Fundraising is Biased and Broken. It Also Works Pretty Well and Isn't Going to Change

Everything you’ve heard about fundraising—all the worst things about it—are largely true.

Yes, straight white dudes get most of the money.

Yes, biased straight white does dole out most of the money.

Yes, many of these founders are pitching dumb stuff that gets funded all the time—especially by people they know.

Yes, someone else in the Silicon Valley insiders club got way more money than you for basically the same idea, even though you were first.

All true.

Here’s the other truth: The venture fundraising process actually does a pretty good job of distributing capital to the founders with the best chance of creating big financial outcomes—at least at the onset. I can’t speak to later stage capital that has nowhere else to go and winds up overfunding a limited number of pre-IPO companies at outsized valuations.

That’s a different ballgame.

But as for the earlier stages when we’re just picking teams and ideas—I think it works best for everyone to assume that it’s actually working rather than dismiss its brokenness. This way, you can reverse engineer your own path to success rather than flip the game board over and decide you’re not going to play the game as designed.

Before you hit reply and send me an angry note, keep in mind what I said there. I didn’t say it funds the founders with the highest potential.

I said it funds the people with the best chance of big financial outcomes.

Take Marc Lore, the founder of food delivery service Wonder, Jet.com, and Diapers.com among other previous efforts.

I’ve never met him, but supposedly he’s very smart and excellent at math.

Is he a Nobel Laureate in Mathematics? No.

(Funny enough, no one is because there’s no prize for math—supposedly because Alferd Nobel just didn’t actually like math.)

He’s from Staten Island and he went to Bucknell, not Harvard. His mom was a fitness trainer and his dad started a small IT consulting company—so, sure he had the basics of housing and financial stability, but it’s not what most people would say were gale force winds at his back, all due respect to his mom, who could probably kick my ass.

In fact, he has stated publicly that, in school, he didn't apply himself and was seen more as a class clown.

So, not only are there a ton of founders out there who were probably equally capable from a raw potential standpoint, he’s also probably someone his high school classmates would have said at their reunion, “THAT GUY is a billionaire? Seriously?”

The differance—and why when Marc set out to raise for Jet.com, he raised over $50 million at a $100 million valuation before he had built anything at all—is that everyone else doesn’t have a track record as long as your arm of starting things and selling them for lots of money.

He sold Jet.com for over $3 billion, Diapers.com for over $500 million.

Before that, at 29, he started an eBay alternative called The Pit that sold to Topps for almost $6 million. He then became Topps’ COO and that kind of became his thing—find a space in the consumer market, try to build something that someone would clearly need to buy even if it didn’t succeed independently, and join the acquiror who would ultimately need his wisdom and experience to compete.

He’s probably the very best at this particular thing—meaning that investors who back him seem to stand a pretty good chance of making money because he’s seen as backable and acquirable—which is ultimately the point.

So while your idea for a new ecommerce site might be objectively better than Marc’s next attempt at building online Costco, launching the next Amazon when Amazon already exists, or smushing all your favorite delivery joints into one location—less than groundbreaking ideas that also burn a ton of cash as they grow—he’s going to get funded for it and you, statistically, probably won’t.

After over one hundred investments in mostly first time founders, a huge percentage of whom hail from communities that don’t often get venture funding, I have to admit something.

I understand why.

Marc probably doesn’t make first timer mistakes or makes less of them than an actual first timer.

If he doesn’t know how to do something, he knows the person who probably does—because they’ve probably worked for him. If he wants to do a deal with a company, he probably already knows someone who works high up at that company.

That doesn’t mean he won’t fail. It just means that his failures probably won’t derail the company and he’s got the track record to be able to raise plenty of cushion for when it happens.

So when I ask around and I say, “Who’s out there who can actually demonstrate they have a higher liklihood of success than most (as opposed to raw potential) that is struggling to raise?” I have to be honest, I don’t get a windfall of responses. Also, most successful founders who struggled to raise early on will admit that, based on what they knew at the time, or how they were pitching, investors were actually right to turn them down.

Most of the time, when people send me folks struggling to raise, I get unproven founders pitching ideas I can pretty easily poke holes in playing in markets no one wants to invest in for good reason.

You can do two things about that if you’re a founder.

You can complain about it, pick up your marbles and go home.

Or, you can figure out why investors think this way, learn what actually proves your potential to be successful, and play the game as well as Marc or the next Marc right behind him.

Does that mean you have to pitch like a straight white guy?

No.

But it also means you can’t be dismissive of the real value of the networks these founders participate in, their willingness (or situational ability) to take larger risks and their prior startup experience.

Like it or not, straight white guys are asking for more money than everyone else.

Like it or not, they’re in networks of insider knowledge that alters their chances of success—and they use these networks better. They make asks of people they met one time on a basketball court 15 years ago, when other people are afraid to reach out to their best friend’s spouse who works at a company they’re trying to sell into, even though they were at their wedding.

Like it or not, lots of “dumb stuff” made investors tons and tons of money, so it’s just not even worth making that argument. (See Bitcoin, Facebook, Twitter, etc…)

This year, I’m going to be writing a lot of content that is less, “Be like this successful person” and more “This is how the system works that creates success… so now that you know about it, what are you going to do about it?”

It won’t be for everyone, but for those people that want a push and a dose of reality, I think you’ll appreciate it and I welcome feedback to the contrary.