Great post—solving real problems is often how startups get off the ground. But I’ve found that some of the most important companies didn’t start by solving a clearly defined problem.
Money also flows to products that create new markets, unlock latent desires, and spark entirely new behavioral patterns.
These aren’t always solving a clear problem—instead, they create gravity, they shift. Enabling what once wasn’t even imaginable, let alone defined as a problem. (Instagram and many others great examples)
So alongside (Problem → Solution → Money) "what problem are you fixing?", there's a parallel dynamic: (Tool/Behavior → Adoption → New Market/Value Creation + New Needs → Money)"what happens if this works?"
This is actually true! There are some other things that impact the way money flows: for example, money is not always right in the short term because it follows excitement/trends (hype) and also is very easy to scare when things don't seem to go right (bull run). However, long term money always knows where real value is created and stays there
Some of the recent investments that have paid off for VC’s have been companies that don’t truly solve a problem, but have a tech or AI wrapper to them, and are sold to public markets or other companies, resulting in a net capital loss to the market - WeWork comes to mind.
as for the Pharma analogy - the most profitable medications these days outside the GLP-1 agonists are specialty drugs that can cost upwards of $1mm but only hit a narrow market - leading to market product fit problems b/c payers are not designed or prepared to pay for these expensive meds…
Is this meant more for B2C type companies? And does this include demand outside the VC network bubble, where VC’s fund ideas that mainly hit their needs, not those of the average consumer?
But, if there is room to disagree with - "Money wants to solve the most important problems". Actually whether you look at VC/PE/Public markets. Most rational/optimal investors do no look into the rule of solving the real/deep problems.
The goal is to ensure optimal risk: reward ratio and corresponding returns for the investment. And that is almost right. Compromising on that means you are actually going outside the sphere of investment. That's also ok, as long that's understood well.
So what matters is the returns.
So if one is genuinely solving a big problem you will still need to go and make it a viable business and sell the story. There are many very important problems many good founders I have met that need long term patient capital, which will basically not meet the threshold for returns. There are very few investors for that - and rightly so, because those are important problems but not money making businesses.
On the contrary there are many non-real problems, but are actually great opportunities to create new markets and exploit those markets, creating new needs, fulfilling those needs and making money in the process. Those are good investments as long as they don't cross the legal boundaries.
Another way to look at the river and valley analogy that you provided is: capital attracts capital. The valley is the equilibrium state for water. The right returns are the equilibrium for investment capital. So it moves from opportunity to opportunity until it finds the one n where it's getting the best returns.
Where there is convincing opportunity to make capital grow, attracts capital - how do you convince about the future capital opportunity? That's the art of storytelling combining the problem-opportunity statement + solution with execution capabilities.
This is a great answer and point, however I don't think it contradicts my analysis, but rather gives it more depth. It's not tha money flows to solve the biggest problems strictly but rather the biggest problems that can be solved with the least amount of effort. So it's a matter of finding which problem has the best ratio effortinxOutcome. (if it makes sense)
Right.. indeed, I suppose it's nuances where we may differ and may not be about the premise.
With your latest comment, yes the way it makes sense to me is:
1. If you can pick a real deep problem.
2. Find a way to make a solution such that it can make a lot of money in the quickest possible fashion.
3. And sell that vision, with compelling urgency at reach stage of the funding cycle, then you can raise capital.
The quickest possible fashion is largely, where I may have a different PoV with the nuance of least effort(max efficiency). A good number of VC run businesses actually beat other businesses who are doing things with significantly less effort and more efficiency, because VC run businesses effectively pour too much capital (too much effort) despite too much inefficiency, but the capital advantage then makes the scale viable and after crossing a certain threshold of critical mass makes it viable only 10/15 years later.
Again I think you and speaking with agreed overlaps, may be just some nuanced differences :)
Great article, thank you very much for sharing! I also recently wrote a short article on how money flows specifically in the AI landscape, which echoes quite well with your points!
Very true Guillermo. VC is focused on solving big problems that can generate big returns. Angel investment is where smaller, niche opportunities can get funded by investors that have a broader range of motivations for investing.
Spot on, Guillermo. Most entrepreneurs do not spend enough time/space in their pitch explaining the problem their company is solving and its magnitude. Most of the time TAM is just a theoretical exercise. Once problem and size are properly addressed, the next most important question becomes the domain expertise of the team, especially for B2B.
Clear breakdown Guillermo on how capital flows in venture — and why so many startup cultures feel chaotic. ⚡️
Pressure moves from LPs to GPs to founders… and lands on employees. The system rewards speed, not sustainability. ⏳
What happens when the cost of returns is a burned-out team?
Great post—solving real problems is often how startups get off the ground. But I’ve found that some of the most important companies didn’t start by solving a clearly defined problem.
Money also flows to products that create new markets, unlock latent desires, and spark entirely new behavioral patterns.
