By Dileep Rao – Guest Contributor
Robert Johnson was on CNBC and like many others, wanted someone to offer more venture capital for minority venture development. With all due respect, he needs to be clearer on exactly what he means, who should be funding this, and what risks are they taking? Also how can the risks be reduced?
Here’s why. VCs like to fund after Aha when there is proof of potential.
Before Aha, you are in the classic BB King (the late, great blues singer and guitarist) stage…. when nobody loves you but your mama and she could be jivin’ too.
BB King must have known VC in his gut. He has caught the zeitgeist of early-stage VC to perfection. Before Aha, everyone wants someone else’s money (and often use the “fake-it-till-you-make-it” attitude) to believe in their version of the next great billion-dollar opportunity. But few want to fund these ventures before Aha because it is all risk and no proof.
Bill Gates got VC after he was taking off. So did Jeff Bezos. Jan Koum. Brian Chesky. And on and on. No one can look into your eyes and see your potential. They want proof. This means that other financial strategies are needed to fund the ventures and bring it to Aha. Pre-Aha financiers, mainly family and friends, are taking one hell of a risk, and they fail a lot of the time. In Silicon Valley, you can add angels to the mix.
Andy Rachleff, a successful VC, notes the following: “Even Ron Conway’s second angel fund, which had the good fortune to invest in Google (a 400x cost winner), only broke even.” And Ron Conway happens to be a very successful angel. Is that because he focuses on Silicon Valley?
This means that pitch competitions are relying on gut instinct – just like the lottery. So what’s an entrepreneur to do:
o Get sales
- If you need a lot of capital to get sales, change your business model. See how Harold Roitenberg made $20 million in his first year without any investment– because he had no money and nobody to give him any. He got funding from 13 entrepreneurs who signed on to his network and financed their own stores with inventory from suppliers he lined up. A printer gave him credit to print the catalog. Without any investment, he netted $20 million in his first year.
- Imitate unicorn-entrepreneurs who found smart ways to finance their ventures. They learned how to:
o Sift their financial needs by use and stage
o Reduce their financial needs, especially losses, which are tough to finance anywhere, and especially outside Silicon Valley
o Do operational bootstrapping to reduce both waste and financial needs
o Implement strategic bootstrapping to grow more with less
o Finance each need separately from the best sources for the need
o Use the right instruments
o Learn to launch without losses by using the right sales driver and financial skills.
The Next Stage: When VCs Want Your Venture… But Not You
If you can prove your venture’s strategy and its potential, you face an interesting dilemma. Your venture’s potential may be evident, but your own business skills to scale up may not be. If you get VC at this stage, the VCs will want to hire a new, professional CEO with proven corporate leadership skills to change a chaotic venture into a corporation. You are out. Are you ok with that? This is what happened to Earl Bakken of Medtronic and Pierre Omidyar of eBay.
The Venture Nirvana stage: VCs-Kiss-Your-Ring and offer VC on your terms
This is when your venture is taking off in a hot industry. VCs smell money. They are knocking on your door and whispering sweet nothings in your ear while telling you how much they can add to your venture. And they will “let” you run your venture. They just want to have a great IPO and collect their billions. This is what happened to Bezos, Gates, Koum, Chesky, Musk, and many others.
If you need capital-as-a-weapon, consider getting VC – after the Venture Nirvana stage. If you don’t, keep growing the way you did. This is what Richard Burke of UnitedHealthcare did. And built a giant without VC.
MY TAKE: Most entrepreneurs are at the BB King stage. No one really loves you but your mama. Make her proud. Get to Aha!
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.