To Raise or not to Raise: Insights from Shadow Ventures Founder and CEO, KP Reddy
Review of Raising Capital vs. Organic Growth for Proptech and Contech Start-ups
by Aktham Dabbas and Cristina Savian
We had the pleasure of hearing from KP Reddy, founder and CEO of Shadow Ventures, last week at the House of Digital Twins Clubhouse. As a serial entrepreneur and civil engineer by training, KP has amassed over 25 years of experience consulting for start-ups, enterprises, and Fortune 500 companies and is recognized as a global authority in AEC built environment technology.
KP started by highlighting that the ecosystem of venture capital today looks a lot different to the one he was first introduced to a couple of decades ago. He notes, “I completely bootstrapped my first company with credit cards, having to go out and buy $20,000 worth of servers to get the product online in the first place. Now, because of how much easier it’s gotten with lower barriers to entry, you’re having to compete with talent from all over the world that’s able to bring a product to market in just as quick of a time... Venture Capital is actually the most expensive type of capital you can access to grow your company. Because of that, as an entrepreneur, you ought to be careful how, when, and if you choose to accept dilutive growth capital to drive your startup’s vision.”
"Venture Capital is actually the most expensive type of capital you can access to grow your company" - KP Reddy, Shadow Ventures
So, what is it that startup founders keep getting wrong about venture funding?
1) Use VC as Fuel, Not the Spark.
For starters, KP uses a simple rule of thumb to determine whether a startup should seek venture funding to scale: “... if you believe you can hire someone off the street and they can sell your product, then you are ready for venture capital. It’s about whether you need funding to grow the company in the first place or to add fuel to the fire. It needs to be an already growing beast, or you’re in for an unpleasant surprise.” Alternatively, he argues that if you are still using your network to sell your product, then you shouldn’t be looking to deploy venture capital until you start to see real traction in the market. Once there, that money can be used to pay strangers to effortlessly sell your product or service with consistent demand and growth.
2) Cognitive Bias: Investor Validation vs. Product-Market Fit
Some have argued that more capital can be one of the answers to the lack of technology adoption in the AEC industry, but KP sees this differently. Founders may be inclined to misconstrue a successful fundraiser for the actual success of their company-and it can be easy to become complacent once you have successfully convinced someone enough that they are willing to write you a check. But just because an investor likes your idea, doesn’t mean the market will. And even if it does, there’s no guarantee that your end-user is going to want to buy it. You may have chosen a big enough problem to solve, but not the right solution to tackle it. You could also very well have both but at the wrong price, or just none of the above. “The key, if you’re going to pivot and adapt your business to market feedback,” says KP, “is that it should have to do with the solution and the way it might be framed, but not the problem. If you’re changing problems, then you are just changing the business itself. It’s no longer the same company it was at the start.”
3) Friction vs. Immovable Object: Unique Characteristics in the AEC industry
How do you know when to stop beating a dead horse? In KP’s opinion, it is especially important for founders to understand the difference between friction and immovable objects when pursuing their start-ups. This is especially true with AEC tech startups seeing as they don't scale the same way SaaS companies in traditional verticals do. Rarely you see companies in this space hit a hockey stick moment and go viral within months the same way DropBox did, for example. Unlike most industries being disrupted by technology, slow and steady wins the race.
Generalist VCs tend to struggle with this notion and may put unrealistic expectations in place without the consideration that AEC startups don’t succeed by selling their products to enterprises or consumers, but to PROJECTS instead—one team at a time. Therefore the buying decisions here become bottom-up in nature.
Unlike most industries being disrupted by technology, slow and steady wins the race.
The critical point of this Clubhouse discussion is that, contrary to popular belief, not all technology companies are venture fundable. “People are typically inclined to look at BIM or Digital Twin and think therein lies a trillion-dollar market opportunity. In reality, people don’t realize how tiny those markets become once you break them down into their addressable segments to identify an initial penetration point. In most cases, too tiny to be considered venture fundable" argues KP.
Those are the types of situations in which the only chance of success may be organically building a company that generates only $5-10M in sustainable income and pivoting it to wherever the market tells you to.” With this in mind, startup founders must challenge themselves with metrics that are inherently difficult to measure at pre-revenue stages.
This seems to be the one thing that early-stage startups trying to innovate in the built environment have severely lacked up to this point, as they often feel the need to track progress against the same outcomes that might apply to other venture-funded companies in their investors’ portfolios—because investors are looking to feed underwriting and performance spreadsheets on a one-size-fits-all basis. It doesn’t take very long, in this case, before inputs being plugged into a given formula start to look more like ill-founded assumptions being placed into a black or white box.
This is an incredibly important factor to consider for startups considering venture funding, especially from investors that operate across general industries. Founders become accountable to KPIs that stand to be completely unrealistic to their stakeholders’ expectations, and if they aren’t meeting quarterly targets, investors will be looking for justification by trying to translate traditional outcome measures like MRR, ARR, and the like, making entrepreneurs feel like they need to fit into a narrative that just doesn’t apply to them.
The answer? If AEC startups decide to accept venture funding, they ought to seek investors who can act as operational mentors to, for lack of a better phrase, beat the crap out of their ideas. This can prove immensely helpful as early-stage startups cycle through phases of trial and error to achieve product-market fit, or at least abandon a bad idea before completely running out of resources to adapt to market conditions. The hope is that, by surrounding themselves with investors that provide a deeper level of industry insight, start-ups can make decisions about the merits of their solutions in advance of completely burning out their runway..
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