These aren’t always solving a clear problem—instead, they create gravity, they shift. Enabling what once wasn’t even imaginable, let alone defined as a problem. (Instagram and many others great examples)
So alongside (Problem → Solution → Money) "what problem are you fixing?", there's a parallel dynamic: (Tool/Behavior → Adoption → New Market/Value Creation + New Needs → Money)"what happens if this works?"
Curious of your thoughts?
This is actually true! There are some other things that impact the way money flows: for example, money is not always right in the short term because it follows excitement/trends (hype) and also is very easy to scare when things don't seem to go right (bull run). However, long term money always knows where real value is created and stays there
Some of the recent investments that have paid off for VC’s have been companies that don’t truly solve a problem, but have a tech or AI wrapper to them, and are sold to public markets or other companies, resulting in a net capital loss to the market - WeWork comes to mind.
as for the Pharma analogy - the most profitable medications these days outside the GLP-1 agonists are specialty drugs that can cost upwards of $1mm but only hit a narrow market - leading to market product fit problems b/c payers are not designed or prepared to pay for these expensive meds…
Is this meant more for B2C type companies? And does this include demand outside the VC network bubble, where VC’s fund ideas that mainly hit their needs, not those of the average consumer?
interesting points
The way you have written it is very nice.
But, if there is room to disagree with - "Money wants to solve the most important problems". Actually whether you look at VC/PE/Public markets. Most rational/optimal investors do no look into the rule of solving the real/deep problems.
The goal is to ensure optimal risk: reward ratio and corresponding returns for the investment. And that is almost right. Compromising on that means you are actually going outside the sphere of investment. That's also ok, as long that's understood well.
So what matters is the returns.
So if one is genuinely solving a big problem you will still need to go and make it a viable business and sell the story. There are many very important problems many good founders I have met that need long term patient capital, which will basically not meet the threshold for returns. There are very few investors for that - and rightly so, because those are important problems but not money making businesses.
On the contrary there are many non-real problems, but are actually great opportunities to create new markets and exploit those markets, creating new needs, fulfilling those needs and making money in the process. Those are good investments as long as they don't cross the legal boundaries.
Another way to look at the river and valley analogy that you provided is: capital attracts capital. The valley is the equilibrium state for water. The right returns are the equilibrium for investment capital. So it moves from opportunity to opportunity until it finds the one n where it's getting the best returns.
Where there is convincing opportunity to make capital grow, attracts capital - how do you convince about the future capital opportunity? That's the art of storytelling combining the problem-opportunity statement + solution with execution capabilities.
This is a great answer and point, however I don't think it contradicts my analysis, but rather gives it more depth. It's not tha money flows to solve the biggest problems strictly but rather the biggest problems that can be solved with the least amount of effort. So it's a matter of finding which problem has the best ratio effortinxOutcome. (if it makes sense)
Right.. indeed, I suppose it's nuances where we may differ and may not be about the premise.
With your latest comment, yes the way it makes sense to me is:
1. If you can pick a real deep problem.
2. Find a way to make a solution such that it can make a lot of money in the quickest possible fashion.
3. And sell that vision, with compelling urgency at reach stage of the funding cycle, then you can raise capital.
The quickest possible fashion is largely, where I may have a different PoV with the nuance of least effort(max efficiency). A good number of VC run businesses actually beat other businesses who are doing things with significantly less effort and more efficiency, because VC run businesses effectively pour too much capital (too much effort) despite too much inefficiency, but the capital advantage then makes the scale viable and after crossing a certain threshold of critical mass makes it viable only 10/15 years later.
Again I think you and speaking with agreed overlaps, may be just some nuanced differences :)
I'm thinking about writing a book about this. Will let you know so you can help me with a chapter!
Always a pleasure to collaborate with like minded professionals..
Great article, thank you very much for sharing! I also recently wrote a short article on how money flows specifically in the AI landscape, which echoes quite well with your points!
Thanks so much Victor!
Make laziness affordable, and you’ll have VCs on speed dial. This is why companies like Doordash excel.
There’s no need for huge problems.
Very true Guillermo. VC is focused on solving big problems that can generate big returns. Angel investment is where smaller, niche opportunities can get funded by investors that have a broader range of motivations for investing.
Spot on, Guillermo. Most entrepreneurs do not spend enough time/space in their pitch explaining the problem their company is solving and its magnitude. Most of the time TAM is just a theoretical exercise. Once problem and size are properly addressed, the next most important question becomes the domain expertise of the team, especially for B2B.
So true!
An absolute gem, Guillermo. Beautifully written!
Thanks!!!
well written. can i share it :) ?
Please do!! Please give me credit!
of course ! on linkedin
Makes complete sense! Thanks for sharing..
Thanks for the feedback!!
You are destroying 90% startups of 2024.
Well, 90% of startups fail 😅
Please don't tell too much truth.
Brilliant and obvious. Guess the conclusion has to be “don’t just think big, think really big.”
Thanks!!! Or also, not thinking big makes it harder for founders and VCs
This is a peace of gold. Thanks for sharing it with us👏
Thanks!!
The ideal scenario: the founder is the target audience.
The second ideal scenario: the founder has deep knowledge of the target audience.
Thanks!!🙏