Lessons - The Truth About Venture Capital Nobody Tells You | Rand Fishkin - Author of 'Lost and Founder'

In this lessons episode, explore how the culture of venture capital shapes modern entrepreneurship and why it often limits sustainable growth. Discover why most startups fail under hyper-growth expectations, understand how alternative funding models can build profitable and lasting businesses, and uncover how redefining success beyond hustle culture leads to balance, equity, and genuine fulfillment. I think that the ideas that you champion around entrepreneurship are very important, because it paints a very pragmatic picture for people that want to start something, and potentially are just looking to go find VC money and think that that's the only path that they can take, which it's not. Yeah, well, and even for people, one of my big frustration, Scott, is that even for people who don't raise venture, they build their companies in the media ecosystem and the echo chamber that is dominated by venture. Right, and so even if you are a startup that is an agency, for example, a consulting business, the concepts of blitz scaling and hyper-growth and growth hacking and maximizing growth rate of hustle culture, all of these things are weighing down on you regardless of whether you are actually, you know, in that funded structure. So I think this is one of my big challenges, right, is that even though many venture capitalists would say, and they do say this all the time, right, they say VC is wrong for 99% of companies. And if you're a tech entrepreneur, it is marketed to 100% of us, right? It's the ocean that we're swimming in. So I think it's really, really wise to understand why does that asset class exist? How does it function? What's the goal behind it, right? The goal behind it is to avoid taxes. And the goal behind that is essentially maximize growth at the expense of long-term survivability. So, you know, if you look at the small business and administration, right, in the U.S., which looks at tons of small businesses. So people with whatever, two to 100 employees. The average survival rate over five years is like, I think it's 55-58%. It's down a little bit in the last few years because of COVID and stuff. But the average five-year survival rate for a venture funded, as soon as you raise that first venture round or the pre-seed or the seed round that would lead to a venture round, your five-year survival rate drops like 15%. That's a lot worse than a restaurant, right? So it is a very strange strange world if you are an entrepreneur. And I don't think it's talked about enough that these high failure rates exist. There's also the culture of, you know, I think the whole ecosystem around it creates this idea that, you know, Scott, let's say you start something tomorrow, what you're essentially told is, hey, yes, there's a high failure rate. That's part of the game, but you are special. And if you are good enough, if you are a true champion, if you work hard enough, if you sacrifice enough of the rest of the things in your life and you put your full energy and effort and you devote everything to this venture, you may be able to prove yourself as one of the big success stories. I hate that too. Like, that does not work well with my mental model and how how I want the world to be, right? I want a world of far more equity and far more distribution of opportunity rather than maximizing inequality by saying for every, you know, 500 entrepreneurs, there will be two or three big winners and a few who do okay and the vast majority will fail entirely. I think that's what we have in society, American society at least, overall right now, you know, if you look at the wealth distribution, income distribution, it's basically a tiny few massive winners, right? A few, you know, maybe another 10% who's doing pretty all right. And then kind of this, oh man, you do, you know, whereas when we were born, you know, maybe I don't know how old you are, but 30, 40 years ago, you really didn't want to be in the bottom 40% of Americans. Now you really don't want to be in the bottom 70% and it feels like we're going to a place where you wouldn't want to be in the bottom 90% in another 20 years. That's ugly. That's not the world I want to live in. That's not the world I want to agree. It's an ugly version of capitalism. It's an ugly version of capitalism in that. Yeah. Yeah. Super ugly version. And look, I, you know, I think extremely highly of a lot of people who are in that world, right? I have a bunch of investors who are venture back. Darmeshaw, Darmesh, the co-founder of Habsaw. He was, he was the lead investor in Spark Toro. He's been my friend for forever. I love that guy to pieces. I think he's a wonderful human being. I don't love the model of investing that he generally does and supports, right? And he's had obviously an incredible success with HubSpot and with venture backing. I know he thinks highly of HubSpot's venture investors years ago and he invests in a lot of startups that go on to raise money. But I don't, I don't, I don't love it. And I think, I think in order for us to change that, we have to have lots and lots of role models that are showing a different path and doing it well. And that's, that is the most fundamental thing that Spark Toro is trying to be is a role model for a different