital; the last three principles relate to tangible elements and financial capital.

1. Create an efficient brand: A brand is not about graphic identity, and it is not limited to having a vision. If you have one, that’s great, but it is not a brand. According to Sue Mizera, managing partner at Torchfish, a brand comprises nine elements: vision, mission, target, offering, personality, promise, core values, name, and differentiation. You must coherently work on all of these elements to build an efficient brand. See this short video to know more.

2. Set up a high-functioning team: this principle is not just about finding and recruiting the best talent for a job. To build such a team, you need more than competitive incentive plans. As in the Netflix example, you want to have an inspiring brand and to develop a strong corporate culture to keep people unified and steady, whatever the external situation. 

3. Interact with your community: continuous interactions with your community constitute the best way to validate what people want, both at launch and at scale. Your community is your guide to discovering hidden market needs in your industry. If a large community has your back, you are in an excellent position to grow fast with less spending on marketing and with more financial freedom.

4. Follow a niche-to-mass market plan: start by manually addressing a few rich customers who have a critical problem, are willing to move fast, and can pay a premium price for your product. Make these few customers very happy. Then, grow from there to reach a niche market that can become a mass market. Whatever the stage you are in, make sure your business can grow.

5. Build an economic engine: there are two types of economic models—the fuzzy ones and those with strong unit economics. The latter validate everything: the problem, the solution, the product-market fit, the potential, the monetization, and the scaling—all in one. Strong unit economics built into a business system becomes an economic engine or, if you prefer, a money-making machine.

6. Master your return/risk rationale: finance is mainly a matter of the return and risk rationale. All stakeholder categories (e.g., entrepreneurs, investors, employees, advisors) want the same thing: to maximize their return or minimize their risks, ideally both. To align interests and create long-term value, one must know, talk, and walk this rationale. 

Everyone can be a builder. The primary qualification is being aware of what it takes and how long it takes to build. Start as early as possible and continue with discipline, consistency, and patience.

Make, then build.