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The Truth About

Venture Capital

Why Billion-Dollar Entrepreneurs

Avoid VC or Delay It

Dileep Rao, Ph.D.

ISBN: 978-0-9800477-6-9

www.dileeprao.com

Copying or reproduction in any format without the prior, express written

consent of the copyright holder is prohibited.

Contents

Introduction…………………………………………………………………5

26 Reasons to Avoid Venture Capital……………………………7

1. Entrepreneurs have built giant ventures without VC

2. Most billion-dollar entrepreneurs avoid VC

3. VC has funded giants in Silicon Valley – but few outside

4. VC is rare among mini giants outside Silicon Valley

5. VCs prefer disruptive opportunities

6. VCs prefer emerging, high-potential industries

7. VCs want ventures that can dominate emerging, high-

potential industries

8. VCs prefer ventures with attractive exit options.

9. About 99.98 percent of startups will not receive VC.

10. Getting VC is not much easier at later stages

11. Early-stage VCs need home runs to earn high returns

12. Home runs are rare

13. Home runs are concentrated in Silicon Valley

14. VC home runs need emerging industries

15. VCs prefer post-Aha ventures with potential

16. Few VCs succeed because home runs are rare

17. VC advice may be no better than other advice

18. VCs seek strategic control of your venture.

19. VCs seek the right to replace you with executives

The Truth About Venture Capital

20. Find the right type of VC for you

21. Entrepreneurs may not do well even when VCs do

22. Without capital efficiency, angel financing can fail

23. Angels can sometimes become sharks

24. Angels do well in Silicon Valley

25. Even angels want an exit

26. To create and retain wealth, control the venture

5 Reasons to Delay Venture Capital…………………………… 82

1. Consider VC if your direct competitors have it

2. Delay VC till take-off to keep control

3. Delaying helps to know who wants you

4. Delaying helps to know who you want

5. Delaying can bring a better deal

Conclusion………………………………………………………………… 99

Introduction

Is your goal to raise venture capital (VC) or is it to build

a successful business? These two goals may conflict with each

other.

Building a giant company from scratch, to become

wealthy, is the holy grail for entrepreneurs, venture capitalists

(VCs), executives, and governments.

The question is: Is VC necessary and should you seek VC

to build your dream business?

Here are some common assumptions in America today:

• Entrepreneurs cannot build a big business without VC

• VC will help you build a big business to make your fortune

• All VCs are experts who can help you build a big business

• To get VC, write a business plan and participate in a

business-plan competition or shark tank

• Angel financing will lead to VC that will lead to an IPO that

will lead to wealth.

These assumptions are not true most of the time for

most entrepreneurs in most places. 99.9 percent of American

entrepreneurs will not get VC. 99.98 percent should avoid VC.

The remaining 0.02 percent should delay VC. This book tells

you why.

The Truth About Venture Capital

Perspective: VC v. Entrepreneurs

When you hear about VC home runs, it’s usually about

how VCs helped to build giants such as Google and Facebook.i

i Home runs are defined here as ventures that go from startup to over $1 billion

in sales and valuation

But what if you analyzed the situation from the

perspective of billion-dollar entrepreneurs who built ventures

from startup to over $1 billion in sales and valuation, and

remained involved in the venture.

The reality about VCs and VC-funded home runs is that:

• Even after being super-selective and financing only around

0.1 percent of American ventures, VCs fail to develop home

runs in about 99 percent of the ventures that they do

finance.

• VCs seek, and mostly get, strategic control of the venture.

• In the ventures that do become home runs, estimated at

about 15 to 60 per year, entrepreneurs would have kept

more of the wealth created if they had delayed VC.

The Findings

The findings in this book are based on an analysis of

billion-dollar entrepreneurs. It shows you why 99.98 percent

of entrepreneurs should not seek VC, and the rest should delay.

The key question for you: Should you seek VC early, seek VC late,

or avoid VC?

26 Reasons to Avoid VC

26 Reasons To Avoid VC

The Truth About Venture Capital

26 Reasons To Avoid VC

Contrary to popular mythology, raising VC does not

guarantee that the venture will succeed or that you will

become rich. All it means is that you may have ceded control of

your business to investors whose interests may not mesh with

yours.

Many myths have developed around VC as the elixir of

venture success, and around VCs as the high priests who

carefully allot this elixir to a select few and grant them riches

beyond the dreams of avarice. It is difficult to pick up a

business publication without reading about VC skills in

building fabulous ventures. The stories are basically about how

entrepreneurs secured VC and soared to wealth, often with

wise guidance from the VCs. This has led entrepreneurs to

assume that VC is the only model for success, that they should

write business plans, attend VC conferences, present at

business-plan competitions, seek VC, and hand over control of

their venture to the VCs. Is this wise?

Is VC a cornucopia of riches? Or is the lure of VC based

on a nugget of reality that is enveloped in a cocoon of myths?

26 Reasons to Avoid VC

Entrepreneurs ask, “How can I get VC,” which presumes

that they need VC to grow, and that everyone can get VC if they

know how. Instead, the questions should be the following.

Can a giant business be built from scratch without

VC? Many entrepreneurs have built billion-dollar and

hundred-million-dollar companies from scratch, without VC.1

In fact, 76 percent of billion-dollar entrepreneurs grew without

VC. Outside Silicon Valley, the percentage of billion-dollar

entrepreneurs who built giant businesses without VC soars to

91 percent. So yes, it can be done, and it has been done.

Should you seek VC or grow without it? If you are an

entrepreneur seeking VC, you should evaluate whether you can

build your business by avoiding, or delaying VC, whichever can

help you control your business and keep more of the wealth

you create.

VC has done wonders in Silicon Valley where it has

created one of the greatest assemblages of growth companies

the world has seen. In Silicon Valley, VC has created attractive

jobs and astounding wealth, and most importantly, promoted

the myth of VC invincibility. This has led to entrepreneurs with

a dream seeking VC as the first step to building a home run.

But if you are an entrepreneur in Silicon Valley, should

you get VC early, later, or not at all? If you are an entrepreneur

outside Silicon Valley, can you get VC, or compete and win

against the money, technology, and juggernaut that is Silicon

Valley?

The Truth About Venture Capital

If you are an executive, should you follow the high-risk,

capital-intensive VC strategy, which may potentially jeopardize

your career? Or should you opt for the risk-reduced, capital-

efficient strategies of many billion-dollar entrepreneurs, but

then you could face the possibility of losing to a venture that

has received VC?

In my study of nearly 90 billion-dollar entrepreneurs, I could not

find any who beat ventures funded by the Silicon Valley VCs. If

your direct competitors have funding from the Silicon Valley VCs,

you may want to consider seeking funding from them. But do so

after Aha to keep control of your venture.

To know what is right for your venture, company, or

area, first understand the myths and the realities of VC. Next

read about billion-dollar entrepreneurs who built giant

companies from scratch – without VC.ii Finally choose the right

option for you.

Key Myths of VC

This book tells you about the myths and the realities of

VC. It points out why VC is available to very few and

importantly, why even among these “fortunate” ones who get

VC, only about one percent become home runs. In the home

ii Nothing Ventured, Everything Gained, Dileep Rao, www.dileeprao.com

26 Reasons to Avoid VC

runs, many at the periphery become millionaires and those at

the center of the flame become billionaires.

David Choe is an artist whose connection to Facebook

was that he painted the murals on the walls of Facebook’s

office, thereby putting him in the periphery. He was smart, or

lucky, enough to ask for stock instead of cash. This stock was

estimated to be worth about $200 million.2 Sheryl Sandberg,

Facebook’s COO, who is closer to the center of the flame, is

worth about $1 billion.3 Mark Zuckerberg, who is the flame, is

worth $72 billion (as of May 2018).4

But most VC-funded ventures do not become home

runs. The success of VC has created many beliefs about VCs.

#1: Venture capital is essential to build giant ventures.

#2: Get VC as soon as you can get it.

#3: It is easy to get VC.

#4: All VCs can help you build home runs.

#5: Accept VC since VCs add more value than they take.

#6: Angels are a stepping stone to VC and to a home run.

These beliefs are not true most of the time for most

people in most places. Here’s why.

The Truth About Venture Capital

1. Entrepreneurs Have Built Giant Ventures Without VC

A common myth is that it is not possible to build giant

companies without venture capital.

Since the 1970s, when the Silicon Valley VC industry

started to take shape in its present form, its capital-intensive

method has been assumed to be the only way to build giant

companies. The relentless drumbeat of the VC industry has

convinced entrepreneurs that VC is essential in order to build a

giant business. The intense publicity around venture capitalists

and their home runs, such as Google and Facebook, has

encouraged governments to offer funding and incentives to

form VC funds with the hope of growing their own home runs

in the “industries of the future.” Universities and area leaders

organize VC forums and design technology transfer programs

with the hope of developing successful ventures, of generating

wealth, and of creating jobs.

But is using VC a smart strategy for entrepreneurs, for

governments or for universities?

Kevin Plank started Under Armour when he completed

his undergraduate studies at the University of Maryland in

1996. As a football player, he noted that the fabric in his

compression shorts kept him dry while his t-shirts got soaked.

26 Reasons to Avoid VC

When he finished his undergraduate studies, he founded Under

Armour in his grandmother’s basement and started selling to

football teams. He did not take a salary from his firm for nine

years. From this start, and without VC, Plank built Under

Armour to annual sales of over $2.3 billion and a market

capitalization of over $8 billion (as of May 3, 2018).5

Other examples of entrepreneurs who built billion-

dollar companies without venture capital include Amancio

Ortega (Zara), Michael Dell (Dell), Dick Schulze (Best Buy), and

Michael Bloomberg (Bloomberg).

Of the 85 billion-dollar entrepreneurs analyzed, an

astounding 76 percent were VC-Avoiders. These entrepreneurs

learned how to grow without capital, and thereby kept control

of their business and of the fortune they created.

Implications: Entrepreneurs can build, and have built,

giant companies without VC. One reason you may not have heard

about many of the VC-Avoiding billion-dollar entrepreneurs is that

they often do not get any benefit from announcing their success,

especially if they plan to stay private. They can fly under the radar

and keep their size and strength a secret until they are ready to

announce their accomplishments. VCs, on the other hand, seek

publicity for themselves and for their portfolio companies in order

to increase the venture’s exit value. Promoting home runs also

helps VCs raise their next fund more easily.

The Truth About Venture Capital

2. Most Billion-Dollar Entrepreneurs Avoid

Billion-dollar entrepreneurs are a rare bunch. To know

how rare it is to build a company to over $1 billion in sales and

valuation with the entrepreneur in a leading role, consider this

– only about 0.023 percent of 27 million U.S. businesses have

sales in excess of $1 billion.iii We found 85. These 85 can be

classified as VC-Controlled, VC-Delayers, and VC-Avoiders.

VC-Controlled VC-Delayer VC-Avoider

VC Timing Early Late Never

Control VC VC/ Entrepreneur Entrepreneur

Leadership Hired CEO Entrepreneur Entrepreneur

Percent 6% 18% 76%

Examples Jobs, Omidyar Gates, Zuckerberg Dell, Schulze

Table 1. VC-Controlled, VC-Delayers and VC-Avoiders

VC-Controlled get VC early and relinquish control to a

CEO picked by the VCs. Steve Jobs was “VC-Controlled.” He co-

founded Apple when he was 21, started to take off in the PC

revolution, got VC, and built Apple into a hot growth company.

iii Estimated number of U.S. public and private businesses with annual sales

above $1 billion are estimated at 6,801 by LexisNexis, 5,711 by Business

26 Reasons to Avoid VC

But when the growth stumbled, Jobs was fired by the VCs. Six

percent of America’s billion-dollar entrepreneurs are VC-

Controlled, including Pierre Omidyar of eBay (Table 1).

VC-Delayers get VC late and stay in control. They grow

without VC until their growth and potential are evident. At this

point, VCs are interested in investing. Bill Gates was a VC-

Delayer. He co-founded Microsoft with Paul Allen in 1976

when he was 21. They convinced a major computer firm that

they could develop software for the firm. When IBM decided to

get into PCs, Gates licensed and then bought an operating

system for IBM PCs. He sold non-exclusive licenses to IBM and

to other PC manufacturers to make clones of the IBM PC. He

got VC after Microsoft was in a growth mode, and kept control.

Although they are diluted by the VCs, VC-Delayers stay on as

CEO and do not relinquish control of the business. 18 percent

of America’s billion-dollar entrepreneurs are VC-Delayers,

including Mark Zuckerberg of Facebook.

VC-Avoiders do not get VC. They grow without it.

Michael Dell was one. He started Dell out of his dorm room as a

freshman at the University of Texas at Austin. He later went

into the business full time in 1984 at the age of 19. He sold PCs

and accessories from his condo and built the business with his

own and with family money. He never got VC. 76 percent of

America’s billion-dollar entrepreneurs are VC-Avoiders,

Source Complete, and 6,003 by Business Insights (as of June 2018) for an

average of 6,171

The Truth About Venture Capital

including Michael Bloomberg (Bloomberg) and Dick Schulze

(Best Buy).

26 Reasons to Avoid VC

3. VC Has Funded Giants In Silicon Valley – But Few Outside

There are two Americas: Silicon Valley and the U.S.

outside Silicon Valley (Table 2), and there is a chasm between

the two.

VC-Controlled VC-Delayers VC-Avoiders

Silicon Valley 25% 63% 12%

Outside SV 1% 8% 91%

Table 2. VC Strategies by Area

In Silicon Valley, 88 percent of the billion-dollar

entrepreneurs used VC. Outside Silicon Valley, 91 percent of

the billion-dollar entrepreneurs built their businesses without

VC. This means that entrepreneurs have built giant businesses

without VC, but mainly outside Silicon Valley.

This is confirmed in Minnesota.6 Minnesota has

developed one of the highest number per capita of home-

grown Fortune 500 companies, and one of the highest number

per capita of billion-dollar entrepreneurs in the country, so it

must have done something right. In Minnesota, none of the

billion-dollar entrepreneurs got VC at the start, 20 percent got

it after going public, and 80 percent never got VC.

The Truth About Venture Capital

• Dick Schulze, the founder of Best Buy, the world’s largest

consumer electronics retailer with over $40 billion in

revenues (May 2018), built the giant with only $9,000 in

equity and no VC.7

• Richard Burke built UnitedHealth Group into the world’s

largest private healthcare-management company with over

$200 billion (May 2018) in annual sales.8 He did it without

VC.

IPO location also gives a clue to high-potential ventures.

