Venture capital in shrinking markets: An unfiltered perspective
In a shrinking market, founders are faced with a tough choice: scale locally or expand globally. And for many, that means heading to the U.S. with its low barriers to starting a business and abundant resources for startups. This shift leaves local venture funds in a bind, struggling to maintain relevance.
Two paths present themselves for these venture funds:
- Retreat to the familiar: By investing in the second-tier founders that remain within the local ecosystem, funds may achieve modest success in smaller, less competitive markets. However, the long-term sustainability of such a strategy is questionable.
- Embrace change: Venture funds can pivot to aim for a global stage to stay competitive. This move requires them to prove themselves and build their reputation, reputation, and network—all while competing against fierce competition.
A mythical third path is also proposed: win back top founders by offering a vision of market entry. But this approach is problematic for several reasons:
Top Founders Don't Need It
Founders capable of succeeding in the U.S. already understand their value. Aligning themselves with local investors who might tarnish their reputation in a more competitive market isn't a smart move.
Top VCs Back the Best Founders
Top-tier VCs prioritize working with the most promising founders to keep their brand strong. Forcing such VCs into setting their sights on second-tier founders could backfire.
Promises of Market Entry Can Harm Founders
Overpromising and underdelivering on market entry strategies can harm founders by misbranding them or undermining their credibility in the global marketplace.
Ultimately, the best founders choose the best VCs. If the top performers in a shrinking market aren't picking you, your days as a top-tier VC may be numbered. At this juncture, venture capitalists must re-evaluate their strategy, as product-market fit hinges on one crucial factor: customers—the entrepreneurs they serve.
In light of a shrinking market, venture funds must now decide whether to remain loyal to their roots or adapt to meet the challenges of a quickly evolving global landscape. The choice for founders may be straightforward, but the path forward for venture capital is anything but.
In light of this scenario, venture funds might consider exploring alternative investment opportunities in lesser-known markets to mitigate their potential decline. This approach could involve seeking out promising ventures and entrepreneurs in these markets, utilizing the 'VC in a box' model that provides local expansion alternatives.
Moreover, collaboration with international venture capital firms or partnering with local incubators and accelerators could potentially open new doors to potential investments and market expansion prospects. By striving for diversity and expanding their horizons past traditional markets, venture funds can maintain their relevance in an increasingly competitive landscape.
