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Now more than ever, Bristol start-ups must avoid the venture capital trap

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The fall of Silicon Valley Bank has highlighted the need for startups to handle their finances with care. Agilebase CEO Cliff Calcutt says SVB’s implosion offers a valuable lesson for Bristol tech startups: avoid venture capital investment at all costs.

Clifford Calcutt, CEO of Agilebase

In a stunning move, on March 11, 2023, US regulators shut down Silicon Valley Bank (SVB). This significant failure is the most serious since the financial crash of 2008 and has left the venture capital and tech start-up community in shock. California banking regulators cited “inadequate liquidity and insolvency” as the impetus for their decision, which was made to “protect insured depositors.”

SVB experienced a setback when their sale of assets was impacted by higher interest rates, leading to a loss the bank struggled to fill. This prompted panicked customers to make a rush of withdrawals. SVB’s collapse has since sparked fears about the entire banking sector.

For Agilebase CEO Cliff Calcutt, the failure of Silicon Valley Bank had many causes. But its chief cause was that its patrons were venture capital investors. It was their herd-like behaviour, he says, that precipitated its collapse. 

“Investors hurt not only their interests but those of the start-ups they fund,” said Calcutt. “My advice to start-ups is simple: avoid venture capital investment.

A £100 billion bet on interest rates

Silicon Valley Bank (SVB) specialized in providing banking to start-ups flush with cash from venture capital investors. And it was a lot of cash. Deposits at Silicon Valley Bank grew from $62 billion at the end of 2019 to $189 billion at the end of 2021. 

Why did many start-ups put their money in Silicon Valley Bank? Venture capitalists told them to. 

Venture capitalists require their portfolio companies to use approved vendors, such as tech-specialist law firms Morrison & Foerster or Wilson Sonsini. With banks, this means S.V.B. 

At the same time, Silicon Valley Bank assessed its clients’ creditworthiness based on the V.C.s that funded them. A notable investment from a top V.C., such as Andreessen Horowitz, Sequoia Capital or Kleiner Perkins, could open doors.

S.V.B. attempted to invest the money conservatively, typically opting for U.S. Treasuries and other long-term bonds. But this amounted to “a huge, $100-billion-plus one-way bet on interest rates”, according to financial historian Adam Tooze.

As interest rates rose, Silicon Valley Bank faced a double blow: its investments lost value, and its customers needed their money back. With no hedging or diversification in place, the bank was left exposed. 

Alexander Torrenegra, an S.B.V. depositor for two companies and his own accounts, took to Twitter to describe the subsequent events.

“Thursday, 9 AM: in one chat with 200+ tech founders (most in the Bay Area), questions about SVB start to show up.” he wrote. “10 AM: some suggest getting the money out of SVB for safety. Only upside. No downside.”

Insiders noted the Twitter chat was an extension of the way the venture capital community generated groupthink on the grand scale.  An executive from S.V.B. cautioned the Financial Times that the greatest risk to their business is investors. They were “tight-knit” and demonstrated “herd-like mentalities”. 

“Doesn’t that sound like a bank run waiting to happen?”

Take me to the moon

More than 50 years ago, a change took place. Venture capitalists, business angels, and incubators, persuaded entrepreneurs they needed extra funding. Writing business plans and raising venture capital were what founders should do. 

The venture capital industry had good reasons for saying this. Their eco-system sometimes created valuable companies and delivered huge returns. 

“It’s your job to build the rocket, and VCs put the fuel in. If your rocket isn’t as good as you thought it was, VCs have the right to take more of your rocket company.”

But that was just one side of the story.  Harvard Business School’s Josh Lerner has analyzed returns from venture capital funds. More than half of all VC funds have only delivered low single-digit returns on investment. Twenty percent of funds achieved 20 percent returns (or better).  Almost one in five funds delivered below-zero returns.  

For Cliff Calcutt, this is no surprise. 