An analysis of initial public offerings from 1996 to 2000 shows

that six states – California, Florida, Illinois, Massachusetts, New

York and Texas – had 56 percent of the U.S. total. California

alone had 21 percent. This means that California VC funds were

more likely to find high-potential ventures in their area.9

Implications: VC has succeeded in Silicon Valley.

Billion-dollar entrepreneurs have succeeded without VC

outside Silicon Valley.

26 Reasons to Avoid VC

4. VC Is Rare Among Mini-Giants Outside Silicon Valley

Obviously, most entrepreneurs do not become billion-

dollar entrepreneurs. Some become hundred-million-dollar

entrepreneurs.

In Minnesota, VC has not been very prevalent even

among hundred-million-dollar entrepreneurs. Among

Minnesota’s hundred-million-dollar entrepreneurs, 88 percent

never used VC in their first venture. Of the three who did use

VC, two got it after the business was established and when it

was growing, i.e., after Aha! They kept control of their venture.

One got VC too early and lost control. Today he wants nothing

to do with venture capital.

20%

40%

60%

80%

100%

HMD

Entrepreneurs

Without VC

With VC

Figure 1. Minnesota’s Hundred-Million Dollar (HMD)

Entrepreneurs using VC

Ed Flaherty is an excellent example of a hundred-

million-dollar entrepreneur who built his company without

The Truth About Venture Capital

VC.10 As he was building his software company in Minneapolis,

he found that service stations expected him to leave his car

there all day to get his oil changed. He had seen an innovative

model in California where they did it faster and more

conveniently. He leased a gas station and started the first Rapid

Oil Change. The chain grew and Flaherty soon found himself

courted by the major oil companies. He sold to one of them,

took the proceeds, bought the rights to grow Applebee’s

restaurants, and developed a chain with sales in the hundreds

of millions.

Should you seek venture capital for your venture if you

have a more modest vision. You will have four strikes against

you.

1. The top VC funds are not interested in modest visions. They

want potential block busters to make up for the large

proportion of failures in their portfolio, and to get good

portfolio returns.iv

2. The lower tier of VC funds, who are smaller and may

finance modest visions, do not have a track record of

building home runs. This means that you may give up

iv A “typical” VC portfolio has about 1% home runs,19% successes, and the

remaining 80% fail to meet the minimum thresholds for VC success, which is to

get a portfolio return of 20% per year. In ventures that do not meet the minimum

thresholds, VCs are likely to get most of the gain, if any. There may not be

much left over for the hired managers and entrepreneurs. For more on this, see

“Designing successful venture capital funds for area development: Bridging the

hierarchy and equity gaps” by the author, Applied Research in Economic

Development, 2006 Volume 3, No. 2.

26 Reasons to Avoid VC

control of your dream to VCs who don’t have a track record

of success.

3. VCs get their money out first, so they may do well even

when others involved in the business do not.

4. They may hire a professional CEO who may fire you from

your venture, and then dilute your financial stake with new

financing. You end up with little to show for your dream.

Implications: All VCs have onerous requirements,

especially before Aha. If your goal is modest, you may not get

VC from the top VC funds and you may not want VC from the

ones at the bottom. Smaller VCs usually do not have a great

track record of success. Seeking to grow without VC may be a

better option than getting it from VCs who do not have a good

track record. Entrepreneurs outside Silicon Valley may have no

choice because they are not likely to get venture capital. They

may have to grow without it.

The Truth About Venture Capital

5. VCs Prefer Disruptive Opportunities

Reading the business press, it is possible to believe that

every entrepreneur can get VC if he or she writes a great

business plan. There are many consultants, accountants,

attorneys, and financial brokers who claim they can help

entrepreneurs get venture capital. Incubators and universities

develop programs, forums, business-plan competitions, and

shark tanks to connect entrepreneurs with venture capitalists

and angels.

But is it easy to get VC? VCs hope to earn a high annual

return to offset the high level of risk in new ventures. To earn

these high portfolio returns, VCs seek high target returns from

each venture in their portfolio. These target annual returns

range from 30 percent from late-stage ventures to more than

80 percent from early-stage ventures. Very few ventures

achieve these high target returns. Therefore, VCs are very

selective, and have developed sophisticated selection criteria

hoping to achieve high returns.

Hamdi Ulukaya built Chobani into a billion-dollar

company – without VC. When his father suggested that he start

a dairy company due to the shortage of “good” dairy products

in the U.S., Ulukaya jumped into the industry, bought plants

that were closed, and started his company with debt. He did

26 Reasons to Avoid VC

not use VC. Dairy products are not considered disruptive, and

VCs prefer disruptive ventures.11

Non-disruptive products in mature industries can be

imitated by existing companies, and may not offer

entrepreneurs a sufficient advantage to build new giants.

Ulukaya seems to be a lucky exception. By not entering the

market until Chobani had a significant market share, the

incumbent yogurt companies allowed Chobani the space to

grow without barriers, and belatedly introduced their own

brand of Greek yogurt. Also, since yogurt is not a high priority

industry for VC funds, Ulukaya was able to grow without VC-

funded competitors.

VCs prefer to fund high-potential, disruptive

opportunities in emerging industries that can offer them high

returns. Existing corporations often find it difficult to compete

against emerging-industry companies, such as Amazon.com,

with disruptive products and business models. Amazon.com

has disrupted many markets and made it difficult for brick-

and-mortar book stores, such as Borders, to copy its strategy of

selling books and other products online. To combat such

competitors, larger companies often acquire successful

ventures in emerging industries, giving VCs an exit. eBay’s

acquisition of Paypal is an example of an established company

buying a growing venture in a new industry.

But there are only a few high-potential, disruptive

opportunities. Therefore, VCs invest in few ventures – only

The Truth About Venture Capital

about 1,500 seed-stage ventures got VC in 2017, which is about

0.2 percent of annual startups. And only about 5,300 existing

ventures got VC in 2017.12 Given that the mean age for getting

VC is when the venture is between 3 and 4, and the number of

new ventures in the last six years is about 3,700,000,13 this

means that about 0.1 percent of new ventures get VC at any

stage (note that some ventures get multiple rounds of VC

investment).

Implications: If your opportunity is not disruptive and

not in an emerging industry, the probability of getting VC is

small.

26 Reasons to Avoid VC

6. VCs Prefer Emerging, High-Potential

Industries

Pierre Omidyar founded eBay in 1995 at the dawn of

the Internet age.14 In 1996, the company held 250,000

auctions. In November 1996, he obtained a customer who sold

travel products and the number of auctions grew to 2,000,000

in January 1997. Later that year, after growth was evident and

when the industry was emerging, he got his first VC investment

of $6.7 million. He was “forced” to get VC because his success

attracted direct competitors with significantly more funding

than he had. eBay went public in September 2008 and was

instantly worth billions. That’s what happens in the emerging

stages of high-potential multi-billion-dollar industries. The VC

investment was worth $2.4 billion, making it one of the best VC

investments of all time – until Instagram.

VCs do well when they invest in the emerging stages of

high-potential industries. It is easier for the venture to grow

rapidly in a fast-growing, emerging industry, and such

industries do not have large, well-established competitors.

Often the high growth required by VCs is only possible in

emerging, high-potential industries. 47 percent of U.S. billion-

dollar entrepreneurs in emerging industries used VC. In non-

emerging industries, only two percent got VC.

The Truth About Venture Capital

VC-favored industries have changed over time as

previously emerging industries mature and newer ones

emerge. Recently, the leading-edge industries, namely

software, biotechnology, industrial/ energy (green), media and

entertainment, and IT services, accounted for nearly three-

quarters of VC investments.15 If VCs invest in mature

industries, such as the medical device industry, they seek to

dominate new niche markets and usually sell their successful

investments to larger, more established medical-device

corporations. High-performance entrepreneurs who are not in

emerging industries need to develop alternate growth

strategies.

Bob Kierlin is the founder of Fastenal, the largest U.S.

seller of nuts and bolts.16 At the age of 11, Kierlin designed a

vending machine to sell nuts and bolts. He then finished his

education, did a stint in the Peace Corps, and started working

for IBM. At this time, he returned to his dream to sell nuts and

bolts via a vending machine, and started Fastenal. In the first

two weeks after he started, he realized that the idea was not

feasible at the time. He changed the business model to a retail

store selling nuts and bolts. He financed the company with

$31,000 from his own savings and money from his friends. He

did not seek VC, and VCs were unlikely to invest in a business

that sold nuts and bolts because it was not an emerging

industry, and had no obvious advantages such as a new

technology or a disruptive business model. Kierlin dominated

26 Reasons to Avoid VC

the fragmented industry because he was a better entrepreneur

than his competitors. VCs recruit “proven” executives with a

track record. They do not like to “gamble” on new

entrepreneurs – unless the entrepreneurs can show evidence

of potential.

Jill Blashack Strahan dropped out of college because she

wanted to “connect the dots” of what she was learning.17 When

her son was born, Blashack Strahan closed her gift basket

business, which required long hours but resulted in earnings of

less than $6,000 per year. Then she got the inspiration to sell

exceptional convenient foods through home parties. Blashack

Strahan bootstrapped the business, called Tastefully Simple,

with a total of $36,000, which she obtained from her savings, a

partner and a $20,000 Small Business Administration loan. In

2008, Tastefully Simple’s sales were in excess of $140 million,

the company was debt free, and Blashack Strahan continued to

hold 70 percent of the company. Blashack-Strahan did not seek

VC nor was she offered VC because the gift industry was

mature and her business idea was not disruptive.

Implications: VCs prefer opportunities in the growth

stages of emerging, high-potential industries. Ventures that are

not in the VC-favored industries have a difficult time getting

venture capital.

The Truth About Venture Capital

7. VCs Want Ventures That Can Dominate

Emerging, High-Potential Industries

VCs are very picky. They reject about 99 percent of the

deals they see.

Nearly every venture, including Google, has been turned

down by VCs. In fact, Google was turned down by a company

that could have bought it for $1 million, and Page and Brin, the

co-founders of Google, are said to have rejected a counter-offer

of $750,000 from the company. That is not the only

noteworthy turndown for Google. A venture capitalist from

Bessemer Venture Partners (BVP) was visiting a friend who

had rented her garage to Brin and Page. She volunteered to

introduce the VC to these two entrepreneurs. He turned down

the offer.18 In fact, his actual words were “How can I get out of

this house without going anywhere near your garage?”

VCs seek ventures that demonstrate that they can

dominate emerging, high-potential, multi-billion-dollar

markets because these leading companies are often favored by

public stock-market investors and strategic buyers, and tend to

create great wealth. Google dominates search with a 91

percent market share while Microsoft is a distant second.19

This is one reason Google is worth $722 billion (May 4, 2018).

Implications: To take high risks, VCs need to see high

returns. To see high returns, VCs need to finance emerging-

26 Reasons to Avoid VC

stage ventures that will dominate high-growth markets and

high-potential industries.

The Truth About Venture Capital

8. VCs Prefer Ventures With Attractive Exit

Options

In early April 2012, Instagram raised $50 million at a

valuation of $500 million. A few days later, on April 12,

Facebook bought Instagram for about $1 billion.20 According to

sources, Instagram had 30 million users who paid nothing for

the service.21 Another source notes that Instagram had “lots of

buzz and no business model.”22 Instagram is very unusual, but

its investors’ entry and quick exit from the company shows

that VCs like ventures with attractive exit potential.

VCs have the exit in mind when they invest. Very

successful ventures offer exits to VCs via initial public offerings

(IPO) or via strategic sales to large corporations. These exits

are attractive due to the higher valuations.

IPOs like eBay and strategic sales like Instagram offered

huge returns. Ventures without the potential of an attractive

IPO or strategic sale are unlikely to get VC funding because

they do not offer the potential of high valuations.

Very few ventures are likely to have attractive IPOs,

although the number is higher when the markets are in a

frothy state of “irrational exuberance” as in the late 1990s. In

1999 and 2000, 486 and 406 companies went public

respectively. This number fell to 31 in 2008 and 160 in 2017.23

This compares with about 600,000 new startups each year and

26 Reasons to Avoid VC

27 million businesses in the U.S. The same is true of strategic

sales. Few ventures have the strategic value that entices big

corporations to pay a hefty price.

Mark Cuban built Broadcast.com and sold it to Yahoo

for $5.7 billion in Yahoo stock. When it was sold, the company

was said to have sales close to $100 million.24 This is the stuff

that dreams are made of and an example of a high-value exit.

But they don’t happen frequently.

In contrast, the billion-dollar entrepreneurs

interviewed had high aspirations, such as Dick Schulze’s goal of

$1 billion in sales for Best Buy, but these entrepreneurs did not

expect an IPO at the start. Most were not even thinking of an

“exit.” As they grew, some sold at high valuations. Others

stayed to build giants. Some went public. Most stayed private.

Implications: To have a high-value IPO, it helps if you

are a leader in a hot, emerging industry. For a strategic sale,

check to see if anyone purchased your direct competitors and

whether your valuation is likely to be comparable. If your

venture is not expected to have an attractive exit option, via a

public offering or a strategic sale to a buyer with strategic

interests and deep pockets, you are unlikely to get VC. Don’t

seek VC if your goal is to stay private. VCs want the highest

return they can get, and this is usually from an IPO or from a

high-value sale to a strategic buyer.

The Truth About Venture Capital

9. About 99.8 Percent Of American Startups

Will Not Receive VC

More entrepreneurs ask, “How can I get VC” rather than

“Will I get VC?”

The question of how to get VC presumes that everyone

can get VC if only they knew how, or if they wrote the perfect

business plan. Due to the high risk in emerging ventures, VCs

are picky and finance only one or two ventures out of about

100 business plans they see. VCs reject the other 98 percent -

99 percent mainly because they do not see a high reward with

acceptable risk

According to the Small Business Administration, about

600,000 new businesses are started in the U.S. each year, and

the number of startups funded by VCs was about 1,500.25 The

number of startups funded by VCs at the research and

development stage has varied depending on economic

conditions. At 1,500, the probability of an average new

business getting VC is about 0.002, which means that 99.8

percent of startups will not get VC. VC is tough to get for

startups, for ventures without perceived high-potential, for

ventures not in emerging industries, and for ventures outside

Silicon Valley.

Implications: Unless you have a cure for cancer or

some research breakthrough, or you have just sold your

26 Reasons to Avoid VC

venture to a strategic buyer for billions and want to start your

second venture, do not expect VC as a startup. Few startups get

VC. Usually the ones who do get it are able to develop an

attractive track record in a high-potential, emerging industry

where the odds of a blockbuster are high.

