Taking Off Without the Constraints of VC
A vast entrepreneurial ecosystem is dedicated to the proposition that venture growth needs venture capital (VC). This may be the most wasteful idea in venture development – wasting both financial capital and human potential.
Risk of VC Failure
Contrary to the assumption of a VC shortage, there may actually be too many VCs. Experts estimate that only about 2% of VCs (about 20), are said to earn about 95% of VC profits. Most VCs do poorly because early stage VCs fail on 80% of their ventures and there are few home runs to offset the many failures. Marc Andreessen, a Top 20 VC, notes that the Top VC funds invest in about 200 ventures per year and do well in about 15. If this is the success rate of the Top 20, who earn 95% of VC profits, the others are likely doing worse.
8 Strategies to Cut the Risks
Here are 8 strategies to cut the risk of VC-led failures.
#1. Risk of VC Control: Among 85 billion-dollar entrepreneurs, who started and built billion-dollar companies, only 6% succeeded by getting early VC, and ceded control to a CEO hired by VCs. 94% stayed in control of their ventures – by using skills and finance-smart strategies to delay VC or avoid it.
Strategy: Learn unicorn-skills and finance-smart strategies to stay on as CEO.
#2. Fog of Emerging-Trends: Unicorns mainly launch on emerging trends – from Walmart and Target in the big-box trend to Airbnb in Internet 3.0. But emerging trends are hazy and strategies to dominate them are unclear at the start. Many unicorn-entrepreneurs pivot when the takeoff strategy is clear. Entrepreneurs can pivot more easily without VCs who may disagree with the pivot.
Strategy: Wait until you prove your strategy and leadership, so you do not have to pivot.
#3. Risk of “Go Big or Go Home.” This means going for broke to seek domination of the emerging industry to create wealth. The problem is that you are more likely to ‘go home’ since about 80% of VC-funded ventures are estimated to fail. Only ~1% dominate, and they are mainly in Silicon Valley. Also, VCs may move on or expect the venture to turnaround from capital profligacy to capital smart on its own. Chipper Cash is learning this lesson the hard way. Turnarounds are risky.
Strategy: VCs want high returns. High returns require high speeds. High speeds entail high risks. Dominate before getting VC and grow at a smart speed.
#4. New CEO Risk: VCs replace about 30% – 85% of entrepreneurs with a new CEO. The most famous replacement was Steve Jobs, which nearly destroyed Apple. Entrepreneurs who are replaced by a professional CEO are heavily diluted by the executives and the VCs because they do not have a say. Billion-Dollar Entrepreneurs kept 2x the proportion of wealth created by delaying VC and staying on as CEO, and 7x the proportion of wealth created by avoiding VC altogether (The Truth About VC at www.dileeprao.com).
Strategy: Learn skills and finance-smart strategies to avoid or delay VC.
#5. Incompetent-VC Risk: You may get VC from the lower 98% of VCs. Since only about 2% of VCs do very well, working with the wrong VC may mean failure rather than a home run.
Strategy: Wait until you can pick the VCs you want.
#6. VC-Size Risk: The size of the VC fund can mean the difference between success and failure. Small VCs, especially those who are not networked, may not be able to offer enough capital when your only edge is capital. Size matters.
Strategy: Delay or avoid VC till you can pick a VC from the Top 20. Or develop a finance-smart unicorn-strategy to dominate without VC.
#7. Constrained-VC Risk: You may get venture capital from a VC who can only finance entrepreneurs in targeted areas and targeted communities. Their track record, skill sets, and networks may not be as good as those of the Top 20 VCs.
Strategy: Wait to pick the right unconstrained VCs, if needed, and not be controlled by them.
`#8. VC-Exit Risk: VCs need to exit from ventures in a limited period due to the demands of the limited partners, which means that the venture may be sold before reaching its full valuation.
Strategy: Wait till you can control the exit. By delaying, you also may be able to reduce the time from VC to exit, and make VCs happier.
Surviving the ~80% VC Failure Rate
The most crucial step you can take to build your unicorn and finance it to improve your odds of success is to make sure you control it. To do this, the better way is not the Venture-Capital route but the Smart-Capital route. It may require more preparation and skills, but the rewards may be higher and risks lower.
MY TAKE: VC can act like rocket fuel, or an anchor. VCs can be launching pads, or leeches. Most VCs do not seem to add much beyond capital. Getting VC may only mean that you have ceded control to the wrong VCs. Instead, learn to takeoff without VC. If you need VC after takeoff, find the right VCs but control your venture to keep more of the wealth created.
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