By Dileep Rao – Guest Contributor
There will never be enough early-stage venture capital (VC) to satisfy the world’s venture hopes. But these hopes may be misguided by the myths—and the hype—of VC.
VC has many holes that need to be plugged:
- VCs finance very few and succeed on fewer. Although VCs are very selective and only finance about 100/100,000 ventures, they fail on about 80. Only about one is a home run (HR).
- Few VCs truly add value. The top 20 VCs are said to earn most of VC profits because they fund most of the home runs. The rest are not as successful. The top VCs are in Silicon Valley because that’s where most HRs are.
- VCs may dilute more than they add value, especially for those who get VC early.
- VCs may replace you with a professional CEO, causing you to lose control of your venture.
- VC does not usually follow angel capital (AC).About 90-95% of those who get AC do not get VC and have to take-off with limited capital.
- Most importantly, VCs fund after Aha, i.e., after evidence of potential. Aha can be opportunity Aha (after the technology’s potential is evident), strategy Aha, and entrepreneurial leadership Aha.
Entrepreneurs seeking growth need to plug the VC holes. Among 87 billion-dollar entrepreneurs (BDEs), who built their ventures from idea to more than $1 billion in value and sales:
- 1% got VC after technology Aha and were replaced as CEO
- 5% got VC after strategy Aha and were replaced as CEO
- 18% got VC after take-off and evidence of leadership Aha, and stayed as CEO, and
- 76% avoided VC
The myth is that entrepreneurs need VC to succeed. Reality is different. More than 9/10 BDEs took off without VC and controlled their venture and the wealth created. Entrepreneurs seeking growth with control can learn from these unicorn-entrepreneurs.
Here are five of their secrets.
#1. Emerging trends are more important than existing trends. Entrepreneurs mainly built unicorns on emerging trends:
- Jeff Bezos jumped on the emerging Internet trend to beat the entrenched giants in book retailing.
- Bill Gates used the emergence of PCs to beat the giants of the mainframe computer industry.
- Steve Jobs used the smart phone to revolutionize the music industry.
- Travis Kalanick (Uber) used the smart phone to revolutionize transportation.
#2. Smart movers with strategic innovations are more important than first movers with product innovations. 89% of first movers failed or failed to dominate. Unicorn-entrepreneurs (BDEs and hundred-million-dollar entrepreneurs) mainly succeeded by exploiting first-mover flaws. Steve Jobs exploited first-mover weakness by making music downloads legal with the iPod, and by making the iPhone into a global platform for apps. Page and Brin optimized Internet search to launch Google. Sam Walton exploited Kmart’s neglect of rural markets. Zuckerberg focused on universities to beat MySpace.
#3. Capital-smart strategies are more important than capital-intensive strategies. The VC method, to grow more with more, is capital intensive. The unicorn-entrepreneur method, to grow more with less, is capital smart. Michael Dell grew by selling direct to consumers who paid him in advance. Mark Zuckerberg focused on universities to grow more with less. Bill Gates used a strategic alliance to grow more with less. More than 9/10 unicorn-entrepreneurs took off with capital-smart strategies by growing more with less.
#4. Reverse-VC is more important than VC. Only 1% of unicorn-entrepreneurs got VC after product innovation. The remaining 99% used Reverse-VC to get to Strategy Aha or Leadership Aha, or to avoid VC and stay in control:
- Sam Walton used cash flow, leases, vendor financing and development finance (government)
- Dell used customer payments and vendor credit. So did Niraj Jain (Wayfair)
- Bloomberg used an alliance with Merrill Lynch to build a giant company
- Steve Ells used family financing, leases, cash flow, and a corporate alliance to build Chipotle
- Bob Kierlin (Fastenal) linked business and finance to grow at 30% per year from cash flow
#5. Skills are more important than capital. Nearly all BDEs used skills and smart strategies to take-off without VC:
- 5% of BDEs got VC after proving their unicorn strategy. They were replaced as CEO and only kept 7% of the wealth created.
- 18% got VC after proving their unicorn strategy and leadership potential and stayed in control. This group, which includes Bezos and Zuckerberg, kept 16% of the wealth created.
- 76%, including Bloomberg and Dell, avoided VC, and kept 52% of the wealth created.
Conclusion: To control the venture and keep more of the wealth created, take off without VC. To take off without VC, use emerging trends, strategic innovations, capital-smart strategies, reverse-VC, and skills-as-a-weapon. That’s what more than 9/10 unicorn-entrepreneurs did.
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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