The Truth About Venture Capital

10. Getting VC Is Not Much Easier At Later

Stages

Are your odds better at later stages? In general, the

odds do not seem to change much, although the number of

ventures getting VC does increase. More entrepreneurs may

get VC at a later stage because most VCs like to invest after

potential has been proven. The percentage of funding going to

ventures in the startup/ seed stage since between 2012 and

2017 was about 3 percent.26 So about 97 percent of VC funding

has gone to ventures on or after the seed stage when the

advantage is more evident.

But the odds of getting VC are prohibitive even at later

stages. The average annual number of all VC deals at all stages

between 1995 and 2012 was about 3,500 ventures (see Table

3). As noted earlier, in 2017, this number has increased to

5,300. Many of these deals are VC follow-on investments in the

same venture, so the number of ventures funded is lower.

Assuming that the age of ventures receiving VC is less than six

years old, which seems reasonable given that the average age

of a venture receiving seed-stage VC funding is 2.4 years27, this

means that, each year, about 0.15 percent of ventures seem to

get VC. In other words, about 99.85 percent are unlikely to get

VC.

26 Reasons to Avoid VC

Table 3. Number of Deals financed by VCs

Source: PwcMoneyTree

(https://www.pwc.com/us/en/industries/technology/moneyt

ree/explorer.html#/currentQ=Q1%202018&qRangeStart=Q1

%202013&qRangeEnd=Q1%202018)

Ventures at later stages have history, which means that

potential is more evident and risk is lower. This can attract VC

funds, and may allow you to pick the right VC, to negotiate

better terms, to keep more of the business, and to stay in

control. But if you cannot show progress, the odds of getting VC

fall.

Implications: Most entrepreneurs will never receive

VC, which means that you need to learn to grow without it.

Importantly, note that securing VC does not mean that you

have built a home run or become wealthy. All it means is that

you may have most likely ceded control of your business to

investors whose interests may not coincide with yours.

Secondly, even with VC, you may not make a fortune. Instead

Years Average No. of Deals per year

1995-1996 2,120

1997-1998 3,315

1999-2000 6,604

2001-2009 3,469

2010-2017 4,948

The Truth About Venture Capital

you may have lost control of your one great idea. Most

entrepreneurs I met in the course of my financing career had

faith that their business would succeed, and that they would

make a fortune. Otherwise why become an entrepreneur and

suffer the agonies of a new venture? For many, it is to build a

home run. But home runs are rare. If your venture does not

become a home run with VC, your odds of making a huge

fortune diminish considerably. You may have done better

without VC.

26 Reasons to Avoid VC

11. Early-Stage VCs Need Home-Runs To

Earn High Returns

Policy makers and entrepreneurs constantly lament the

“shortage” of VC funding to build businesses, giving the

impression that what entrepreneurs need to develop

successful businesses is more capital. If there were really a

shortage of VC that could be successfully used to build high-

growth ventures, then all VCs should earn high returns.

But is this true? Are all VCs successful, all the time, and

everywhere? Or are only a handful successful, and at certain

times, and in certain places? Is there a hierarchy of VCs? If

there is a hierarchy, who are the most successful VCs and

should you select one of them for your venture, if VC is right for

you, and you do decide to seek VC?

It is dangerous when perceptions trump reality,

especially in finance. VCs have sold their industry so well that

funding sources, including pension funds, offer them huge

pools of money hoping that VCs can earn high returns by

creating new giant companies all the time and everywhere.

Even governments get in on the act and often waste taxpayer

money. And there is no shortage of entrepreneurs who think

that all VCs can help them build huge companies and therefore

seek VC as the key to venture success.

The Truth About Venture Capital

Early stage VC is high-risk investing. As compensation

for the high risk, early stage VCs, seek portfolio returns

exceeding 20 percent after expenses. But VC returns have not

been attractive for a while. Median VC returns have been below

break-even since the 2000 Internet crash (Figure 1).

VC portfolio: VC returns are affected by many factors.28

• Venture mix: This is the proportion of portfolio ventures

that are home runs, successes, break-even ventures, partial

failures and total failures.

• Investment per venture; Ventures are financed in stages as

they grow. Ventures that are successes and the home runs

receive more investment from VCs in subsequent rounds of

financing. These subsequent rounds are usually larger than

earlier rounds, have a shorter time to exit and a higher

venture valuation, unless it is a down round. The target

return for VCs is usually lower in later rounds than in

earlier rounds

• Years to exit: This can vary depending on the stage of the

venture and the frothiness of stock markets. When markets

are very attractive for IPOs, VCs often exit from their

ventures in shorter time periods. Shorter exits can also

happen when a large company wants to make a strategic

acquisition (see Facebook’s acquisition of Instagram in next

finding). Normally, VCs assume that the time to exit is about

5 to 7 years from startup, which is one reason for the 10-

year life of the typical VC limited partnership.

26 Reasons to Avoid VC

Impact of Home Runs on Portfolio Returns:

Analyzing the VC portfolio shows that home runs have a

dramatic impact on VC returns. eBay and Instagram were

home runs. A portfolio with these home runs can do well. Given

that there are few home runs, and most of them are in Silicon

Valley, it is not surprising that the most successful VCs are in

Silicon Valley, as shown in the list of top 50 VCs.

Implications: Increasing the number of home-run

ventures has the biggest impact on returns from early stage VC

portfolios. Without home runs, early stage VC portfolios do not

show high returns. But, as the following sections show, home

runs are rare, and the few who invest in home runs do well.

The rest fare poorly.

The Truth About Venture Capital

12. Home Runs Are Rare

It is easy to get the impression from the business press

that VCs invest in nothing but home runs like eBay and

Instagram.

eBay is one of the most successful home runs of all time

when measured on an annual IRR basis. About $7 million

invested in eBay was worth $2.4 billion in 18 months, an

annual return of about 5,000 percent.29 As noted earlier,

Instagram may have a better annual return, with a 100 percent

return in one week. The average internal rate of return (IRR)

from seven other home runs in the 1980s was 781 percent.30

But home runs are rare, even in Silicon Valley, which is

blessed with one of the highest concentrations of home runs in

history.

Marc Andreessen’s track record of home runs is

spectacular. He was a co-founder of Netscape and the founder

of Opsware, which he sold to HP. He also started a VC firm

called Andreessen Horowitz, invested in Skype and LinkedIn,

and sits on the boards of HP and Facebook. Andreessen’s basic

assumption is that “97 percent of venture-capital returns

comes from 15 investments.”31 The statement refers to his

belief that only about 15 ventures each year are home runs and

create most of the VC profits for the year. This compares with

26 Reasons to Avoid VC

about 5,000 to 6,000 ventures that are funded by VCs each

year, and about 600,000 to 700,000 that are started each year.

According to Jesse Reyes of Thomson Venture

Economics, of the 17,000 companies financed by VCs between

1996 and 2004, only 12 percent exited through IPO or M&A,

which are the attractive exit strategies. 5,500 (32 percent)

were written off, and 9,500 (56 percent) were left in viable

inventory as of mid-year 2004.32 With fewer than about 600

IPOs between 2004 and 2008, it is unlikely that many of the

9,500 ventures in inventory went public. This suggests that

VCs had attractive returns only on about 12 percent of their

investments, and very few of these were home runs.

According to Howard Anderson, a former venture

capitalist, the “common wisdom” in the VC industry is that out

of every 100 ventures financed, 20 are total write offs, 20 are

losers, 40 are in the middle and 20 are winners.33

PWCMoneytree.com notes that there were 54,747 VC

deals between 1995 and 2008. Some of these investments

were likely to be multiple rounds of financing for the same

venture, so the number of ventures may be slightly lower. In

the same period, there were about 1,450 to 1,500 VC-backed

IPOs for an annual average of about 103-106 (The number is

an approximate range based on estimates from a graph.34) This

suggests that under 3 percent of VC-backed ventures went

public.

The Truth About Venture Capital

Gary Hamel, a noted author and strategy consultant,

estimated that out of 10 VC investments, five will fail, three will

have a small return, one will double the amount invested

(which is 19 percent IRR if exited in four years and 15 percent

if in five years), and one will be a home run (offering 50 to 100

times the original amount invested).

Lately, some analysts have suggested that 33 percent of

the ventures fail completely, 33 percent return the principal

invested, and 33 percent offer attractive returns.35

Implications: The key is that the VC model is built on a

few home runs to pay for many duds. This means that VC

works for a few entrepreneurs, and under certain conditions.

The question for you is whether you will be in the 1 percent of

ventures and become a home run with VC. And if you do have a

home run, how much of the wealth created will you keep?

26 Reasons to Avoid VC

13. Home Runs Are Concentrated In Silicon

Valley

Silicon Valley is practically the only area where home

runs are being developed and VC wealth is being created.

Silicon Valley accounts for the following:36

• Over half of the 50 top VC-backed exits since 2012

• 15 of the top 20 largest VC-backed tech exits since 2009

• Exit valuation that was larger in Silicon Valley compared

with any other part of the U.S.

As noted earlier, exits are important for high returns.

IPOs and strategic sales to large corporations are the primary

high-value exit strategies for the VC industry. Of the two, exit

valuations are usually higher in IPOs than in strategic sales.37

Between June 1996 and December 2006, there were a total of

2,123 IPOs. Of these 585 (28 percent) were in California, and

five states (CA, NY, TX, MA, FL) accounted for a total of 1,093

IPOs (51 percent).

Silicon Valley’s dominance is not recent. It has been

growing for the last 50 years. Table 4 shows home runs by

timing and emerging industry. This is not a complete list of

home runs but a good sample of the last 50 years. Most are in

Silicon Valley. Silicon Valley also leads the number of IPOs in

many key industries.38

The Truth About Venture Capital

Implication: This geographic concentration of high-

value exits suggests that VC funds that invest in areas with

more IPOs, i.e. Silicon Valley, would be more likely to invest in

home-run ventures and do better financially than VCs in areas

without many home runs. Early stage VCs who invest outside

Silicon Valley are likely to have very few home runs in their

portfolios, and are not likely to offer high returns to their

investors.

26 Reasons to Avoid VC

14. VC Home Runs Need Emerging

Industries

Home runs are rare because they are not created in a

vacuum. They need high-potential, emerging industries.

While VCs have tried to create new industries without a

breakthrough technology, they have mostly failed. After the

dot-com bust, some VC funds, such as Kleiner Perkins, invested

to create a “green” industry. But Kleiner Perkins had to go back

to the digital world after gambling on green technology. One

investor noted that “they have stopped drinking the Kool-Aid

and are committing to coming back and focusing on making

money again.”39

VCs do best in emerging, high-potential industries

because high-value ventures are more likely to be developed in

emerging, high-potential industries. Emerging industries are

also unlikely to have strong, established direct competitors.

In the past 50 years, the U.S. has seen a number of new

industries, which were waves of opportunity for VC home runs.

These new industries and the new markets they created, such

as semiconductors in the 1960s and 1970s, personal

computers and software in the 1970s, biotechnology in the

1970s and early 1980s, telecom in the 1980s and 1990s,

Internet 1.0 in the1990s, and Internet 2.0 in the 2000s,

emerged and created a plethora of home-run opportunities

The Truth About Venture Capital

such as Intel, AMD, Apple, Google, and Facebook. These home

runs provided high returns to VCs, and showered bonanzas on

entrepreneurs. Table 4 shows the timing of emerging

industries and some of the home runs in these industries.

Timing Industry Home-Runs (year founded)

1960s Semiconductors Intel (1968), AMD (1969)

1970s PCs Apple (1976), Microsoft (1975).

1970s-80s Biotechnology Genentech (1976), Amgen (1980)

1980s-90s Telecom/ Optics Cisco (1984), Ciena (1992)

1990s Internet Yahoo (1994), eBay (1994),

Google (1998)

2000s Internet 2.0 Facebook (2004), Twitter (2006),

LinkedIn (2003)

Table 4. Home runs by timing and emerging industry

The impact of these home runs can be seen in the

returns from VC funds with various vintages:

• Returns ranged from 42.9 percent for funds started in

the 1990-96 era to -9.77 percent for funds started in the

1998-2008 period40

• Returns were very high for funds that were started in

1994 (49.6 percent per year) and 1997 (67.5 percent)

due to their investments in the Internet41

26 Reasons to Avoid VC

When there are no great emerging industries that create

home runs or stock market euphoria, VC returns fall.

Implications: To get high returns, VCs need home runs.

To have home-runs, VCs need emerging industries. VC funds

have better results when high-potential industries are

emerging and when stock markets are in major bull markets.

The Truth About Venture Capital

15. VCs Prefer Post-Aha Ventures With

Potential

VCs rarely invest at the research and development

stage. Kleiner Perkins, one of the top VC funds in Silicon Valley,

rejected Steve Jobs’s request for funding when Apple was a

startup. Years later, when he was asked why his firm had not

financed Apple as a startup, Tom Perkins, co-founder of

Kleiner, Perkins, Caufield and Byers, noted that the “key to

Kleiner Perkins’s success was determining a venture’s risk, then

attempting to eliminate it.”42 Perkins could not be expected to

foresee that the genius of Steve Jobs would overcome the risk

of investing in a startup.

Steve Shank founded Capella University in1993 in

Minneapolis and is today a leading online university. At the

start, Shank managed Capella with funding from his limited

personal resources and from an investment group. He knew

that it would have to last him until accreditation, especially if

he wanted to minimize dilution. He spent only on essentials

and took only the risks that he could not avoid. The philosophy

was to lose very little. By 1998, Capella was accredited, and its

students could access federal loans. This enhanced Capella’s

value, and it secured funds from NCS, a large corporation with

a strategic interest in Capella’s area of interest. However, the

strategic fit never worked. In 2000, Capella sought external

26 Reasons to Avoid VC

financing and approached VCs who liked what they saw in the

company, and offered an investment of $40 million to $100

million when the company only wanted to raise $15 million.

Note that it is easier to obtain VC when entrepreneurs can offer

proof of potential by growing past Aha!

VCs seek a proven advantage, and they like to see proof

of potential before investing. Only a few VCs invest in the early

stages of a venture but even they prefer Aha in the technology.

Most prefer the later stages when the risk has been reduced.43

Ventures without a track record, or where the edge is

not evident, seldom receive VC. It is difficult to get VC funding

for startup ventures before the entrepreneur has created

business momentum, and/ or without a track record of success

from a previous venture. Dell Computer did not receive VC

because there was nothing to distinguish the company from its

hundreds of PC competitors. Michael Dell tapped family

resources for initial capital,44 and then grew with a business

model that uses a reverse cash-flow cycle. He got cash from his

customers before he had to pay his vendors. This meant that

the more he sold the more cash flow he generated, which is

unlike the cash-flow model of most entrepreneurs.