kind of path. So we are doing our marketing differently. We're doing our growth differently. We're doing hiring differently. We think about what we want the next quarter in the next year to be differently. We technically, we are growing at a rate that a venture investor would be excited about. But we don't have to be. It's almost unintentional, right? It's sort of like, oh, well, look at this happy accident that is going along. You know, Spark Toro is going quite quite well, especially at the moment. I'm sure we'll have some down months in the future. But yeah, that's not our goal is not hyper growth. My goal is to work 30 or 35 hours in a week, right? I want French or Italian hours. I don't want American hours. I'm not drippers. Yeah. All right. That's the last one. I mean, it'll be like, of course, I know exactly what you're talking about. If I remember last time, last time I went to, I was, I was last, last European trip was Vienna, Austria, and the I was on my phone on a Friday afternoon. And everybody was looking at me like I had three heads, like the fact that I was on my phone on a Friday afternoon. It was just a regular for wasn't the holiday. It's like, what are you doing? Like what are you working on? It's like Josefra. Yeah. Yeah. Get off your phone. Look at the beautiful sunset. Look at this incredible plate of pasta before you just go to a vineyard. Let's go drink. Let's go eat. Let's rest so get an aperitivo. That's so I mean, I don't think I don't think that at the, you know, at the end of my life, I'm going to look back and say, I wish I'd made more money. You know, like I just can't see it. I just cannot. I wish I, I wish I'd grind it harder. I wish I'd hustled more. Like I don't, I don't think those are the things I'm going to be thinking about. I think it's weird that there may be there are people who will feel that way. I don't know. I don't think so. Well, I think that that's why you have to find a way. Okay. So let's, let's break now. I want to break down some some tactical device for entrepreneurs on on how they can build a company like Spark Toro because everybody, like you said, is marketed and they're in this ocean of VC investment or if not VC investment, then okay, I have to bootstrap, but there's not a lot of bootstrap success. There are some, but I mean, there's not a lot. So how do you, and buddy do it? And these are not the only two options, right? There's a whole bunch of stuff in between that is poorly understood and not well marketed and not it gets very little press, gets very little media and for obvious reasons, right? It's just that there's not that much of it. And also it is rarely the case that those people have power, influence, and wealth to impact media in the same in the same way, right? So so what I would, what I would urge folks to think about is in the structure of your company, you can raise money from investors private or crowdfunded in ways that let you build the kind of company that you want to build. And there are supportive groups of investors who are like, like myself, right? Who are looking for opportunities to fund companies that have a, hey, we're going to exist for a long time. Our first priority is sort of paying back our investors their initial sum. This is, this is how the Spark Toural Model works. We raised $1.3 million from 35 36 angel investors. They're mostly folks, gosh, from my personal network over the years. So you, for our model, you do need accredited investors, but there are innovations on that model that let you crowdfund this, this same sort of thing. You can look at what Sahil Langavia did, SHL on Twitter. And he, you know, he, he basically built a fund structure that, that's a little more crowdfunding style. But those 36 investors put in between $25,000, $100,000 each, and our goal at Spark Toro is essentially to become profitable, which, which we have been for a while now, and then pay back that $1.3 million at which point everybody gets to participate pro-rata, meaning to their amount of shares in profit sharing. So if we make, you know, $100,000 in profit, for 10 years, everybody, you know, all the investors get to split whatever it is, 35% of those profits and founders get to, and employees get to split the other part. Hopefully, right? Our hope is that Spark Toro is a several million dollar a year business, maybe even a 10 million dollar a year business. And that our profits are seven figures, right? And that we can pay out that money every year annually. And that compounded over time, Spark Toro will actually be one of the best, maybe the best performing investment in our investors portfolio, and the only downside, the only shitty thing for them, ordinary income taxes, right? They'll have to pay ordinary income taxes on the money that Spark Toro makes them. But if you can find, you know, sort of, tax progressive investors, right, who believe in this, that the one nice thing is if and when Spark Toro ever does sell, right? If it's acquired by some other company in the future, good news on that money our investors will get capital gains. Thanks for tuning in. If you found this valuable, don't forget to hit that subscribe button so you never miss an episode. And if you want to dive deeper into this conversation, check out the links in the description to watch the full episode. See you in the next one.