October 01, 2020
Fundraising Startups

The Case for Camels: Part 2


Why backing innovators that seek balanced growth, not just growth-at-all cost, is good business and good investing:

The Silicon Valley model for venture capital is built around finding and funding the next unicorn – Silicon Valley’s term for high-growth billion-dollar businesses. Success for venture capitalists in this arena often only requires one investment that experiences a large enough growth multiple to make up for the losses of the other companies in the larger fund. As fund sizes have become consistently larger in recent years, the hunt for the elusive unicorn outcome has become that much more critical for a chance at compelling financial returns.

Outside Silicon Valley, and particularly in emerging startup ecosystems, the most successful entrepreneurs build camels – not unicorns. Camels are still of course wired for growth – ambitious, exponential, industry-shaking growth – but because they are built in tougher ecosystems, they are also built for the long haul, weaving in sustainable unit economics from day one, managing burn, and valuing resilience. This in turn translates to a more predictable and balanced risk and return outlook – without sacrificing the upside.

Instead of chasing unicorns, venture capitalists should fund the next caravan of camels.

First, what’s happening outside Silicon Valley? The rise of camels.

“What we’ve seen at Endeavor over the last 20+ years is that the most successful scale-up founders in emerging and underserved markets have this unique combination of ambition and resilience. They understand how to step on the gas and really invest in growth when opportunity calls for it, but also know how to hunker down when needed. Built both to thrive and to survive, these scale-up companies drive growth that is capital-efficient and crisis-resistant – in other words, exactly what they need to be to build enduring, long-term value within their fast-growing (but more volatile) markets.” – Allen Taylor, Managing Director, Endeavor Catalyst

In 2013, you would have been right to think most of the action in tech was in Silicon Valley and a handful of other markets. Only 4 markets had created billion-dollar companies. Today, global industry leaders. The largest credit-led digital bank is in Brazil (Nubank), the largest robotic process automation company was born in Romania (UiPath), and the largest superapp is in China (Tencent).

Outside of Silicon Valley, startups must navigate ecosystems with less capital, less resources and often more macroeconomic uncertainty. As a result, the leading startups are more likely to be camels, building on a strategy that is focused on efficient, enduring, and long-term growth. It is of course the strategy de riguer in emerging markets, but plays equally well in emerging startup ecosystems in developed countries. The stories of Qualtrics in Salt Lake City, or Grub Hub in Chicago exemplify this phenomenon. Similarly, Atlassian was founded in Sydney, Australia in October 2002. It took until July 2010 for them to raise their first outside round of capital from Accel Partners. The software maker went public in December 2015, with a market cap of $4.3 billion. Some camels even go to the extreme and never raise at all. MailChimp founded in Atlanta generated over $700 million in revenue through digital marketing, all without ever raising a dollar of VC funding.

Camels can of course exist anywhere, including Silicon Valley: just look at Quizlet, the $1 billion dollar Camel.

What does that mean for a venture capitalist who invests in Camels?

“It is clear that the market for venture capital is shifting both geographically and in terms of risk profile. As such the product-market fit, that incidentally we insist on for the companies we invest in, is shifting too. We’re already seeing a lot of experimentation in funding models and it is imperative that we converge on a more sustainable model soon.” – Sid Mofya, COO, Draper Venture Network

Investing in startups anywhere is inherently high risk. Over 90% of startups fail. Venture capital’s return profile is dominated by a power law. Unlike normal distributions, in a power law the top few companies see outsized success, and the remainder see mild to no returns.

In Silicon Valley’s chase for growth-at-all-cost-style unicorns, when a business shows signs of success, startups raise a large sum of capital – at even larger valuations – to capture market share rapidly before anyone else does. This leads to fierce competition, and usually only one or two startups will be successful in that market. For every Facebook, there was a Myspace.

Because of this concentration in so few so-called “fund-returners”, estimates suggest that after fees, half of all venture capital firms don’t return their capital (a zero or negative rate of return), and only 5% return more than three times the capital (the equivalent of 12% annualized return over ten years). This means that after ten years, half of venture capital firms provide worse returns than comparatively investing in low-interest checking accounts (at a much higher level of risk). Even when half of firms perform poorly, however, the average industry return remains quite attractive. That’s because returns are highly concentrated among a few firms and, within them, in a few deals that generate most of the returns.

Of course, the venture capital model is power-law driven, whether in Silicon Valley or not. However, I believe the theoretical camel-centric portfolio mix is just different, creating a lower chance of astronomical returns (for now) but a greater hit ratio – generating more consistent returns, with less capital intake and a lower risk of posting a loss. See the image below for a (highly imperfect) graphical representation.


The data is still early, but there are already strong indications. For one, survival rates are higher in emerging startup ecosystems. At the same time, because they are more capital efficient (and valuations on average are more reasonable), they can generate greater cash-on-cash multiples on higher ownership. A study by PitchBook Data demonstrates that venture capital returns in the US Midwest are among the best in the country. Remarkably, among successful exits, nearly half (45%) of Chicago investments have provided a multiple on invested capital (MOIC, the capital returned relative to the original investment) of 10x, compared with only 25% in the Bay Area (because of tell-tale camel signs of greater capital efficiency and more sustainability). From 2006, the average MOIC was 5.6x for Chicago, outpacing the Bay Area’s 4.2x by a significant amount. Cambridge Associates, an investment consulting company, estimates that the average return for emerging-market venture capital and private equity over the past 15 years is more than 10%, and under certain metrics exceed Silicon Valley. Over time, I expect we will continue to see greater evidence for the attractiveness of investing in Camels.

“The optimist in me looks forward to the day when we have a more sustainable model for venture investing that is not winner take all.” – Consuelo Valarde, Co-Founder SV Latam

What does this mean going forward? An evolution. 

As the world shifts towards a more global startup ecosystem, we will also need to see proliferation and adaptation of the venture capital business model. By changing the way VCs search for new investments and by valuing more economically stable companies over longer time horizons, venture capitalists can create healthier and less risky startup business environments, reward well-run startups, and mitigate their own high risks. It is a win-win-win, and in the face of current market instabilities, it seems like the right time to start adjusting venture capital strategies.

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