The source of a venture’s competitive advantage can

affect how VCs view its attractiveness. When the competitive

advantage is in the technology, entrepreneurs may be able to

convince VCs to invest before the venture has momentum. But

then the VCs often recruit an experienced CEO.

The Truth About Venture Capital

If the competitive advantage is the skill of the

entrepreneur, VCs may not be convinced enough to invest until

after the momentum is established. Most billion-dollar

entrepreneurs succeed due to the skills and leadership of the

entrepreneur. They did not have a technology advantage. They

did not get VC for take-off.

Implications: Very few VCs invest in a venture before

momentum and pre-Aha, unless it has developed a fantastic

technology whose value is evident. A proven cure for cancer

would satisfy this requirement. VCs who invest before Aha and

without a great technology take huge risks. Cherish them. They

may not be around for long. If you are expecting to dominate

your industry due to your personal skills, you will have to

delay or avoid VC. But if you are able to build your venture to a

decent size without VC, can you continue to grow without VC?

26 Reasons to Avoid VC

16. Few VCs Succeed Because Home Runs

Are Rare

The ugly truth of the VC industry is that most VCs have

unattractive returns.

An analysis of VC fund returns showed that 4 percent of

1,200 VC firms accounted for 66 percent of market value from

IPOs between 1997 and 2001.45 IPO exits usually offer the

highest level of profits for VCs. Next come strategic sales to

large corporations.

The distribution of annual returns over 20 years for 904

VC funds, broken down into four performance categories with

226 funds in each, showed that only the top quartile had an

annual return above 20 percent.46 This is because the top

quartile returns are benefitting from the returns from the top 4

percent. This means that the remainder of the VCs in this top

quartile did not do as well as the top 4 percent. The average for

the last three categories was 5.4 percent and the overall

weighted average was 10 percent.47 VC funds not in the top

half had an average return at or less than one percent.

Early stage VCs do well when they have home runs.

Given that there are hundreds of VC funds in the U.S., which

include VC limited partnerships, small business investment

companies, and local VC funds, and an estimated 15 to 60

home-run ventures in an average year, most VCs are unlikely

The Truth About Venture Capital

to invest in even one home run, even though each home-run

venture has multiple investors. The ones who invest in one or

more home runs will have attractive returns. The ones who do

not invest in home runs have mediocre returns.

Participating Small Business Investment Companies

(SBICs): Participating SBICs were a type of early stage VC fund

that was sponsored by the Small Business Administration

(SBA) to offer government financing to early stage ventures.

According to the SBA, 4 Participating Small Business

Investment Companies (SBIC) out of 184, i.e. about 2 percent of

the total, accounted for 50 percent of the net profits of the

entire group and 8 (4 percent) accounted for 75 percent.48 The

Participating SBIC program was terminated due to high losses.

Implications: The top 50 VC funds do well, especially when

high-potential industries are emerging. VC performance points

to a hierarchy of VCs where a few VCs account for nearly all of

the profits, and the rest have mediocre results. Entrepreneurs

who get funding from the top four percent of VC funds have

better odds than those who obtain money from others. If you

are planning on getting VC and ceding control to VCs in hopes

of a home run, get VC from a fund in the top 50. The top 4

percent of VC limited partnerships (and Participating SBICs)

got the majority of profits of the industry. These top 4 percent

seem to know how to grow winners, but even they do it rarely.

26 Reasons to Avoid VC

They have offices in Silicon Valley because that’s where the

home runs are located. If you cannot get money from them, try

capital efficiency.

The Truth About Venture Capital

17. VC Advice May Be No Better Than Other

Advice

Do VCs give good advice that benefits the entrepreneur?

When you consider the fact that there are very few home runs,

you should question why the other 98 percent to 99 percent of

VC-funded ventures are not home runs, and why VCs fail on 80

percent of their ventures.v Do successful VCs succeed due to

luck or skill? Are the home runs the result of good VC advice,

the uniqueness of the opportunity, which is the contribution

made by the entrepreneur, or some other factor? If VCs are

experts at new-business development, shouldn’t VCs create

more home runs and shouldn’t they have a better track record?

Shouldn’t they be able to do it all the time and everywhere?

One of the key sales pitches of venture capitalists is that

their money comes with their expertise and networks. Top VCs

do have extensive networks. Most corporate executives and

other experts are interested in being involved with top VC-

backed ventures because these VCs have the reputation and

potential for creating wealth.

However, the quality of VC advice may be overrated. For

example, post-investment involvement of VCs does not

v Note that the precise number of whether home runs are one percent or two

percent of a “typical” VC portfolio is not as important as the fact that about 98

26 Reasons to Avoid VC

significantly affect venture performance, and angels may offer

better help.49 The reason for the possibly higher quality of

angel advice could be that many angels have actually managed

and built businesses. They know how to grow a business. VCs

often have more professional backgrounds and may not have

built successful businesses themselves.

Perhaps the real problem with offering advice to new

ventures is that there are too many unknowns, and pushing for

faster growth in the face of all these unknowns may increase

the risk of failure. So while VCs, even the experienced ones,

may offer good advice to help you succeed in older industries,

new emerging industries may be different. The differences

could be in the technology, strength of competitors, viability of

the advantage, attractiveness of customers, rate of acceptance,

or a hundred other variables and decisions. Guess wrong on

even one and you may have a failure on your hands.

Even Marc Andreessen, who built Netscape and is

considered to be one of Silicon Valley’s VC stars, guessed

incorrectly on Instagram.50 Although his firm, Andreessen

Horowitz, made a fortune in the company, he guessed

incorrectly that a competing company would be dominant. He

invested in the competitor’s succeeding rounds, and not in

Instagram’s.

percent to 99 percent are not. If there were more than 2 percent home runs, VC

returns would exceed historical averages, as they did during the dot-com boom.

The Truth About Venture Capital

At the end of the day, it is a guessing game. Everyone

seems to be guessing about where to plant their seeds, except

that the Silicon Valley VCs are guessing in a very fertile field.

Implications: Many experienced VCs will agree that the

amount of VC advice offered and taken in a venture is often

inversely proportional to the success of the venture. Great

ventures don’t seem to need much advice, although everyone

associated with it is glad to accept tributes to their brilliance. If

VC advice were all that potent, shouldn’t VCs be successful in

developing more home runs than in just 1 percent of their

investments, shouldn’t they make money in good times and

bad, and shouldn’t they be successful everywhere? Since no

one can forecast the future accurately, it might be better to

avoid VCs until the direction of your venture is clear and you

are not gambling with your one great idea. Otherwise too many

cooks may kill the venture. So the implication for you, the

entrepreneur, is whether you want to risk your venture on

someone else’s advice or base your decisions on practical, low-

cost tests to find the right strategic direction. If you are going

to opt for the VC route, wait until you have proven your

venture’s potential, and then seek funding from the Top 50

VCs. Make sure you get a partner with a great track record.

Then test their advice before accepting their infallibility.

26 Reasons to Avoid VC

18. VCs Seek Strategic Control Of Your

Venture

Although early stage VCs mostly invest after Aha, the

risks are still high because it is not clear which venture will

dominate the market. Due to the high risks, VCs usually seek to

control the venture’s strategic direction.

VCs, including John Doerr of Kleiner Perkins, invested

about $100 million in Dean Kamen’s Segway.51 Segway failed to

reach its goals and was sold to a British entrepreneur.52 The

inventor, Dean Kamen, noted that the Segway "will be to the car

what the car was to the horse and buggy.”53 Obviously, Segway

did not even come close to doing what the car did to the horse

and buggy. VCs do gamble and usually lose.

Since no one is perfect and this includes the top VCs,

ceding strategic control to investors who impose their vision

may not be better than implementing your own. It may be

worse, because if you lose control to the VCs, you may not get a

say in implementing your vision.

This is why Zuckerberg was smart. Since he had already

proven Facebook’s growth and value potential, and developed

a successful business model before seeking VC, he was able to

control the VCs rather than the other way around.

Implication: The question for entrepreneurs is whether

VC vision is better than your own. The fact that VCs fail to

The Truth About Venture Capital

reach their goals 80 percent of the time should be sobering,

unless of course, you want to gamble with your business.

If you are planning to gamble, stack the deck. Do it in

Silicon Valley, in an emerging industry, and when the

advantage is money. At other times, the odds are not favorable.

For entrepreneurs, getting VC early means that they lose

control of their venture, they are significantly diluted by the

VC, and then they are further diluted by the professional

managers recruited by the VCs. If the venture becomes a home

run, the entrepreneurs may do well. But in the others,

entrepreneurs don’t do as well as the VCs who have preferred

claims for any wealth created.

So if you have to get VC to improve your odds, do so, but

only after you have a track record and have found the right

business strategy to dominate your emerging industry.

26 Reasons to Avoid VC

19. VCs Seek The Right To Replace You With

Executives

One of the most controversial decisions, at least in

hindsight, was the decision by the board of Apple, and the VC

on the board, to fire Steve Jobs. After a string of ineffectual

CEOs who nearly wrecked Apple, Jobs returned to lead one of

the greatest turnarounds in business history.

Finding the right leadership for the venture is one of the

fundamental principles of venture capital. Although VCs seek

ventures in hot industries, and with a proven edge, they are

fond of repeating that it is “management, management,

management” that influences venture success. This means that

they like to find professional managers who have led successful

ventures or corporate businesses to manage the venture.

Table 5 compares VC practice with 85 U.S. billion-dollar

entrepreneurs. Best estimates are that 20 percent to 40

percent of the ventures with VC-funding replace the founder

with a non-founder CEO. Among the companies started by the

billion-dollar entrepreneurs, only 6 percent of the founders

were replaced by a non-founder CEO.

VC-backed ventures that have recruited professional

CEOs have seldom made their entrepreneurial founders into

billion-dollar entrepreneurs. The reasons are many, and can

include the incompetence of the hired CEOs, dilution of the

The Truth About Venture Capital

founding entrepreneurs, or other reasons such as early exits

and strategic sales.

Non-Founder Founder No-VC

VC-Backed Ventures 20 -40% 60%-80% N/A

Billion-dollar

Entrepreneurs**

6% 18% 76%

Table 5. VC CEOs vs. Billion-Dollar Entrepreneurs

* Source: https://hbr.org/2018/02/research-what-happens-to-

a-startup-when-venture-capitalists-replace-the-founder

** Entrepreneurs who founded companies and were involved in

building them to over $1 billion in sales and valuation

VCs also recruit leaders by stages and seek CEOs who fit

the stage of the venture. An excellent paper by Pascal

Levensohn highlights this transition.54 At the start-up stage,

they seek leaders who can develop and introduce the product

into the market and recruit the right team. At the emerging

stage, they seek leaders who can guide and control the

company after its take off. At the growth stage, they seek

leaders who can build the business into a major corporation,

take the company public, or position it for a high-value sale to a

strategic buyer. VCs hope that professional managers or

previously successful entrepreneurs can recreate their magic,

and reduce their risk. If the venture takes off immediately, the

VCs’ faith in the CEO is justified.

26 Reasons to Avoid VC

However, ventures do not take off as soon as they are

started or as soon as VCs invest. There is a lag between the

start of the venture and its take off. Except for Viagra, it has

taken at least 3 years between the introduction of a

revolutionary product and its takeoff.55 Although VCs delay

their investment until they see signs of Aha, sometimes they

make mistakes. When the venture does not takeoff as expected,

VCs may change leaders.

Implications: High-performance entrepreneurs prefer

to keep control of the venture they create. To do this, 75

percent of the billion-dollar entrepreneurs who used VC

delayed getting it until after Aha. The key question for you, if

you are considering VC, is whether your venture would fare

well with professional management and under VCs who are

not passionate about the venture, and may have a different

vision than you. If the early results are not satisfactory, VCs

and their professional managers may find greener pastures

and let the venture wither. And it may be difficult to stage a

comeback against competitors who already dominate the

market. Can you nurture your venture to momentum without

VC? That is your billion-dollar question. After momentum,

everyone will jump on the bandwagon.

The Truth About Venture Capital

20. Find the Right VC Fund For You

Now that you know that 99.95 percent of entrepreneurs

will never get VC, that 99.98 percent of entrepreneurs should

seek to grow without VC, and that the rest should delay getting

VC to stay in control of the venture and of the wealth created,

what should you do?

Only a few VCs fund home runs. Work with the best VCs

if you want a home run. Want a home run if you seek VC. If you

need to be capital intensive and seek VC, find the ones who can

best help you.

While all VCs seek to earn the highest returns, some

have restrictions that affect their investment choices and,

therefore, their returns. All other things being equal, VCs who

invest in the most attractive emerging industries and

geographic areas, have few restrictions. They should be

expected to earn the highest returns. Some of them do.

Institutional VCs can be private VCs or public VCs.

Private VCs invest private funds for profit. They include:

• Early stage VCs, that invest in the earlier stages of a venture

when the risk is highest and there is limited financial

history.

• Corporate VC funds, that are organized by corporations that

want to invest in the next generation of technologies,

especially those that are relevant to their own company

26 Reasons to Avoid VC

• Mezzanine funds, that invest in the later stages of a venture,

and is closer to an exit event for investors. Mezzanine funds

take fewer risks than early stage VCs, but also expect lower

returns from each venture.

Public VCs offer funding for profit and social benefits,

such as jobs and economic development. Some types of public

VCs cannot demand control, except under special

circumstances. Public VCs can be useful if you fit their specific

criteria and if you can get their financing without losing control

of your business.

Types of public VC firms include:

• Small Business Investment Companies (SBICs), which are

private institutions with a government license that allows

them to borrow federal money for reinvestment. Few of

them invest in early stage ventures, except for bank-owned

SBICs, which are an exception since they are usually not

leveraged.

• Area and community VCs that invest in ventures in a

defined area, such as a state or city, and are often funded by

area governments, institutions or individuals. These areas

are mostly outside Silicon Valley and are formed to offset

the perceived shortage of local VC funds. They are often

created to achieve the “double bottom-line” goals of jobs

and returns. Not many of them have built huge companies

from scratch – so do not lose control to them.

The Truth About Venture Capital

Know each type of VC firm’s goals and restrictions to

pick the right type of fund for you and allow you to keep

control of your business.

Venture Capital Group Annual Returns

Best 32%

Next Best 10%

Second Worst 1%

Worst -3%

Table 6. Range of Annual Returns from VC Firms

Source: Focus Ventures and Thomson Venture Economics, WSJ

5/27/2004

The distribution of annual returns for 904 VC funds

(Table 6), broken down into four performance categories (226

funds in each), showed that the overall weighted average was

10 percent, while the average for the last three categories was

5.4 percent. Only the top quartile had an annual return above

20 percent and these were helped by the top 50 who earn the

bulk of VC profits due to their investments in unicorns. These

returns point to a hierarchy of VC funds where a few do well

and most have sub-par results.

