Mar 5 2014, 1:25pm CST | by Forbes
Billions are being made in Silicon Valley by entrepreneurs and VCs. And, like a lottery, much of this fortune seems to be instantly created in the flash of an IPO or a strategic sale. Is Silicon Valley becoming a new-venture Las Vegas offering the lure of jackpots to entrepreneurs?
Las Vegas has many losers and few winners. So does venture capital. In venture capital, about one percent of investments are home runs and 19 percent are successes where VCs do well. Since VCs usually get their rewards first, entrepreneurs may not do as well in some of these ventures. 80 percent of VC-funded ventures fail in varying degrees. The few billion-dollar entrepreneurs, such as the developers of Facebook (Mark Zuckerberg) and Twitter (Jack Dorsey) are eminently news worthy, and the press cannot stop writing about them – just as Las Vegas and the state lotteries love to promote the few winners of jackpots. In both cases, you don’t hear about the millions who lost.
The odds also seem similar. With casinos the rule is “heads I win, tails you lose.” It is not that different with venture capitalists. They invest other peoples’ money for a handsome fee. If the fund does well, the VCs get an additional cut of the upside gain. If the fund fails, VCs still collect their fee, but the investors in the funds lose.
So are VCs like the casino owners, and are business publications doing entrepreneurs a disservice when they promote VC? Many business-school students no longer ask, “How do I build a business?” What I am hearing is “How do I raise money?” I have to remind them that raising money is not the same as making money.
Given the very few winners in VC as in Las Vegas and in state lotteries, why is there a mad rush to seek VC? When people in their 20s read about Mark Zuckerberg starting Facebook in his dorm and now living the good life in his mansion in Silicon Valley, it is difficult not to be seduced by the lure of instant riches and jackpot entrepreneurship.
Entrepreneurs and students can benefit by knowing the following:
MY TAKE: Some winners in the jackpot entrepreneurship sweepstakes have succeeded beyond the dreams of most. But they are not the rule for 99.9975% of entrepreneurs, and they are not the rule outside Silicon Valley. VC has very few successes, especially when compared with the number of ventures started and financed, and nearly all of them are in Silicon Valley. For entrepreneurs outside Silicon Valley, the reality is different. They really have to build a business to succeed.
Source: Forbes Business
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