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Myths about entrepreneurship and early stage venture capital (VC) include:
- Entrepreneurs need VC to build giant ventures from scratch
- VCs can identify potential winners after listening to a pitch
- All VCs are highly successful venture investors and should be termed “smart” money
- 94% of America’s unicorn-entrepreneurs took off without VC and 76% of them never used it
- Those who avoided VC or delayed VC kept more of the wealth created
- VCs finance only about 0.1% of U.S. ventures and fail on about 80% of their investments
- About 20 VCs earn about 95% of VC profits and are mainly located in Silicon Valley.
Most importantly, VCs finance after Aha – after proof of potential. The “standard” VC model is to seek ventures that have reached Aha, seek control, and try to exit as soon as possible at the highest possible valuation. This model has been called to question recently with the success of Facebook and Lyft where the founders control the ventures.
Few VCs succeed because it is tough to find winners. Entrepreneurs have an advantage in negotiations with VCs after the venture has taken off. The take-off proves their strategy and their leadership. Due to lower risk after Aha, entrepreneurs have more financing options, and can pick the ones that best helps them build their unicorn – be it the top 20 VCs, IPOs, strategic alliances, or internal cash flow.
WhatsApp is a good example. Jan Koum built it with angel capital. After WhatsApp took off and had hundreds of millions of users, the VCs were eager to fund him. Koum could decide whether he wanted VC and who he wanted it from.
Bill Gates started Microsoft with Paul Allen. After IBM started using his operating system, Microsoft started soaring. Gates had a choice of VCs and he picked the one he thought could help him dominate.
Look at successful unicorns such as Microsoft, Amazon, Facebook, and Salesforce that received VC. You will find that the VCs did not do much before Aha and had limited influence after. When financing after Aha, VCs may have been on the board of directors and may have been close advisers to the entrepreneurs, but the entrepreneurs stayed firmly in the CEO’s seat and led the venture. This is unlike ventures like Apple where the founding entrepreneur was replaced by a professional CEO. Look what happened to Apple without Jobs.
This suggests that a smarter model would be the reverse-VC model that develops more high-potential ventures by teaching entrepreneurs to bridge the VC gap from idea to Aha, and by developing high-potential ventures the way America’s unicorn-entrepreneurs did – with skills.
The Reverse-VC model would focus on:
- Training ALL entrepreneurs – rather than picking a few based on their pitch, as is done in the top-down, opportunity-based, VC-dependent model
- Training ALL in the skills needed for emerging industries and trends because that is where most unicorn-entrepreneurs succeeded – rather than focusing on ideas, technologies, or opportunities which can nearly always be imitated and improved
- Training ALL in the finance-smart strategies of unicorn-entrepreneurs to take off without VC – rather than squandering capital, as VCs do, in capital-intensive strategies
- Training ALL to use smart financial strategies (used by 94% of unicorn-entrepreneurs) to take off with limited capital and cash flow – and no VC
- Encouraging ALL to take the initiative and take off without VC – rather than spoon-feeding them with angel capital and venture capital
- Offering resources to ALL who need it – after take-off when risk is lower, and the potential is proven.
By focusing on entrepreneurs and not on the opportunity, entrepreneurs and VC-starved areas will be the real winners. Entrepreneurs can take off in emerging industries and emerging trends to bridge the capital gap from idea to Aha. VCs can offer capital after take-off for higher potential with lower risk. History shows how to do this, suggesting that venture developers should be more pro-active before Aha.
MY TAKE: The Reverse-VC model helps to build more high-potential ventures with the right entrepreneurial skills. By training everyone with the skills and smart strategies of the 94% of America’s unicorn-entrepreneurs who took off without VC, the pool of high-potential ventures can be increased. Some of those who take off with finance-smart strategies and sources may need VC, and some may not. Their attractive take off and proof of potential will attract investors. The key is that resources are offered based on real potential, not “pitch” potential; based on real achievement and not on the perceptions of “smart” investors, because even “smart” investors are wrong at least 80% of the time, and even more often before Aha. With little wasted capital, reverse-VC can raise the entrepreneurial capital in the area and offer more potential deals for VCs. The proof can be seen in the 99% of unicorn-entrepreneurs who developed their business strategy without VC, the 94% who took off without VC, and the 76% who never used VC.
April 11, 2019 at 12:18PM
Forbes – Entrepreneurs