Know the VC fund’s track record. All VCs are not the

same. Know the hierarchy of VCs and accept financing from the

top of the VC hierarchy. They have good track records, receive

26 Reasons to Avoid VC

better valuations when they invest, and higher valuations

when they exit. Being funded by one of the top Silicon Valley

VCs is not the same as getting VC from a local VC fund in your

area. Since the top VCs earn most of the profits in the industry,

target this top group if you are seeking to dominate an

emerging industry.

Seek VC only if you want a home run. In marginally

successful ventures, VCs get their money out first. They also get

dividends, and often seek a multiple of their investment before

anyone else. Usually, there is not much left for the others.

Everyone loses in a failure. But the question for you is

whether you could have been successful if you had been capital

efficient until Aha and sought VC after Aha. After Aha, VCs are

unlikely to second guess your winning strategy or successful

leadership. Everyone loves a winner and no one wants to rock

the boat. This way, the second guessing will be minimal.

Implications: If you are seeking VC, seek it to build a

home run. If you are seeking to build a home run, seek

financing from the top VCs and wait until Aha, i.e., until the

venture starts to take off. Seeking VC before your venture has

demonstrated its potential to be a billion-dollar company may

be counter-productive, and you could lose your one major

opportunity. So take off without VC – and let the top VCs come

to you. The top VCs are usually limited partnership funds who

are based, or invest, in Silicon Valley.56

The Truth About Venture Capital

Decide whether to seek VC after Aha – when you can

keep control. Or seek funding from VCs who do not demand

control. They have special criteria, so know these requirements

and check whether you satisfy them.

For more information on the different types of financiers, read

“Handbook of Business Finance” (www.uEntrepreneurs.com)

http://www.uentrepreneurs.com/

26 Reasons to Avoid VC

21. Entrepreneurs May Not Do Well Even

When VCs Do

Rollerblade is a great example of how investors did very

well, but the entrepreneurs did not.57 Rollerblade was started

by Scott Olson to promote and sell inline skates. When he ran

into financial difficulty, he got financing from investors,

including Minneapolis investor Robert Naegele. The history of

the company gets quite complicated with claims, counter

claims, and lawsuits. At the end of the day, however, Naegele

sold his share of the company for more than $100 million.

Olson does not seem to have been as fortunate.58

Even when VCs earn nice returns, which happens in

about 19 percent of funded ventures, entrepreneurs could lose.

VCs usually use a financial instrument called the convertible

preferred share, under which their investment, dividend, and

often a gain is “preferred” over other investors, especially the

entrepreneur. Sometimes, the VCs get not only their

investment but also a multiple of their investment, before

anyone else gets a dime. And then they may dip into whatever

is remaining for an additional share of profits. In a failure, they

get their share of the cash first. Entrepreneurs usually come

last. In about 80 percent of the VC-funded ventures that fail,

entrepreneurs may get only their salaries, which are often

lower than corporate salaries.

The Truth About Venture Capital

A further complication is that high-growth ventures

need ongoing funding. Entrepreneurs often do not have the

resources to invest in these additional rounds, but VCs do,

resulting in further dilution to entrepreneurs. Also ventures

that do not live up to expectations do not have too many

financing options, and sometimes go through what was called

the “cram-down” round,vi where entrepreneurs often lose

more. The net result is that entrepreneurs are likely to see a

strong payday only in home runs like eBay and Google, but

these are rare. However, these are the ones being continually

publicized to promote the achievements of the VCs.

Implications: Since home runs are estimated to be

about one percent of VC-funded ventures. Entrepreneurs may

not gain much from their venture in about 99 percent of the

deals. These entrepreneurs may do better by delaying or

avoiding VC, and staying in control of their venture.

vi Cram down means that the value of the venture has fallen from previous

rounds of financing and the VCs invest more money for a much lower valuation

than in the previous round. It is highly dilutive to existing shareholders. The

term is not popular after some VCs lost a lawsuit by entrepreneurs who claimed

they were unfairly crammed down

26 Reasons to Avoid VC

22. Without Capital Efficiency, Angel

Financing Can Fail

Many entrepreneurs believe that the best method to

build a big business is as follows:

1. Seek angels (individual investors) to help the business get

started

2. Seek more angel financing, or the first round of VC, when

the business is ready for launch

3. Seek more rounds of VC financing to fund its growth

4. Seek an initial public offering (IPO) when public equity

markets are favorable

5. Become a billionaire.

Sometimes the above scenario works and angels do act

as stepping stones to VC and an IPO. It works about 15 to 60

times per year, and, as noted before, mainly in Silicon Valley

when high-potential industries are taking off.

The reality is that the scenario does not work in about

99.997 percent of ventures – even with angel financing.

Most angels are micro-investors. They invest smaller

amounts in earlier stages than institutional VCs, and take more

risks. Compared with VCs, they may be tough to identify, and

compared with the millions of dollars that large VC funds

invest, most angels invest in the tens of thousands. However,

many angels join angel groups and pool their resources to offer

The Truth About Venture Capital

larger amounts. One study of 512 ventures showed that the

average investment per venture was about $450,000.59 This

amount can be leveraged by angel groups joining with others.

In comparison, the average VC investment in the first

startup/seed round was $4.85 million in 2017.60

Angel money can help a venture reach the next level

where VCs get interested. But most ventures that get angel

funding do not get VC. The number of ventures getting angel

financing is estimated to range from about 50,000-57,000.61

And since only about 3,000 to 4,000 ventures are funded by

VCs each year, on the average about 92 percent to 95 percent

of angel-financed ventures will not get VC money.

Angels are often instinctive investors. Angels Den, an

angel network in the U.K., estimates that 73 percent of angels

invest based on their gut feeling.62 Whether or not this is better

than the due diligence conducted by VCs is debatable. Both lose

on a huge portion of their investments. What separates

winners from losers is that the winners invest a significant

amount in one or two home runs.

Implications: Even with angel financing and capital

intensity, the venture still has to reach the stage where the VCs

show an interest. If a small amount of angel financing will do

the job, great. If not, the venture may not be able to survive

with a capital-intensive model because too many things can go

wrong in a new venture. So either design the venture to grow

to self sufficiency with the amount of angel financing that you

26 Reasons to Avoid VC

can raise, or you are gambling that more money is available

from VC funds. The gamble may be smart if you are in Silicon

Valley and if your competitors have VC.

The Truth About Venture Capital

23. Angels Can Sometimes Become Sharks

Google had a number of angel investors. Ram Shriram

was one of four angels who invested about $250,000 each in

Google when it was starting. Shriram was an executive at

Netscape when he left to start Junglee.com. He sold Junglee to

Amazon.com and became an executive at Amazon. That is the

kind of angel you want – someone who has the track record,

the proven skills, and the network to help you grow. He netted

more than $1 billion.

But not all angels are created alike. Some can be sharks,

who seek a controlling interest to “save” the company or to

help it reach the next level. Once they get control, benefits from

the venture are likely to flow to them and to their families.

Make sure you find the right angels for your venture.

Types of angels can include:

• Family and friends, who invest in your business because

they are your family and friends. They usually take more

risks. But most entrepreneurs do not come from rich

families and are limited in the amounts they can raise from

these connections.

• Industry angels, such as executives in your industry, are

usually the best angels. They have connections, can invest

significant amounts of money due to their high corporate

26 Reasons to Avoid VC

positions, can add credibility to the venture, and can open

key doors.

• Area angels invest to build local businesses and make some

money. They can be desirable if they have experience in

building businesses, and many do.

• Rich investors can sometimes be attracted by local

investment bankers. But investment bankers often stay

away from new, unproven concepts due to the high risk.

• Crowd-funding, which is the latest emerging trend in angel

financing, seeks money in small amounts from many micro-

investors. This type of angel financing is just starting

thanks to new legislation and web sites that seek to connect

entrepreneurs and angels.

Implications: Each of the above has different

expectations and demands. Family and friends are more

lenient and usually the most forgiving in case of failure.

Professional investors bring a higher level of sophistication to

the deal but also demand more influence. Industry executives,

like Shriram, can be the most helpful since they add credibility

and connections and are able to offer better advice. If you are

going the angel route, learn capital efficiency to grow with the

limited amount of angel capital available, and to keep control.

You may not see more than one attractive opportunity.

The Truth About Venture Capital

24. Angels Do Well In Silicon Valley

Mark Zuckerberg started Facebook when he was a

student at Harvard. Facebook started growing rapidly while he

was still a student. But his angel financing came from Silicon

Valley in the form of Paypal co-founder Peter Thiel. So

Zuckerberg moved to Silicon Valley, got $500,000 from Thiel

and others. He kept control. Facebook continued to soar. Then

he got VC.63

When you read about angels, you will usually hear

about successful angels in Silicon Valley such as Ram Shriram

and Peter Thiel. It is not a coincidence. Angels usually invest

locally, and the home runs are in Silicon Valley, so it does seem

logical that the successful angels are there.

A study of 539 U.S. and U.K. angels found that angel

returns were as attractive as VCs.64 According to the study,

“these angel investors (across the U.S. and UK) produced a gross

multiple of 2.5X their investment, in a mean time of about four

years.” This translates to an annual rate of return of about 26

percent, which is phenomenal, given that the VC median has

been hovering around break even in the recent past. This

result could be due to a small sample of the top angels out of

the 50,000 (from earlier noted study) to about 300,000 angels

in the U.S.,65 or it could be a sample of their best investments,

or it could be selective memory, or this study may have found

26 Reasons to Avoid VC

truly great angels. But this study and others show that about

10 percent of ventures provide about 85 percent to 90 percent

of the returns, and about 70 percent are said to lose money.66

Implications: Silicon Valley seems to be easier for angels. One

reason could be that they were themselves successful

entrepreneurs. Shriram built Junglee and sold it to

Amazon.com. Thiel built Paypal along with Elon Musk and sold

it to eBay. The second reason could be that angels are investing

in Silicon Valley, which has built the one of the greatest

collection of billion-dollar companies in recent memory. Is

their wisdom and experience useful outside Silicon Valley?

Their track record outside, as measured by billion-dollar

ventures, is not as noteworthy as the one in Silicon Valley.

The Truth About Venture Capital

25. Even Angels Want An Exit

Even angels, including friends and family, want their

money back and hopefully with an attractive return.

To get a nice return, the venture needs an attractive

exit. For an attractive exit, capital-intensive Silicon Valley

ventures need to show success in a high-growth trend with lots

of potential to be attractive for an IPO or a strategic sale.

Usually this happens after the angel round and a few rounds of

VC funding. Without these additional rounds, the capital-

intensive ventures may not have the fast growth for high

valuations. Most of the Silicon Valley billion-dollar ventures,

such as Facebook and Uber, had multiple rounds of financing.

Capital-intensive ventures that do not qualify for

further rounds of equity financing due to poor performance

may not have attractive exits. To survive, these ventures may

need to switch to capital-efficient strategies because external

funding sources have dried up. But once you have started

down the road of capital intensity, it is usually difficult to

return to capital efficiency. A turnaround will require you to

focus and cut expenses with a cold, cold heart. Not many are

good at it. And if you are not growing, your exit will be painful

for both your investors and yourself.

Birchbox has learned this painful lesson. Since it has not

been able to keep most of its original investors happy, it has

26 Reasons to Avoid VC

not had success finding new cash. In a down round, its original

investors invested additional cash and diluted the others.67

So treat all capital, and especially angel capital with

respect, especially if you want to give your angels a decent exit.

Implications: Think about exits before you start to

raise money. With angel financing, you can choose to be capital

efficient or you can gamble with capital intensity. With capital

efficiency, you can seek VC for competitive advantage after

“Aha,” or you can continue to grow with capital efficiency and

self-sufficiency. When you are growing with self-sufficiency

and are not desperate for financing, there are attractive ways

for investors to exit. Without capital efficiency, you are

gambling that you can get VC before you run out of money.

The Truth About Venture Capital

26. To Create And Retain Wealth, Control

the Venture

When is the best time to get VC, assuming that you

absolutely need it?

If you are one of the few who should seek VC, or if you

want VC, when should you do so assuming that VCs are interested

in investing in you?

Many entrepreneurs believe that once they get a business

idea, all they need to do is develop a business plan and attend a

few VC forums in order to get money from VCs or angels – even

when there is no indication that they are a potential home run. Is

this the best time to get VC or is this a fantasy created by the

business press?

Steve Jobs, arguably one of the greatest entrepreneurs of

the last 100 years, was fired from Apple because one of his early

products, the Macintosh, failed to live up to expectations. He was

replaced by a long line of CEOs who managed to bring Apple close

to bankruptcy. Jobs’ legacy at Apple was possible only because he

was brought back with the hope that he would save the company.

And save it he did – all the way to the top of the world.

VCs don’t always make the best decisions. When the VCs

fired him, Jobs sold his Apple stock and started Pixar. When

Apple’s board asked him to return, he demanded stock options

rather than a salary in the early years. This stock made his second

26 Reasons to Avoid VC

fortune. But at the end of the day, by getting VC early, Jobs kept

less than 1 percent of the wealth he created in Apple (based on the

value of Apple stock he owned).

Those who get VC early lose control to the VCs and to the

CEOs who are hired by the VCs. The hiring of the CEO also creates

additional dilution. There is a clear relationship between the

timing of getting VC and the ratio of net worth/ wealth created

(Table 6). It shows that entrepreneurs kept more of the wealth

created by delaying or avoiding VC.

VC-Controlled VC-Delayer VC-Avoider

Wealth Retained/

Wealth Created

7% 16% 52%

Table 6. Net Worth/ Wealth Created for Billion-Dollar

Entrepreneurs

Wealth kept: Entrepreneur’s net worth as of April 2012; Wealth

created: Venture’s market capitalization; data for 22 entrepreneurs

whose personal net worth is available from public sources

VC-Controlled, like Steve Jobs, got VC early and kept only 7

percent of the wealth they created. They relinquished control of

the venture to the VCs and to the hired CEOs. VC-Controlled pay

dearly for early stage VC, not just in dilution but also in control.

VC-Delayers, like Bill Gates, kept 16 percent of the wealth

they created. By delaying VC, Bill Gates kept control of his

company and stayed on as CEO, although he still suffered from

The Truth About Venture Capital

dilution. By delaying VC until Aha, when the business shows

evidence of becoming a home run, billion-dollar entrepreneurs

enhance their credibility and stay in control of their business. By

waiting until they build momentum, entrepreneurs are better able

to demonstrate that they have the promise to build a giant in a

new, emerging industry. This attracts VCs to the venture, which

gives the entrepreneurs additional negotiating clout.

