By Dileep Rao – Guest Contributor
Shark Tank has taken the entrepreneurial world by storm. Many of my students are eagerly devouring every episode. I tell them that they are wasting their time or worse, headed in the wrong direction.
Based on an analysis of 122 billion-dollar entrepreneurs and hundred-million-dollar entrepreneurs (“unicorn-entrepreneurs”), here’s why.
There is a huge venture chasm from idea to Aha.
Idea is the genesis of a venture when the entrepreneur gets all enthused about what he/she wants to sell. This is the stuff of legends, when people talk about the next razor that they liked and therefore started the company or the brilliant inspiration they got when walking on the beach to develop the next great Norwegian taco and soar to success.
Aha is when the world sees your potential, when the press beats on your door, and venture capitalists from Silicon Valley come calling with check book in hand and check signed. All you have to tell them are the terms of your agreement. They did this with Mark Zuckerberg of Facebook and Jan Koum of WhatsApp (interestingly acquired by Facebook).
Crossing this chasm is like walking across the Grand Canyon on a tightrope. Most do not make it.
There are 4 steps from idea to Aha!
#1. The Idea or Opportunity: You need to know what you are going to sell if you want to start a business. That is indeed step one. But how important is this step? Shows like shark tank and pitch competitions at many universities are focused on the idea, the product, the technology. The truly groundbreaking products have a lot of intellectual property and cost a lot of money to research. With an army of technologists and patent attorneys, these products are introduced with great fanfare. But most products and services can be imitated, legally or illegally. In fact, China has built its economy on this feature, and so have many U.S. unicorn-entrepreneurs.
- Steve Jobs imitated the iPod, the iPhone and the iPad. He just made them better and sold them with a flair the world loved. And most importantly, he made them THE platform for music and apps.
- Bezos sold books online. Anyone could have sold books online. There was nothing unique about the idea. It was the execution.
- Michael Dell sold PCs. There were many selling PCs. It was the strategy and the execution.
#3. Financing: The number is not a typo. Financing is the third step from idea to Aha. Many entrepreneurs start with their idea and immediately seek financing from investors and angels.
Some tap into their friends or family networks and others get it when some investors fall in love fall in love with their product. But the odds are daunting. VCs are said to fail on 80 out of 100 of their ventures even though they are the professionals and they wait for Aha before they invest. One can only guess at the success rate of friends, family, and angels.
What’s missing? The reality is that steps 2 and 4 are key to go from idea to Aha!
#2. Strategy: The reality is that most unicorn-entrepreneurs succeed because of their strategy, not their idea. Among the 87 U.S. and international BDEs and 30 hundred-million-dollar entrepreneurs I financed, interviewed or analyzed, only one succeeded due to the genius of the idea and that was Genentech. Herb Boyer was one of the members on the team that split the gene and founded the biotech industry. All of the others used technologies that could be easily imitated and improved (and even Boyer’s techniques could be imitated by others). The genius behind most of the unicorn-entrepreneurs was their strategy.
- Bill Gates bought and licensed the operating system that led to Microsoft’s dominance
- Travis Kalanick pivoted on his original idea to rent limos and succeeded when he allowed peer-based transportation
- Brian Chesky took off with Airbnb after numerous “launchings” when he studied his first 100 landlords to help them succeed
- Sam Walton opened big stores in small towns
- Michael Dell sold personal computers direct to consumers.
#4. Launch: The other secret of unicorn-entrepreneurs was their skill at launching the venture into an emerging trend where nothing was certain, and their skill at finding the secret and succeeding in the murky waters of the new industry. This meant that they needed to guide the venture with limited capital since capital is limited before Aha and the direction to success unclear.
- Elon Musk launched Tesla in the face of fierce ridicule and short sellers. He got the last laugh.
- Richard Burke launched UnitedHealthcare when no one knew how to make HMOs work
- Kevin Plank launched Under Armour, with no capital, by selling to college athletes
- Hamdi Ulukaya launched Chobani and brought a sleepy segment of yogurt to life
- Steve Ells focused on college students and launched Chipotle into the organic trend.
MY TAKE: The idea and financing will only get you into the game. Your strategy and launch skills will get you to the finish line first. Your choice. It would be great if we can get audited data from Shark Tank on how many really get funding and how many really succeed.
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.
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