Asking “Should you take VC?” is like asking “Should you play in the NBA?” The answer is NO.
Of course the answer isn’t no for everyone. But both of these options only make sense for very, very, very, few people.
The idea that VC money isn’t automatically the way for a startup to succeed is starting to get some traction. Sarah Guo just wrote about it, and Gary Vaynerchuk followed up.
This isn’t a new idea. The first of this by a VC that I read was back in 2012 byChris Dixon. The New York Times wrote an article illustrating this point in 2013. But neither really took hold in the zeitgeist. Maybe Guo and Vaynerchuk will get the message out to more people.
And what most people understand about the NBA but not about VC is that the choice it not entirely up to you. I’ve never been taller than 5’6″ and not terribly athletic. Did I ever have a chance at the NBA? NO. And it had nothing to do with my passion or my drive. It had more do with my genesthan my dreams.
Despite the fact that many people love basketball and quite a lot are good at it, most of the press covers only the very top levels of play — except for the occasional article about North Korea. And yet, you don’t see everyone who can make a jump shot reading coverage of the NBA finals and saying “Yup that’s going to be me next year.” But for some reason they read about Zuckerberg and say “Yup, I can do that — just look at this app I made!”
Maybe because we’ve bought into this thing we tell our kids that you can be anything you want to be. You know, “In America anybody can grow up to be president”. I guess George W. Bush proved that was true. But still.
Here’s Why
Investor money (I’ll include professional angels as well as VC but not your rich uncle who loves you and doesn’t care about the money) needs to make a huge return because that’s the way equity investing works. Making a huge return requires a good exit. “Good exit” includes timing as well as size. And this is often where investor’s goals and those of the entrepreneur diverge. Mark Suster has a great article showing how you could have a $30M exit and the founders end up making $20K per year for their efforts. But when you take investor’s money you’re subject to the golden rule. “He who has the gold, makes the rules.”
Having any exit at all, never mind a good one, has very little to do with making a great company. Of course, a great company is required, but it’s hardly sufficient.
From my decades of work as an entrepreneur, a few less decades of consulting with scale-up companies, and almost a decade of angel investing here’s what I’ve come to believe.
- The ability to make a good company is almost entirely under your control. You have to do things right, and avoid doing anything stupid. But if you’re willing to follow your customer’s passion above your own and work at it, you can do probably pull it off. By “good company”, I mean one that meets the needs of customers, produces wealth, produces jobs and lasts a long time.
- The ability to make a GREAT company is all that plus some good luck and timing. Warren Buffett and Ross Perot have been quoted as saying as much, but you can see luck and timing in the history of many other great entrepreneurs. Bill Gates comes to mind. And, by the way, if you’ve done the learning of #1 properly, you’ll probably be able to see if you’ve got that luck and timing or not.
- The ability to have a good EXIT is something else entirely. The things that you can’t control (as entrepreneur or investor) that affect your ability to have an exit include the size of the market, the competitive space, changes in technology, changes in regulation, and entrepreneurial fashion. By that last one, I mean some sectors get hot for a while and then get cold or vice versa. Often faster than you can build a company. The multiple you’ll get when things are hot is considerably more than when they’re not.
Here are two ideas to give you hope if you feel your chances of being a unicorn have been dashed. There are billion dollar companies which have been privately funded. And according to one researcher I talked to, 50% of the IPOs in the last half-century did not take VC money. Better practice that jump shot.
[This article was orginally published on Medium.com]