VC-Avoiders, like Michael Dell, kept 52 percent of the

wealth they created. By avoiding the dilution and loss of control

that VC brings, Dell was able to keep about 50 percent of the

wealth he created in Dell. Michael Bloomberg did even better. He

kept nearly 86 percent of the wealth he created in Bloomberg by

avoiding VC.

Implications: VCs seek to control the board, to recruit

their own CEO, to approve and/or dictate strategy, and to

decide when to exit. They do this to further their own interests,

not necessarily the entrepreneur’s. So if you get VC early, you

could be replaced as CEO and lose control. To retain more of the

wealth you create, keep control by delaying or avoiding VC. By

delaying VC, billion-dollar entrepreneurs have a stronger

negotiating position to stay on as CEO, to avoid sharing the wealth

created with VC-recruited management, and to reduce dilution to

the VCs. Entrepreneurs who avoided VC altogether, kept the

biggest share of the wealth created since they had total control,

which they kept by growing with capital efficiency. Learn capital

efficiency to grow the venture, create wealth, and control it.

26 Reasons to Avoid VC

The Truth About Venture Capital

5 Reasons To Delay VC

5 Reasons to Delay VC

5 Reasons To Delay VC

Should you seek early-stage, institutional VC? Do you

need it? And if so, when should you seek it?

Here are five reasons why some of you need it and

should get it, but should delay getting it.

Many entrepreneurs and policy makers seem to believe

that getting VC guarantees success. The implication is that

“money is money,” and that all VCs succeed along with most of

their ventures. Under this thinking, VCs add value by rigorous

screening for the right venture before they invest. Then they

offer advice, recruit professional management, and open their

networks – and success shows up.

But there are few home runs and even fewer successful

VCs. The question for you is whether you need VC, and when

you should accept it if you need it. Are there disadvantages to

VC that could kill your one great idea? Very rarely do people

get two great ideas. Most do not even get one.

Know the reality of VC before you get it.

The Truth About Venture Capital

1. Consider VC If Your Direct Competitors

Have It

Sometimes you may need VC. The key question is when.

eBay is one of the best home runs in VC history. Pierre

Omidyar raised venture capital because he was facing well-

funded competitors and he wanted to dominate Internet

auctions. Luckily for him, things worked out.

Similarly, Google was not the first Internet search

company. The pioneers included Ask Jeeves, Yahoo, Lycos, and

AltaVista. To dominate the industry, Page and Brin needed

venture capital because their direct competitors had it. They

got VC and did well.

Michael Dell and Michael Bloomberg did not need

venture capital because their business models allowed them to

grow without it. Bloomberg did form a strategic alliance and

received an initial investment from Merrill Lynch,1 and Dell got

an investment from his family.

Mark Zuckerberg was able to postpone VC funding by

bootstrapping initially, and then seeking angel financing.

Subsequently, he did get VC funding and dominated his

industry. By delaying VC, he was able to keep control of the

company.

Bob Kierlin built Fastenal into the largest fastener

company in the U.S. with $31,000. Dick Schulze built Best Buy

5 Reasons to Delay VC

into the largest consumer electronics company in the world

with $9,000. Richard Burke built UnitedHealth into the largest

healthcare-management company in the world with no equity.

They did not have direct competitors who had venture capital.

Implications: VC may be needed if competitors have it.

Nearly all the billion-dollar entrepreneurs who got VC had

competitors who had received VC. If your direct competitor has

VC, that means that VCs are investing in your industry. You

may find it difficult to succeed against someone who is well

funded, with or without VC, unless you have another advantage

that can overcome their financial advantage.

The Truth About Venture Capital

2. Delay VC Till Take off To keep Control

Mark Zuckerberg started Facebook from his dorm

room. His first professional financing was $500,000 in May

2004 from a Silicon Valley angel, Peter Thiel, who was excited

about Facebook’s growth.2 Zuckerberg got his first institutional

VC investment in May 2005.3 By then he had millions of users

and was recruiting hundreds of thousands of new users per

month. By waiting to get institutional VC until after his

venture’s potential was evident, Zuckerberg was able to

continue leading the company. Actually, he went further.

Rather than allowing VCs to take control, Zuckerberg was one

of the first entrepreneurs to institute bylaws that gave him

absolute control over the company, including the crucial

decision of going public.4

If you absolutely need VC, because you are in an

emerging industry and in Silicon Valley, because there is no

way to be capital efficient, because your direct competitors

have VC, or because you do not want to bootstrap, then delay

getting VC until your take off is evident.

You can improve your odds of success by learning how

to build the business and by delaying VC until after take-off. A

venture that may have succeeded with entrepreneurial passion

and capital efficiency may fail with capital intensity and VC,

because VCs can be impatient. This could be the reason why

5 Reasons to Delay VC

billion-dollar entrepreneurs did not get VC early and did not give

up control, either in Silicon Valley or outside. There were 2.5

times as many VC-Delayers as VC-Controlled in Silicon Valley.

And there were 8 times as many VC-Delayers as VC-Controlled

outside Silicon Valley (Table 7). By delaying VC, the billion-

dollar entrepreneurs stayed in control.

VC-

Controlled

VC-

Delayers

Total

using VC

VC-

Avoiders

Silicon Valley 25% 63% 88% 12%

Outside Silicon

Valley

1% 8% 9% 91%

Table 7. Proportion of VC-Controlled, VC-Delayers, and VC-

Avoiders

Implications for entrepreneurs: If you want to keep

control of your business and the wealth you create, avoid VC or

at least delay it.

Implications for corporate executives: When

developing new risky businesses, especially in emerging

industries, large corporations should require their managers to

develop them with capital efficiency, and encourage them to

build momentum before allocating large amounts of capital. It

is easier to be patient when large sums are not at stake and

when the CFO’s office is not breathing down your neck. As

Bernard Arnault, CEO of Louis Vuitton Moet Hennessy and

The Truth About Venture Capital

Europe’s richest entrepreneur, noted, “If you go too fast, you

can lose money. We push on the accelerator only when

everything is in place.”5

5 Reasons to Delay VC

3. Delaying Helps To Know Who Wants You

All VCs have criteria that affect their investment

choices, and nearly all are interested in high-potential ventures

after proof of potential, i.e., Aha!6 If you are an entrepreneur

with a proven, high-potential venture and need VC, you need to

understand VC goals, constraints, track records, and criteria to

find the right ones for you.

These criteria include the following.

Stage of the venture: Ventures grow through stages

unless, of course, they fail. One list of stages includes pre-

product, seed (product ready but no business plan or

management team), start-up (has business plan and

management team), emerging (sales with losses), and growth.

VCs often specialize by stage. Some invest in earlier stages and

others invest in later stages. VCs usually invest in two

successive stages, the first being their preferred one and the

second being a follow-on investment to send a positive signal

and recruit the next group of VCs. VCs investing in early stage

ventures often get better valuations than investors in later

stages, and often earn higher returns if the venture succeeds.

But a higher proportion of their investments fail. The later the

stage, the lower the risk, and a lower annual percentage return

per venture.

The Truth About Venture Capital

Product or industry focus. Some types of VCs can

invest in industries that have the highest prospects for growth

and returns, and they change their focus as new industries

emerge. Others cannot do this. Many industry-focused VCs are

required to invest in their target industries, even if these

industries are not currently attractive. As an example, Intel’s

VC fund only invests in ventures that are strategic to Intel. If

favorable ventures happen to be elsewhere, Intel’s fund is

likely to have a less favorable performance.

Geographic area considered. Some VCs can invest in

any area where the best opportunities exist, and even open

offices there. As an example, Norwest Venture Partners moved

their headquarters from Minneapolis to Silicon Valley to take

advantage of better opportunities there. However, others

invest only in defined regions to develop that region. Since

areas such as Silicon Valley have had some of the most

attractive ventures in the recent past, any fund that cannot

invest there is not likely to see the best deals, and therefore

will not have the best results.

Attractive exit options: VCs usually obtain higher

returns from ventures where they can exit by using an initial

public offering (IPO) or from those that are bought by large

corporations as strategic acquisitions. In a recent strategic

acquisition, Facebook acquired Instagram for $1 billion even

though Instagram did not have any revenues. Facebook also

bought WhatsApp for an estimated range of $16 billion to 19

5 Reasons to Delay VC

billion, even though WhatsApp’s revenues were around $20

million.7 And in another strategic acquisition, Microsoft paid

$8.5 billion for Skype.8 However, most ventures do not qualify

for IPOs, nor do they find corporate buyers willing to pay a

multi-billion-dollar premium. In such cases, VCs often liquidate

their investments at lower prices by selling the venture to

financial buyers, by seeking to sell their interest back to the

company, if possible, or by trying to sell to the entrepreneurs

who usually cannot pay much. VCs who invest in home-run

ventures that allow exits via attractive public offerings or

strategic sales to large corporations are likely to generate

higher returns.

Entrepreneur background. Some VCs were required

to invest only in ventures controlled and managed by

minorities, or by entrepreneurs from a defined group, while

others have no such limitation and seek the best

entrepreneurs. Since management skills are crucial to the

success of the venture, those with the option of investing in

world-class entrepreneurs, or those who can recruit proven

managers would seem to have a higher probability of building

home-run ventures than those that do not.

Potential: Perhaps the most important criteria for most

VC funds is the venture’s potential. If your venture is likely to

dominate a potential multi-billion-dollar market, you are likely

to attract the best in the industry. If on the other hand, you are

likely to remain small, you may have to seek funding from VCs

The Truth About Venture Capital

who specialize in your area, or your industry, or the type of

entrepreneur you are. Or you need to build the venture until a

later-stage VC invests in you.

Implications: Understand VC criteria before you start

your search, and find the best VCs who best fit your

characteristics, your criteria, and your proven potential.

Finding money from VCs who are not in the top 4 percent may

be attractive if you do not lose control. But they may not help

you as much in the form of networks, expertise, or experience

in building a giant business.

For more information on the different types of financiers, read

“Handbook of Business Finance” (www.uEntrepreneurs.com)

http://www.uentrepreneurs.com/

5 Reasons to Delay VC

4. Delaying Helps To Know Who You Want

If you have decided to seek VC and have options among

VC funds, know how to pick the right one for you:

Goals: Some VCs focus on returns and can invest in any

venture that offers them the highest returns. Others, however,

have multiple goals such as job creation, area development or

minority-entrepreneur development. VCs without restrictions

show higher financial returns than those with restrictions

since they have a wider choice of ventures from which to

select. You need to pick from the top 4 percent, but if you

cannot get them and still want to be capital intensive, pick from

among the ones that best fit your goals. For example, if you are

creating jobs, you may get a better deal from a VC fund, if any,

that focuses on local job creation. But do not cede control.

Deal flow: Deal flow refers to the number and quality of

investment opportunities seen by a VC. Obviously, it is not

enough for VCs to seek potential home-run ventures. Potential

home-run ventures often have a choice. Entrepreneurs

developing a potential home-run venture know that their best

chance for success is with VCs with the best track record of

developing home runs. Therefore, the deal flow of the most

highly regarded VCs is likely to be much better, both in quality

and quantity, than the others. If you are a potential home run

The Truth About Venture Capital

in a hot, emerging industry and you have proof of potential,

pick from the top VC funds in Silicon Valley.

Amount of financing available: Some VCs have funds

with hundreds of millions to invest, and invest millions per

venture. Others have less and invest in the hundreds of

thousands. Capital-intensive ventures expecting a high growth

rate usually seek large amounts of capital, and are more likely

to seek funding from the larger VC funds. If you are competing

against well-funded ventures, you may need to match their

funding. In such a case, you may also need to find VCs who can

invest large amounts, and these are usually the top 50 Silicon

Valley funds. VCs also form consortiums to invest larger

amounts than each fund is allowed to offer under the fund’s

charter.

VC track record: Some fund managers have years of

experience, world-class reputations and great track records.

Their experience in developing home runs in the past may help

you develop your nascent venture. Due to their better track

record, these VCs are likely to attract higher quality

entrepreneurs, and get a better valuation when they enter, and

also when they exit. Those without this expertise and

experience may be able to build home runs, but the odds are

not in their favor. Pick the best from among the ones you can

attract.

Organizational structure: The organizational

structure of the VC firm also has an effect on its success. At the

5 Reasons to Delay VC

top of the pyramid, VC funds are mainly organized as limited

partnerships by people with track records in venture

development. At the other end, community development VCs

are organized as non-profit organizations to serve low-income

areas and are often controlled by area residents. While these

directors are mostly well meaning, they usually do not have the

track records or networks to contribute as much as the

directors, advisors and managers of the Silicon Valley VCs.

Between these two extremes are different types of funds that

offer varying degrees of expertise and track records.

Control: Do not lose control of your venture. No matter

their track record, VCs invest in losing ventures significantly

more frequently than in winning ones. Whether the winners

are due to the contributions of the entrepreneur or of the VCs

can be debated. What will not be at issue is who benefits if you

lose control of your venture. So stay in control by delaying or

avoiding VC.

Implications: Know what potential investors want if

you want to find the right ones for your venture, and figure out

how to contact them. The best way to find the top VC funds is

to be introduced to them. Many VCs will not even read

unsolicited business plans sent to them. So find professionals,

such as accountants and attorneys, who work with VC funds

and get them to introduce you to the funds of your choice. Ask

these professionals for candid feedback. The best strategy to

find the right VC fund is to start your business with capital

The Truth About Venture Capital

efficiency to dominate an emerging industry, develop a track

record, get some publicity, and let them come to you. Then pick

from among those who are in the top 50. If you cannot get

these VCs, then seek VCs who allow you to retain control.

Getting VCs who also have expertise and connections in your

industry would be a bonus.

5 Reasons to Delay VC

5. Delaying Can Bring A Better Deal

Good VCs know how to take care of their interests. You

need to worry about yours. Consider the following issues to

structure an arrangement:

Entry and exit valuation: VCs with the best reputation

get a 10 percent to 14 percent edge in valuation when they first

invest in the deal.9 This means that these top VCs not only are

the first choice of the best potential ventures, but they also get

to invest at a better valuation than other VCs. Also, ventures

that have a top-tier VC as an investor and director obtain a

better valuation, or “reduced underpricing” in financial speak,

when they have an initial public offering (IPO).10 Therefore,

top-tier VCs get a first look at the best potential ventures, get

better pricing at the start and better pricing at exit – practically

assuring themselves of a higher return than lower-ranked VCs

along with a higher probability of a home run.