“Venture capital is, at best, a mixed blessing,” he says. “It depends on who you are. If you’re the founder, and you take VC money, you enter into an understanding: The VC will say, I’ll give you rocket fuel. Now, you take me to the moon. It’s your job to build the rocket, and they put the fuel in. The drawback is if your rocket isn’t as good as you thought it was. If that happens, VCs have the right to take more and more of your rocket company. You get diluted out the door.

“Young kids are getting, in theory, large chunks of money,” says Calcutt. “But does that money ever go to the founders? By the time the start-up is successful, investors have edged the founder out.”

While the result may not be good for founders, the journey to get there can be even worse. 

“With the VC route, you’ll find it’s a full-time job,” says Calcutt. “Investor relations distract the entrepreneur from getting the venture onto a productive path.”

And venture capitalists’ advice is not always as valuable as one might wish. 

“What you hear from the founder’s perspective is investors are never there,” says Calcutt. “When they are there, they’re missing the point – because they’re never there. You spend all your time bringing them up to speed. At which point they may offer advice such as, ‘We need to sell more.’”

To make matters worse, there is a bias in who gets funding. The best idea or team does not always win.  Venture capital firms such as Andreessen Horowitz, Sequoia Capital and Kleiner Perkins employ a stringent screening process to ensure only the most promising businesses and founders receive backing. This process places a great emphasis on “culture fit”, which is a term used to describe whether a founder is compatible with the venture capital firm’s portfolio of companies. The ability to successfully go through this process may be a good sign of the future prosperity of the business.

The theory of ‘culture fit’ is widespread; however, it often works to the disadvantage of women and people of colour. “Culture fit” too often means being a white male engineer with a degree from an elite university.

But the truth is the chances of becoming a blockbuster tech firm are low. Founders may not know it, but VCs are taking a gamble in a high-stakes game of all-or-nothing. In 2012, Facebook alone accounted for over 35% of total venture capital (VC) exits in the US. Whilst a select few portfolio companies return the invested capital, the majority are complete wipeouts; meaning that the few successes must cover the losses. No wonder founders and even investors question the long-term value of venture capital investment. 

Venture capital investor Fred Wilson of Union Square Ventures says the amount of money start-ups raise in seed and Series A rounds predicts success. The less money, the more the likelihood of success. This is because when a start-up raises too much money, it can lead to a lack of focus and discipline. It can lead to a lack of urgency and a lack of creativity. It leads to failure.

Bristol: a tech ecosystem

Calcutt agrees that start-ups are better off without venture capital funding. One of his own clients is proof.

Katie Young runs Beacon Compliance, a Swansea-based firm which helps food producers meet certification and compliance standards.  She started the business in 2015. Since then, it has grown from a turnover of £18,000 to £250,000. She employs six people who help her service 40 clients. She has received no outside investment at all. 

“I don’t owe a debt to anybody. I don’t owe anybody anything. The business is wholly mine,” she says.

She uses Agilebase’s No Code CRM platform for her business. She appreciates the way its charging model supports self-financing firms like Katie’s. 

“It’s a progressive platform,” she says. “You start with basic things. If you add more users, you get charged a bit more. As your business grows, you can reinvest into building the platform to fit your business size.”

Calcutt understood his clients’ need for a CRM system that charged by how much you used it. His firm was bootstrapped too.

“We’ve had no external investors,” he says. “We’ve been profitable since day one. Our balance sheet has grown every year since day one. Our sales have grown every year since day one, apart from minor flattening during the COVID. And those are the sorts of things that gives comfort to your clients.”

Calcutt believes there are lessons to be drawn from Silicon Valley.  Venture capital funding is just the wrong lesson.  The blitz-scaling model of a few big winners and thousands of failures is not the best model for tech firms starting out in Bristol. 

“We can take another lesson from Silicon Valley,” he says.  “Silicon Valley was an ecosystem, which then became global. Bristol must build an ecosystem of its own. Forget about venture capital, an eco-system is Bristol’s path to success. We at Agilebase are engaged in helping to build it.”