Is Steve Case Right: Do Areas Outside Silicon Valley Need A New Type of VC Fund? by Forbes – Entrepreneurs

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One of the major beliefs in high-potential, venture development is that a lack of early-stage venture capital (VC) has prevented high-potential ventures from being developed “in the rest” of America. Steve Case, former CEO of AOL, is among the believers. I am an admirer of Case, especially the way he built AOL and merged it with Time-Warner. Both his timing and the terms of the deal were exquisite from AOL’s perspective. But will his current effort address the deficiencies of venture development outside Silicon Valley, or is this one more venture development strategy outside Silicon Valley that is doomed for failure?

To increase the number of high-potential ventures, promoters can try various options, including the following.

  1. Increasing Availability of VC. Silicon Valley has become wealthy by developing unicorns, and it is precisely for this reason that VC has flowed there. VC needs unicorns, unicorns are built in emerging industries, and Silicon Valley has excelled at dominating emerging industries. Areas outside Silicon Valley have not been able to compete because potential unicorns outside Silicon Valley are no match for the potential unicorns in Silicon Valley. The concentration of unicorns in Silicon Valley has resulted in the top VCs being located there, and these 20 VCs earn about 95% of VC profits. Just increasing the availability of VC will not help. The capital will gravitationally flow to Silicon Valley in search of higher returns.

 

  1. Spreading the Availability of Venture Capital: This is Case’s strategy based on the assumption that adding VC outside Silicon Valley will increase the number of high-potential ventures, i.e. unicorns. And he is targeting his capital to geographic areas with a shortage of VC. But there were plenty of early-stage VCs outside Silicon Valley in the 1970s, 1980s, and some of the 1990s. They failed because of the Silicon Valley juggernaut. Governments and foundations have also tried to increase VC availability in other areas but have failed. The problem is that the risk in early-stage VC is high and about 80% of the deals fail. Without unicorns, funds fail. Areas outside Silicon Valley have the failures but not the unicorns. VC-funded ventures that do become mini-unicorns are usually sold to a strategic buyer to give the VCs their exit. This denies long-term benefits to the area.
  1. Developing More Qualified Candidates Outside Silicon Valley: Can entrepreneurs build high-potential ventures outside Silicon Valley without VC, i.e. with skills and limited capital? About 90% of unicorn-entrepreneurs outside Silicon Valley did not use VC and about 99% took off without VC. They grew with skills and smart strategies. This includes entrepreneurs like Michael Dell, Michael Bloomberg, Thai Lee (SHI International), Niraj Shah (Wayfair), Bob Kierlin (Fastenal), John Menard (Menards), and Ron Wanek (Arcadia Furniture). Many of them don’t seek the publicity sought by Silicon Valley entrepreneurs and so we don’t hear about them.

If VC is to succeed outside Silicon Valley, it needs to develop more high-potential ventures. Picking the best of what’s there may not be enough, as Case seems to be doing. To increase the number of qualified ventures, areas need trained entrepreneurs who can cross the VC chasm from idea to Aha. Most unicorn-entrepreneurs did not rely on great innovations. They imitated and improved on others’ innovations. They succeeded because they were better entrepreneurs. Examples include Walton, Gates, Dell, Schulze, and Burke. Their skills can be taught to others. And they did not rely on pitch contests. Pitch contests are not highly reliable as evidenced by the fact that Steve Jobs was rejected by about 12 VCs, and so were the founders of Google. It is difficult to read unicorn potential in the eyes of the entrepreneur.

Area-focused VC needs entrepreneurs with the skills of America’s unicorn-entrepreneurs to bridge the VC gap from idea till Aha, when potential is evident. More entrepreneurs with the right training can develop more unicorns. Unfortunately, I don’t see the right training included in any of the programs because training takes time and is not as glamorous as pitch contests. Plus there is the instant gratification of the VC funding a venture, and the entrepreneur getting money. The failure happens in the future.

MY TAKE: The problem with top-down, VC-focused philanthropists who want to do good outside Silicon Valley is that they are barking up the wrong tree. If their goal is to develop more high-growth ventures, they should focus on the not-so-glamorous task of developing skilled entrepreneurs to take off with limited capital. Learning from history may be more fruitful than trying to reinvent the wheel. This means that these noble, but misguided, efforts should:

  • Avoid judging ventures from a pitch contest – no one is that good a judge
  • Train all entrepreneurs to take off with limited capital, not VC, and see who rises
  • Fund the ones who take off with skills and can show real proof, not “pitch” proof.

By accepting that unicorn-entrepreneurs are difficult to identify before Aha, area VCs can develop more high-growth ventures by first training entrepreneurs to take off without VC. But this may also need a new type of thinking that is willing to sacrifice our sacred cow – that VC is all we need. Pity. This is one sacred cow that should be sacrificed.

April 2, 2019 at 01:02PM
https://www.forbes.com/sites/dileeprao/2019/04/02/is-steve-case-right-do-areas-outside-silicon-valley-need-a-new-type-of-vc-fund/
Forbes – Entrepreneurs
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