Financing sources, restrictions and cost: All funds

have restrictions. Funds with the fewest restrictions and the

most competitive terms are likely to see the best opportunities.

As an example, most small business investment companies

(SBICs) are restricted in their investment strategies by the

rules of the Small Business Administration. These rules can

result in SBICs offering terms that are not as favorable as terms

from other VCs. Secondly, some VCs get management fees from

The Truth About Venture Capital

their investors to pay their operating expenses while others do

not. Those that do not get such fees from investors often seek

payments or interest from their ventures. Ventures prefer not

to pay fees, especially when they themselves need financing for

growth. This means that the most attractive ventures prefer to

work with VCs with the best terms.

Financial instruments used. Many entrepreneurs

prefer to finance using common or preferred stock for stronger

balance sheets. However, some VCs use subordinated debt

with equity features, such as warrants or convertibility, that

allow VCs to share in the upside, but the debt allows them to

recoup principal with interest if the venture does not take off.

The venture also may have to pay interest and principal,

although payment may be deferred. Capital-intensive, high-

growth ventures usually have negative cash flow. This means

that they prefer equity rather than debt financing. Therefore,

such ventures are more likely to seek financing from larger VCs

who offer financing via equity, usually in the form of preferred

stock, which offers VCs favorable terms, such as exits, and

control.

For information on how to structure financing, read “Finance

Any Business Intelligently®” (www.uEntrepreneurs.com)

http://www.uentrepreneurs.com/

5 Reasons to Delay VC

Financial resources & leverage: Leverage, the use of

debt, can exaggerate returns on the upside as well as on the

downside. Some funds do not borrow. Others do. Those that

don’t borrow do not face payments of their own and can be

patient for returns. These funds without leverage have greater

staying power than those that may have to liquidate their

portfolios to repay their loans. VC Limited Partnerships do not

borrow. Many SBICs do. VCs, who do not borrow to invest,

have more staying power.

Implications: Know the reality of VC. VCs often ask

entrepreneurs if they would rather own 10 percent of an eBay

or Google or Facebook, or 100 percent of a failed venture. Ask

the VCs if they have built an eBay or Google or Facebook. If you

are sure that you will become a home run, and you can stay in

control, VC may be good in Silicon Valley and after Aha.

Otherwise, you are gambling with your one great opportunity –

not many entrepreneurs get two great ideas. That’s why

entrepreneurs like Steve Jobs, Elon Musk, and Eli Broad are

rare. Home runs are not the rule. They are the exception. So do

not lose control of your venture. Learn how to do this with the

self-reliant, capital-efficient leadership method.

The Truth About Venture Capital

Conclusion

Should you seek venture capital to build your giant

company and, if so, when? To determine the right timing, you

need to understand the stage of your industry, and the stage of

your venture.

Figure 2. VC returns by year

Source: Cambridge Associates, 2010 Benchmark Report,

vintage year 1990–2009 funds

(http://www.nvca.org/index.php?option=com_content&view=

article&id=78&Itemid=102).

Stage of the industry: Figure 2 shows VC industry

returns for 1990-2010, which roughly coincides with the

emergence and take off of the Internet. The returns soared

The Truth About Venture Capital

when the industry started to build giant companies such as

Google and eBay, and then cooled down. Internet 2.0 did not

make much of a dent between 2000 and 2010 because there

were not that many home runs in that period.

The amount of VC funding1 and its returns soar when

high-potential industries are emerging.2 The VC industry did

well when the semiconductor industry emerged in the1960s

and 1970s, when PCs and biotech emerged in the 1970s, when

telecommunications emerged in the 1980s and1990s, and

when the Internet emerged in the late 1990s. At other times,

VC returns have fallen. The typical VC fund barely breaks even.

The reason for this fluctuation in VC returns is that

emerging, high-potential industries create business giants,

which offer high returns to VCs. But without new, emerging

industries, it becomes difficult to find and finance high-

potential ventures.

Entrepreneurs who seek VC during challenging times

may find that they are ceding too much equity and power to

the VCs. Any setbacks caused by the VCs or their hired

executives could adversely affect the venture, and the

entrepreneurs. While VCs have many arrows in their quiver,

most entrepreneurs have only one venture and may be better

off delaying VC. This is not to suggest that individual VCs do

not earn high returns from occasional hits when high-potential

industries are not emerging.

Conclusion

Stage of your venture – the Aha moment: In addition

to the stage of the industry, entrepreneurs also need to worry

about the stage of their own venture in order to select the right

time to seek venture capital. This issue of timing has profound

implications for the venture and for the entrepreneur. It is

difficult for investors to identify future home runs before the

venture shows evidence of potential, i.e. Aha. Seek VC before

‘Aha’ and you may waste a lot of time seeking venture capital.

Seek it too late, and others may pass you by. So, assuming you

need VC, you need to use ‘Goldilocks’ time – not too hot nor too

cold. That is the moment of “Aha!” After Aha, it is usually easier

to get VC – if you still need it.

There are three periods when entrepreneurs normally

seek venture capital:

• Startup: At startup, entrepreneurs get the idea for a new

business, write a business plan, and then seek financing

from VCs. They usually get it from family and friends. Just

so you know the odds, approximately 600,000 new

ventures are started each year, and about 300 startups get

institutional venture capital each year.3 This means that 1

out of 2000 startups get VC. And often, entrepreneurs with

a previous record of venture development have an easier

time getting VC. The odds are better in Silicon Valley.

• Pre-Aha: This is the stage when you have moved the

venture forward, but it has not yet taken off. People can see

some results, but they usually see more pain than promise.

The Truth About Venture Capital

If you are seeking VC at this stage, you are relying on

someone being convinced of your potential before there is

evidence. You may be one of hundreds of aspiring

entrepreneurs hoping that money will make the difference.

Assuming you are able to convince VCs to invest in your

venture, your negotiating clout is minimal. This means that

you are likely to be heavily diluted, and also required to

cede control of your venture to the VCs. If the venture

becomes a home run, you may have a reasonable net worth

after the dilution from the VCs and the executives they hire.

David Huber was one of the lucky entrepreneurs. He was

still able to get $300 million from Ciena even though he was

fired from the company he created.4 If the venture does not

become a home run, you may not see much benefit. You

may be gambling with your one great idea. So you need to

decide whether to seek VC before Aha based on the

opportunity cost of wasted time spent seeking venture

capital, the dilution cost, and the cost of losing control of

your business. Alternatively, you could learn to grow

without capital, and keep control of your business.

• Post-Aha: This is when the your venture is taking off when

you show promise of high potential, and VCs want to invest

in your venture. At this time, you get to select the VCs who

are right for you. Most importantly, you may keep control

of your venture if you negotiate well. In one of the most

unusual VC arrangements, Mark Zuckerberg was able to

Conclusion

control his investors and vote their shares rather than the

other way around. He owned about 28 percent of Facebook.

But he demanded both voting rights from his investors and

control of about 57 percent of the company.5 He got both

because of Facebook’s prospects.

Implications: In general, seek money after Aha… if you

need it. Not all billion-dollar entrepreneurs needed VC or got it.

In fact, 76 percent did not need VC. Even when they needed

VC, only 25 percent of the billion-dollar entrepreneurs got VC

early. Billion-dollar entrepreneurs built their business without

VC or with delayed VC. Seek VC as a crutch, and others will

control your venture. Seek VC as a fuel for growth after you

have proven your potential, and you may dominate your

market and as well as control your venture and the fortune it

creates.

This was the difference between Steve Jobs I and Steve

Jobs II. After starting Apple with Steve Wozniak, Jobs I got VC

early and relinquished control to the VCs. Since VCs like to

replace unproven entrepreneurs with professional leaders,

Jobs was booted out of Apple when the Mac did not do well.

But when Apple started to rot after three successive

professional CEOs and was close to its deathbed, Jobs was

invited back to run Apple and turn it around. He did – all the

way to the top of the world. Jobs II was heralded as one of the

greatest entrepreneurs in history when he built Apple into one

of the world’s giants with the iPod, the iPhone, and the iPad.

The Truth About Venture Capital

But history does not give many people a second bite of the

same Apple.

Two Methods to Build Ventures

The two methods to build giant companies are:

1. The top-down, capital-intensive VC method, and

2. The bottom-up, capital-efficient leadership method.

1. Top-Down, Capital-Intensive VC Method: The capital-

intensive VC method is to seek dominance with capital. 99

percent of the time the entrepreneur’s gain may be below

expectations, often because a CEO hired by the VCs may

mismanage the company, as in the case of Apple and Steve Jobs

I. That happened to Steve Jobs. If you are one of the 15 to 60

entrepreneurs who start a venture that becomes a VC-financed

home run each year, capital efficiency can help you delay VC,

and control both the business and the wealth created. That’s

what Mark Zuckerberg did.

Can you always be capital efficient and successful

without VC? Perhaps not. VC may be essential sometimes. You

may need VC if you are in Silicon Valley, with home-run

potential, in an emerging industry, with competitors who have

VC, and if money is a key requirement for dominance. But 99.98

percent of entrepreneurs are unlikely to benefit from VC, and

the remainder may benefit from delaying VC.

These rules can help:

Conclusion

• Delay until you improve the odds and cost of VC. If your

goal is to control the venture and the wealth you create,

become capital efficient, and grow without VC or with

delayed VC.

• Seek VC from the top VC funds. Not all VCs are created

equal. VC is close to a winner-takes-all game. When one

venture dominates a new emerging industry, those who

invested in that venture win. The winners mainly include

about 50 VCs in Silicon Valley. These are the 4 percent who

earn about 66 percent of VC IPO profits. So your odds of a

home run are better with the VCs at the top of the

hierarchy. But even these top VCs develop only about 15 to

60 home runs per year, and mainly when high-potential

industries are emerging.

VCs fund very few ventures. The reason for their

importance is that once in every 100 tries, the Silicon Valley

VCs fund a venture that becomes a home run and creates

mega-fortunes. Interestingly, even the VCs cannot predict their

home runs (See Andreessen’s wrong guess regarding

Instagram in Finding 17). If they did, why would they invest in

so many losing ventures? What should be sobering to

entrepreneurs is that even if you do obtain VC, you are about

99 times more likely to fail than to succeed in creating a home

run. To add insult to injury, you may get the boot from your

own venture, or you are diluted to insignificance. All you are

The Truth About Venture Capital

left with is the hope that the new leaders can build the venture

without your passion.

2. Self-Reliant, Capital-Efficient Leadership Method: The

self-reliant, capital-efficient leadership method, which is more

applicable outside Silicon Valley, is to seek dominance with

limited capital and to grow with positive cash flow. If you are

one of the 99.98 percent of entrepreneurs who cannot get VC

or one of the 80 percent who fail with it, this method may be

your only option if you want to grow. Since you don’t know if

you are likely to win or lose with VC, delay it till you have

found your winning strategy and have proven your leadership

skills. The rest should delay.

Over 90 percent of America’s billion-dollar

entrepreneurs built giants without VC, or with delayed VC.

Their strategies can be categorized into foundational, financial,

and take-off rules.

Foundational Rules: The billion-dollar entrepreneurs

built a strong foundation for their business. They found a

disruptive opportunity, developed a customer-focused

business model that gave them an advantage, and linked their

financial strategy to their business model in order to reduce

their financial needs without sacrificing growth. They did not

do this in a lab, incubator, classroom, with mentors, or in

business-plan contests. It was reality based and feedback came

directly from customers and indirectly from competitors. Their

Conclusion

businesses took off when the foundation was right. If it wasn’t,

they adjusted till they got it right. Sam Walton bought his first

store, a Ben Franklin, in 1950. For 12 years, between 1950 and

1962, he tried various ideas before opening his first Walmart.

The rest, as they say, is history.

Financial Rules: Billion-dollar entrepreneurs wanted

to both grow and keep control. They grew with cash flow and

non-controlling financing by linking their business model to

their financial capacity. They used four financial pillars to build

giant businesses without capital, which include:

• Innovate for more potential per dollar

• Develop your strategy for more edge per dollar6

• Use alt-financing to grow with control

• Launch to take off with control7

Take-Off Rules: Then they launched their business

without VC and took off before the end of the cash runway, i.e.

before they ran out of cash.

Most entrepreneurs who gain from VC are in Silicon

Valley. They mainly start their ventures in emerging industries

and exit, or go public, when markets are booming. At other

times and other places, VC does not do well.

Before you seek VC, try to succeed without VC, or take

the venture to the next level before seeking VC. Rarely do

entrepreneurs make billions with VC.

The Truth About Venture Capital

Therefore, learn the self-reliant, capital-efficient

leadership method, and build your venture until Aha! Then

when the VCs call, you can decide whether to return their call.

