Is Jackpot Entrepreneurship Right For You?

Mar 5 2014, 1:25pm CST | by

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:

  • The flipping mentality works for only a few. I do not mean flipping hamburgers or houses. We have also been flipping businesses – especially with our focus on venture capital. Open any business magazine and the coverage is mainly of how entrepreneur A, such as the developer of Instagram, built a major business in an “instant” and reached millions of users with venture capital. Or how entrepreneur B, such as the developers of WhatsApp  sold their business for billions even with minimal sales. The goal is not to build a business – it is to flip a business. This is good for VCs and entrepreneurs in areas where VC has succeeded. But VC has not succeeded outside Silicon Valley.
  • The business press needs to balance its coverage. Major business publications often rely on press releases from industry associations, and promote the concept that VCs create jobs and wealth, even when VCs do not do much of either outside Silicon Valley.
  • Business schools need to balance capital intensity and capital efficiency: Business schools often teach the entrepreneurship process as one where students write a business plan, pitch their plan to investors, and seek financing that results in the entrepreneurs losing control to investors. This does not emphasize the building of the business and of the entrepreneur, and the role of entrepreneurial leadership and capital-efficient venturing. Business schools focus on the financing and the riches, and assume that financing success is venture success.

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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