Categorising Startups in Asset Class

A human mind is a categorisation machine. It is this cognitive ability that saves us from getting overwhelmed with abstract information.

This ability to categorise comes in very handy especially when we are attempting hard things like startups.

One categorisation that I have come across and I have not heard other people talk about is – categorising your startups in Asset Class.

An asset class is a group of financial instruments that have similar financial characteristics and behave similarly in the marketplace.

Asset Class has two important characters:

A. Expected Risk

B. Potential Return

“Low Risk / Low Return” are categorised as Defensive Assets.

“High Risk / High Return” are categorised as Growth Assets.

Based on this startups (at any given stage) can also be broadly classified as:

• Defensive startup* (potential to give a return of 5-10x on the initial investments)
• Growth startup* (potential to give a return of 50-100x on the initial investments)

Makes sense?

Now, why is it important to categorise your startup like this?

It becomes important if you are thinking of raising venture capital. Because venture capital is explicitly meant only for one of these Asset classes – Growth Startups (why is that? this is a separate topic that requires a dedicated post).

It makes no sense for Defensive Startups to raise venture capital.

Whenever a Defensive Startup raises a Series A, either of one will be true:

1. VCs hedging lesser than they should (due to the competitive market).
2. Founders doing the above Asset Class categorisation wrong and thinking they fall into ‘Growth startups’ asset class (and then just raising money because they can).
3. Founders thinking they can use capital to move from Defensive to Growth (and then raising money because they can).

As a founder, 1 is not in your control but 2 and 3 are.

So, be as honest as possible about this categorisation.

A defensive startup raising venture money (because of either 2 or 3) could be as lethal as a retired person putting all his life savings in bitcoin (heck perhaps even Dogecoin). It might… just …. work out… but you won’t be able to stomach the volatility of the market.

A quick litmus test to know which category you fall into:

Imagine you raised a $5M Series A today. Do you foresee that you will be able to return $100M+ in a 10 year time frame? Just for quick math: In order to return $100M, you would likely need an exit of $400M+.

Most of the startups are not Growth Startups. A lot of them are not even Defensive Startups.

After reading this, some common objections might come to your mind.

1. Why can I not raise venture capital and use it to move from Defensive to Growth Startups?
You can NOT buy your way through the 0-1 journey. In startups, capital accelerates whatever is already happening. It acts as a Catalyst, not an Alchemist. If you do this, you will likely gamble away your chance of a 5-10x return (more on the ‘why’ of this in some other post).

2. Can a startup move from one asset class to another?
Of course, This is not fixed across the lifetime of a startup. Both internal (change in startups strategy, product, etc) and external (market, ecosystem, etc) evolution can make this happen. As founders, we should reflect on this categorisation every year or so to see if things have changed.

Any more objections? You can reach out to me at m@mayank.ink. I’ll happy to answer.

Notes

* The terms Defensive startups and Growth startups are mapped directly from the classic asset class categorisation.