----------- The End -----------

Notes

26 Reasons to Avoid VC 1 Dileep Rao, Bootstrap to Billions, (date of publication), InterFinance Corporation, (Url) 2 Lauren Torrisi and Sabina Ghebremedhin, Facebook’s graffiti artist David Choe says life unchanged by 4200 million, ABC News, February 9, 2012, ABC News, http://abcnews.go.com/blogs/business/2012/02/facebook- ipo-turns-graffiti-artist-david-choe-into-multi-millionaire/ 3 ABC News, Sheryl Sandberg leans into piles and piles of money, ABC News, January 23, 2014, ABC News 4 Forbes, Mark Zuckerberg, May 18, 2018, Forbes.com, https://www.forbes.com/profile/mark-zuckerberg/ 5 Finance.yahoo.com, https://finance.yahoo.com/quote/UA?p=UA 6 Dileep Rao, Bootstrap to Billions, 2009, www.dileeprao.com 7 Dileep Rao, Best Buy: Richard Schulze, Bootstrap to Billions, 2009, www.dileeprao 8 Dileep Rao, UnitedHealth Group: Richard Burke, Bootstrap to Billions, 2009, www.dileeprao.com 9 Russ Kashian and Taggert Brooks, Regional Differences and Underwriter Location in Initial Public Offerings. The Industrial Geographer. Volume 2. Issue 1, pp. 94-110 (http://igeographer.lib.indstate.edu/kashian.pdf) 10 Dileep Rao, Rapid Oil Change: Ed Flaherty, Bootstrap to Billions, 2009, www.dileeprao.com 11 Clayton Christensen, Disruptive Innovation, http://www.claytonchristensen.com/key-concepts/ 12 Pwcmoneytree, https://www.pwc.com/us/en/industries/technology/moneytree/explorer. html#/currentQ=Q1%202018&qRangeStart=Q1%202013&qRangeEnd=Q1 %202018 13 Bureau of Labor Statistics, Business Employment Dynamics: Entrepreneurship and the U.S. Economy, https://www.bls.gov/bdm/entrepreneurship/entrepreneurship.htm 14 Google, eBay, https://www.google.com/search?source=hp&ei=YJXsWo2cAaKkjwT4yJvw Cg&q=when+was+eBay+founded&oq=when+was+eBay+founded&gs_l=psy - ab.3..0l2j0i22i30k1.302.5120.0.5340.26.23.2.0.0.0.122.1887.20j3.23.0..2..0.. .1.1.64.psy-ab..1.25.1902.0..0i131k1.0.P0cBAx0KHwc

The Truth About Venture Capital

15 PwcMoneytree, http://www.pwcmoneytree.com/CurrentQuarter/ByIndustry 16 Dileep Rao, Fastenal: Robert Kierlin, Bootstrap to Billions, 2009, www.dileeprao.com 17 Dileep Rao, Tastefully Simple: Jill Blashack Strahan, Bootstrap to Billions, 2009, www.dileeprao.com 18 Bessemer Venture Partners, BVP Web site, https://www.bvp.com/portfolio/anti-portfolio 19 Statcounter Global Stats, April 2017-2018, http://gs.statcounter.com/search-engine-market-share 20 Christine Lagorio-Chafkin, Kevin Systrom and Mike Krieger, Founders of Instagram, Inc. magazine, 2011, http://www.inc.com/30under30/2011/profile-kevin-systrom-mike- krieger-founders-instagram.html 21 Bruce Upbin, Facebook buys Instagram for $1 billion. Smart Arbitrage. Inc. magazine, 4/9/2012, http://www.forbes.com/sites/bruceupbin/2012/04/09/facebook-buys- instagram-for-1-billion-wheres-the-revenue/ 22 Instagram, Wikipedia, http://en.wikipedia.org/wiki/Instagram 23 Number of IPOs in the United States from 1999 to 2017, Statista: The Statistics Portal, https://www.statista.com/statistics/270290/number-of- ipos-in-the-us-since-1999/ 24 How did Mark Cuban become rich, Yahoo! Answers, https://answers.yahoo.com/question/index?qid=1006042308537&guccou nter=1 25 Pwcmoneytree, https://www.pwc.com/us/en/industries/technology/moneytree/explorer. html#/currentQ=Q1%202018&qRangeStart=Q1%202013&qRangeEnd=Q1 %202018 26 Pwcmoneytree, https://www.pwc.com/us/en/industries/technology/moneytree/explorer. html#/currentQ=Q1%202018&qRangeStart=Q1%202013&qRangeEnd=Q1 %202018 27 Michael J. Coren, The value of seed-stage startups just hit the highest point on record: $6.2 million, Quartz, 8/10/2017, https://qz.com/1051121/the-median-value-of-seed-stage-startups-hits- their-highest-valuation-on-record-6-2-million/ 28 Dileep Rao, Designing Successful Venture Capital Funds for Area Development, Applied Research in Economic Development, 2006 Volume 3, Number 2, pp. 27-37 29 Randall E. Stross, eBoys: The first inside account of venture capitalists at work, Crown Publishing Group, 2001 30 William A. Sahlman, The structure and governance of venture-capital organizations. Journal of Financial Economics 27. 473-521, 1990

Notes

31 Nicole Perlroth, How Andreessen Horowitz Bunted on an Instagram investment, The New York Times, 4/20/2012, https://bits.blogs.nytimes.com/2012/04/20/how-andreessen-horowitz- fumbled-an-instagram-investment/?_r=0 32 Thomson Venture Economics and Pricewaterhouse Coopers MoneyTree Survey 33 Howard Anderson, Good-Bye to Venture Capital. MIT Technology Review, 6/2005 34 Steven N. Kaplan and Josh Lerner, It Aint Broke: The Past, Present, and Future of Venture Capital, December 2009, http://faculty.chicagobooth.edu/steven.kaplan/research/kaplanlerner.pdf) 35 Hans Swildens and Eric Yee, The venture capital risk and return matrix, Industryventures.com, 2/7/2017, http://www.industryventures.com/2017/02/07/the-venture-capital-risk- and-return-matrix/ 36 Silicon Valley Tech Venture Almanac, cbinsights.com, https://www.cbinsights.com/venture-capital-silicon-valley 37 Paul A. Gompers and Josh Lerner, The Venture Capital Cycle, MIT Press, Cambridge, MA, 2000 38 Martin Kenney and Donald Patton, The Geography of Employment Growth: The Support Networks for Gazelle IPOs, May 2013, https://www.sba.gov/sites/default/files/files/rs412tot.pdf 39 Adam Lashinsky, Kleiner Perkins gets its digital groove back on, Fortune, December 6, 2010, page 48, http://fortune.com/2010/11/29/kleiner- perkins-gets-its-digital-groove-back-on/ 40 Cambridge Associates LLC, U.S. Venture Capital Index and Selected Benchmark Statistics. June 30, 2010 41 Cambridge Associates quoted in “Good-Bye to Venture Capital” by Howard Anderson, MIT Technology Review, June 1, 2005, https://www.technologyreview.com/s/404215/good-bye-to-venture- capital/ 42 Dealmaker, 11-12/ 2007 (sorry, did not note more details about this reference but it is too good a quote not to be included – if anyone can find more details, please send them to me). 43 http://www.pwcmoneytree.com/CurrentQuarter/BySoD 44 Kasey Wehrum, The Great Leaders Series: Michael Dell, Founder of Dell Computer, 12/9/2009, https://www.inc.com/30years/articles/michael- dell.html 45 Business Week, 7/4/05. p. 81 46 Focus Ventures and Thomson Venture Economics, Wall Street Journal 5/27/04 47 Wall Street Journal 5/27/04 48 Small Business Investment Company Program. Financial Performance Report for Cohorts 1994 – 2004, SBA

The Truth About Venture Capital

49 Jess H. Chuai, University of Calgary, and Zhenyi Wui, University of Saskatchewan, Value added by angel investors through post-investment involvement: Empirical evidence and ownership implications, Clevelandfed.org, March 10, 2009 50 Nicole Perlroth, How Andreessen Horowitz Bunted on an Instagram investment, The New York Times, 4/20/2012, http://bits.blogs.nytimes.com/2012/04/20/how-andreessen-horowitz- fumbled-an-instagram-investment/?_r=0 51 Gary Rivlin, Segway’s Breakdown, Wired, 3/1/2003, http://www.wired.com/wired/archive/11.03/segway_pr.html 52 Segway web site, http://www.segway.com/about-segway/segway- milestones.php 53 Gary Rivlin, Segway’s Breakdown, Wired, 3/1/2003, http://www.wired.com/wired/archive/11.03/segway_pr.html 54 Pascal Levensohn, Rites of Passage: Managing CEO Transition in Venture- Backed Technology Companies, 1/23/2006, http://www.businesswire.com/news/home/20060123005046/en/White- Paper-Venture-Capitalist-Pascal-Levensohn-Notes#.UuqxlvtEJFw 55 Karl Ulrich (MIT), Developing New-Category Products, Allen Shockley Lecture at Carlson School of Management, University of Minnesota, 2004, http://www.npdbd.umn.edu/useful-links/shocker-lecture/shocker- lecture-2004 56 Forbes.com, The Midas List 2018, https://www.forbes.com/midas/list/#tab:overall 57 Funding Universe, http://www.fundinguniverse.com/company- histories/rollerblade-inc-history/ 58 Scott Olson, The Rollerblade Story, http://scottolson.com/rollerbladestory.shtml 59 Scott Shane, The importance of angel investing in financing the growth of entrepreneurial ventures – A working paper, Small Business Administration, 9/2008, http://www.angelcapitalassociation.org/data/Documents/Resources/Ange lGroupResarch/1d%20-%20Resources%20- %20Research/19%20Angel_Investing_in_Financing_the_Growth_of_Entrepr eneurial_Ventures.pdf 60 Pwcmoneytree.com, https://www.pwc.com/us/en/industries/technology/moneytree/explorer. html#/currentQ=Q1%202018&qRangeStart=Q1%202013&qRangeEnd=Q1 %202018 61 Scott Shane, The importance of angel investing in financing the growth of entrepreneurial ventures – A working paper, Small Business Administration, 9/2008, http://www.angelcapitalassociation.org/data/Documents/Resources/Ange lGroupResarch/1d%20-%20Resources%20-

https://www.angelcapitalassociation.org/data/Documents/Resources/AngelGroupResarch/1d%20-%20Resources%20-%20Research/19%20Angel_Investing_in_Financing_the_Growth_of_Entrepreneurial_Ventures.pdf

Notes

%20Research/19%20Angel_Investing_in_Financing_the_Growth_of_Entrepr eneurial_Ventures.pdf 62 Laura Huang, Why early-stage investors tend to trust their gut, Knowledge@Wharton, 1/20/2017, http://knowledge.wharton.upenn.edu/article/gut-feel-and-investing/ 63 Ellen Rosen, Student’s start-up draws attention and $13 million, NY Times, 5/26/2005, https://www.nytimes.com/2005/05/26/business/students-startup- draws-attention-and-13-million.html 64 Robert Wiltbank and Warren Boeker, Returns to angel investors in groups, 11/14/2007, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1028592 65 http://www.angelcapitalassociation.org/press-center/angel-group-faq/ 66 Michael Taylor, Angel investing isn’t for the faint of heart, San Antonio Express-News, 7/21/2017, https://www.expressnews.com/business/business_columnists/michael_ta ylor/article/Angel-investing-isn-t-for-the-feint-of-heart-11305099.php 67 Elizabeth Segran, Here’s why nobody wants to buy Birchbox, even after VCs spent $90M, Fast Company, 05/04/18, https://www.fastcompany.com/40567670/heres-why-nobody-wants-to- buy-birchbox-even-after-vcs-spent-90m

5 Reasons to Delay VC 1 http://en.wikipedia.org/wiki/Bloomberg_L.P. 2 Nicholas Carlson, At last – the full story of how Facebook was founded, Businessinsider.com, 3/5/2010, http://www.businessinsider.com/how- facebook-was-founded-2010-3?op=1 3 Ari Levy, Accel Facebook bet poised to become biggest venture profit: Tech, Bloomberg.com, 1/17/2012, http://www.bloomberg.com/news/2012-01-18/accel-s-facebook-bet- poised-to-become-biggest-ever-venture-profit-tech.html 4 Douglas MacMillan, How Mark Zuckerberg Hacked the Valley, Bloomberg BusinessWeek, May 21, 2012, page 62 5 Janet Guyon, The Magic Touch, Fortune, 9/6/2004, page236, http://archive.fortune.com/magazines/fortune/fortune_archive/2004/09/ 06/380345/index.htm 6 https://nvca.org/about-nvca/members/ 7 Henry Blodget, Everyone who thinks Facebook is stupid to buy WhatsApp for $19 billion should think again, Businessinsider.com, 2/20/2014, http://www.businessinsider.com/why-facebook-buying-whatsapp-2014-2 8 Peter Bright, Microsoft buys Skype for $8.5 billion. Why, exactly? Wired.com, 5/10/2011, http://www.wired.com/business/2011/05/microsoft-buys-skype-2/

https://www.angelcapitalassociation.org/data/Documents/Resources/AngelGroupResarch/1d%20-%20Resources%20-%20Research/19%20Angel_Investing_in_Financing_the_Growth_of_Entrepreneurial_Ventures.pdf

The Truth About Venture Capital

9 David Hsu, What do entrepreneurs pay for venture capital affiliation? Journal of Finance Vol. 59 No. 4, August 2004 p. 1805 10 Megginson, William C. and Kathleen.A. Weiss. (1991). Venture Capital Characteristics in Initial Public Offerings. Journal of Finance. 46. pp. 879-93

Conclusion 1 Pwcmoneytree, Pricewaterhouse Coopers, https://www.pwc.com/us/en/industries/technology/moneytree/explorer. html#/currentQ=Q1%202018&qRangeStart=Q1%202013&qRangeEnd=Q1 %202018 2 Cambridge Associates, U.S. Venture Capital Returns, Quarterly reports, https://www.cambridgeassociates.com/private-investment-benchmarks/ 3 Dileep Rao, Why 99.997 percent of entrepreneurs may want to postpone or avoid VC even if you can get it, Forbes.com, 07/29/2013, http://www.forbes.com/sites/dileeprao/2013/07/29/why-99-997-of- entrepreneurs-may-want-to-postpone-or-avoid-vc-even-if-you-can-get-it/ 4 Toni Mack, Communications: the next wave, Forbes.com, 10/6/1997, https://www.forbes.com/forbes/1997/1006/6007070a.html#727ce67b1c 5f 5 Matthew Yglesias, All hail, Emperor Zuckerberg, Slate.com, 2/3/2012, http://www.slate.com/articles/business/moneybox/2012/02/facebook_s_ ipo_how_mark_zuckerberg_plans_to_retain_dictatorial_control_his_compan y_.html 6 Dileep Rao, Nothing Ventured, Everything Gained: How entrepreneurs create, control and retain wealth without venture capital, Dileep Rao, 2018, www.dileeprao.com 7 Dileep Rao, Finance Secrets of Billion-Dollar Entrepreneurs, Dileep Rao, 2018, www.dileeprao.com

http://www.forbes.com/sites/dileeprao/2013/07/29/why-99-997-of-entrepreneurs-may-want-to-postpone-or-avoid-vc-even-if-you-can-get-it/

http://www.slate.com/articles/business/moneybox/2012/02/facebook_s_ipo_how_mark_zuckerberg_plans_to_retain_dictatorial_control_his_company_.html

Notes

About Dileep Rao

Finance and Business: Dileep Rao managed five business

turnarounds, and financed hundreds of ventures with venture

capital, subordinated convertible debt, senior debt, and leases.

Rao has consulted with corporations (including Medtronic and

General Mills), governments (U.S. and state), and community

development corporations in Minnesota, Wisconsin, Georgia,

Puerto Rico, California, Arizona, etc. Rao was the chairman of

one corporation and a director of many emerging ventures.

Entrepreneurial Education: Currently Dr. Rao teaches in MBA

and Executive MBA programs around the world. He has taught

at Stanford University, INCAE (Costa Rica), and the University

of Minnesota. He currently teaches at Florida International

University. He has won many awards for teaching excellence.

Author: Rao writes a blog for Forbes.com, and has written

nationally acclaimed books, including Handbook of Business

Finance & Capital Sources (American Management

Association), Business Financing: 25 Keys to Raising Money (NY

Times MBA Series), and Bootstrap to Billions.

Sample reviews include: “Business needs all the help it can get.

Like the U.S. Cavalry, (Rao’s) Handbook enters the scene just in

time” ... Inc. magazine.

The Truth About Venture Capital