Is this the end of Target VC?
A recent U.S. court ruling banning venture capital funds from focusing on funding minority entrepreneurs may seem like a setback. But the change could empower minority entrepreneurs to follow the unicorn path that has enabled many to succeed without venture capital or with delayed venture capital. Historically, about 94% of billion-dollar startups in the U.S. have done so without venture capital and maintained control over their businesses and the wealth they created.
Without debating whether the court’s decision was wise or unwise, it might be worth exploring why this is not as big an obstacle as it seems. Historically, entrepreneurs like Sam Walton (Walmart), Dick Schultz (Best Buy), and Michael Dell (Dell) have built multi-billion dollar companies without venture capital and controlled the ventures and the wealth created. More recently,
· Gaston Tarratuta didn’t wait for VCs to create unicorns, instead he developed the skills to start a startup with $2,000 and founded Aleph, which later became a unicorn.
Joe Martin didn’t wait for venture capital. He emigrated from Israel, started a startup with $375, and built a unicorn called Boxycharm.com.
Sara Blakely didn’t need venture capital. She started Spanx with $5,000 of her own savings and built it into a unicorn.
These examples, and those of the 94% of billion-dollar entrepreneurs, are important because they show that success without VC is not only possible, but extremely common. The recent court decision may not affect them, but rather benefit minority entrepreneurs, as it encourages minority entrepreneurs to focus on the unicorn entrepreneurial ecosystem that helped most entrepreneurs succeed without VC, rather than the over-hyped VC ecosystem that only helps a very few entrepreneurs in a very few sectors and then heavily dilutes them.
Two Unicorn Ecosystems
The reality is that there are two unicorn ecosystems: one that supports about 20 out of every 100,000 entrepreneurs, and one that supports all entrepreneurs.
VC-Based Ecosystem: Funding
Heavily promoted by the press and VCs, this VC-based ecosystem focuses on innovation, pitch competitions (“Shark Tank”), angel capital, and VCs. There are obstacles to this ecosystem:
· Access Restrictions: Most minority entrepreneurs are unlikely to get VC funding, even if the targeted VC funding is legitimate. The VC industry as a whole is said to only invest in about 100 of every 100,000 ventures.
· Pitch LimitVCs can’t see potential by listening to a pitch. That’s why about a dozen VCs, including Tom Perkins of Kleiner Perkins, rejected Steve Jobs, one of the greatest entrepreneurs of all time. VCs wait for the Aha, the evidence of potential. Every entrepreneur needs to know how to get to the Aha.
· High failure rateAbout 80% of VC investments fail, and because minority-focused VCs are relatively inexperienced, ventures partnered with them also tend to have higher failure rates.
· Few VCs are successful: According to Marc Andreessen, about 15 unicorns annually make up the majority of VC profits, and about 20 VCs make 95% of VC profits. History shows that minority-focused VCs are unlikely to make it into this exalted group. Read about Minority-Served Businesses (SBICs).
· Dilution: Most entrepreneurs have their wealth significantly diluted by VCs. In a study of 22 billion-dollar entrepreneurs, those who acquired VC early on kept 7% of the wealth they created, while those who avoided VCs kept about 52% (see www.dileeprao.com for the truth about VCs).
The unicorn entrepreneurial ecosystem.
Minority entrepreneurs have a better chance of building a unicorn by following the unicorn entrepreneur ecosystem. By emulating the 94% of billion-dollar entrepreneurs who succeeded without venture capital and were inspired by skill and smart strategies, they can maintain control of their venture and grow. To succeed without venture capital, minority entrepreneurs need to:
· Find opportunities for growth: Leverage your skills to identify opportunities.
· Develop a winning strategyDevelop strategies to drive growth.
· Leverage smart finance: Leverage financing methods to drive growth and maintain control.
· Takeoff without VC: Demonstrate potential through proven results, not sales pitches.
· Acquire unicorn skills: Nearly every billion-dollar entrepreneur goes far beyond the idea, the pitch, the angels, and the VC ecosystem. They focus on skills, strategy, growth, management, unicorns, and the entrepreneurial ecosystem. And so should you.
In addition to Taratuta, Martin and Blakeley, other success stories include:
Jan Koum: He grew WhatsApp to millions of users with $250,000 in angel capital.
Mark Zuckerberg: Started Facebook with funding from family and friends
· Jeff Bezos: Proved Amazon’s potential and attracted one of the world’s leading VC firms.
My take: The court may have benefited all entrepreneurs by shedding light on the realities of venture capital and encouraging them to learn the skills and strategies that have worked for billion-dollar startups.
