Finance Growth Stages

How finance-smart entrepreneurs find financing in a finance-short world

By Dileep Rao – Guest Contributor

There will never be enough new business financing to satisfy all the world’s entrepreneurial hopes. Having been to many venture-development conferences, I have found that one theme remains constant – entrepreneurs everywhere, and the venture developers who promote them, seem to constantly complain about the shortage of early stage venture capital (VC). Finance needs are always greater than availability because entrepreneurs are eternally hopeful, and financiers are eternally wary.

But is there a real shortage of VC for potentially successful deals? If there were truly a shortage:

  • Would VCs fail on 80% of ventures financed, even after waiting for Aha, i.e., for proof of potential?
  • Would VCs get more home runs if they invested in more than 100/100,000 ventures?
  • Would VCs fund home runs everywhere rather than finding more of them in Silicon Valley?
  • Would more angels and development financiers succeed at VC financing by funding the VC “shortage” from idea to Aha, which is when VCs show interest?

Offering VC before Aha or to targeted entrepreneurs has not done well:

  • The Minority Enterprise Small Business Investment Company (MESBIC) was shuttered due to few successes and many failures.
  • Most VCs, especially those outside Silicon Valley, have not done well as evidenced by the experience of a leading VC that about 20 VCs earn about 95% of VC profits, and most of these successful VCs (in the U.S.) have been in Silicon Valley.

So why is it that financiers who want to finance ventures cannot find more qualified deals that need financing, especially outside Silicon Valley, and entrepreneurs who need funding, cannot find more willing financiers?

The two sides have a difficult time meeting because they are looking for different things.

Entrepreneurs who have trouble getting money usually want money for high-risk endeavors. They have not reduced the risk to the financiers or developed their venture to the point where the potential is evident.

Financiers who don’t get enough deals often hope that they get more fully formed, high-potential, low-risk deals that have bridged the gap from idea to Aha in their target areas or target population segments. This means that they often compete for the proven deals with other financiers, often financiers with more experience, more capital to invest, and a better track record that is more attractive to entrepreneurs. And if they finance before Aha, they mainly fail.

So what’s the solution? Consider Mark Zuckerberg. When he was building Facebook, he used resources from his family and a few friends, along with his skills, to write the code, build the site, and launch the company. This is when financial angels whisked him off to Silicon Valley and funded him. Zuckerberg still controlled the company because the angels did not demand control. After takeoff when he started to dominate his space, he got VCs who invested in his company – and gave him proxies to vote their shares, which is highly unusual, since giving proxies is not something that VCs normally do. By controlling Facebook, Zuckerberg became one of the richest people on the planet.

There are some lessons here for other hopeful entrepreneurs.

  1. Develop the skills to take off without venture capital. Venture capitalists like to fund successful ventures, not just ideas
  2. Develop the strategies your venture needs to take off without VC, not just products
  3. Stay in control when the money comes knocking.

And there are also lessons for financiers. If financiers want more deals, they will need to help entrepreneurs get to the next step. But since most financiers don’t see entrepreneur development as their core competency, they fight for the few deals that show promise. To finance more potentially successful ventures with less risk, financiers need to know how to make marginal deals financeable by finding the right package of sources and instruments, instead of competing for fully formed deals and, more important, instead of using their instinct, which is another term for gambling.

MY TAKE: In the long run, venture developers and development financiers will do better by teaching entrepreneurs the proven skills and smart strategies of unicorn entrepreneurs to bridge the gap from idea to Aha. The problem is that not many know how to do it either. So they wait for entrepreneurs to show them potential. Instead of teaching proven unicorn skills and strategies, they show them how to develop their business model or business plan in a few weeks. When it takes 18 months of business school education to get an MBA and start at the bottom of the corporation, you may wonder how an incubator can develop potentially successful entrepreneurs to lead their growth ventures in a few weeks. If you are an entrepreneur, the odds are that you will have difficulty getting financing – or getting the right financing. To get your share, learn the secrets of unicorn-entrepreneurs to take off with the limited capital you can find.

This column was first published in Forbes.

Dileep Rao is the author of Finance Secrets of Billion-Dollar Entrepreneurs  (FIU Business Press, November 2020) and teaches entrepreneurship, unicorn-entrepreneurship, and venture financing at Florida International University. He is a former venture financier.

READ MORE from Dileep Rao: GRIT V. GLAM: THE 2 FACES OF BILLION-DOLLAR ENTREPRENEURSHIP

 

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