Why entrepreneurs should not follow an investor’s compass

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I think it is quite hilarious to see so many Venture Capitalists (VCs) tell entrepreneurs everyday how to build a successful business, given that they have no political leg to stand on to offer such advice. The advice offered ranges from how-to-build a company (many have never) to how-to-talk to an investor (to submit to subprime?), to how-to-deal with their downside protection.

The merit of the VC compass
The reality is that in the marriage between the assets of the Limited Partner (money) and the assets of the entrepreneur (idea), VC has proven to be a miserable match-maker by virtue of its empirical and statistical performance (see here).

So in essence it is the VC who needs help in finding more disruptive innovation, not the entrepreneur providing it.

We covered at length how few VCs actually have had the relevant personal experience of guiding an early stage company as CEO from the left side of the chasm to the right side (where massive adoption awaits) and why few of them actually have the merit to judge innovation to begin with. But even if some GPs did have the personal experience, the model by which many deployed risk is simply incompatible with finding the outliers of innovation to which none of their innovation “scripts” applies. With an overall success rate in the last 10 years by VCs of less than 3%, simply raising a first round from any investor has statistically become the entrepreneur’s highway to hell.

And VCs openly and proudly admit to their demi-cartel (confusing a strength with a weakness). Here is some evidence I picked up from the Twitter hemisphere recently that describes that abuse of power, the lack of investor competition and the dysfunction of the Venture market model so well:

If U (that is “you” in text-speak) say to investor A that investor B wants to invest, expect A to immediately ping B. And if B says no, kiss goodbye to A.

Now I have spoken with the investor in the past who said this, and know some of the portfolio companies from his first-time lower-teens “play” fund, and can imagine how he depends on the consensus from his peers to make investment decisions. He cannot invest using a truly unique thesis, as he simply cannot support the runway of any of his companies monolithically with such a tiny fund and I feel sorry for the stance he has to take. But the commoditized investment thesis (alluded to in the Tweet), stuffed with syndication makes for a cesspool of subprime deals that is so indicative and prevalent in Silicon Valley.

So entrepreneurs should not get derailed by the general VC compass, as it:

  • Generated no more than 3% public value over the last 10 years (below 1% if you take the Google IPO out of the mix)
  • Lost about $1.7 Trillion in funds
  • Eroded public market trust with short-term gains

For twenty years real entrepreneurs have been abused by a financial system that first threw money at anything moving and ten years later retrenched and still imposes the fear stemming from the minute socioeconomic value those opportunities created.

The entrepreneur’s conundrum
But that leaves entrepreneurs with an interesting conundrum, of whom to listen to. If the compass of the VC that may give the entrepreneurs their first money to start building their company cannot be trusted, where else do they go to get their idea funded? VCs exploit this problem by basking in the glory of no real deal competition (they prefer to syndicate) and no other financial instrument that can compete in providing full runway support for early stage innovation. Meanwhile entrepreneurs get more desperate and bow down to the will-power of the VC cartel, and submit to its terms.

That deadlock caused the smart entrepreneurs to leave the “dating scene” altogether (and find better custodians for their intellectual brainpower) and leaves a maelstrom of subprime VCs actively telling hopeless entrepreneurs how to build greater returns using subprime deployment of risk and terms. And we still have 10-years of past subprime deals clogging up the pipes of venture firms to look out for and ready to pop soon.

The answer, my friends
Instead of listening to the opinion from many VCs (whose merit is impossible to assess, but based on average sector performance generally deplorable) drawn out in the blogosphere, entrepreneurs should simply follow the compass of success.

So I hear: define success.

Success in early stage technology innovation is highly dependent on the creation of authentic socioeconomic value and public trust (and attachment to existing macro-economic behavior), that creates valuable IPOs, that can be courted by M&A, that is supported by high-growth venture investments, that is spawned by the proper deployment of investment risk.

Venture investors need to step up to combat the lack of trust our public market has in technology companies. Since many venture investors pissed away public trust in the 90s with their choices of new public companies that suggested massive valuations but proved to contain only nominal value, investors now need to be extra diligent in producing authentic value the public market can trust again.

But entrepreneurs need to learn that the real value of the idea is not described by populist investor buy-in, but is defined by how unique and how well the company can build that socioeconomic value. And that means instead of forward planning from a first round of funding, entrepreneurs need to set their compass to point to a social economic endpoint, get agreement with investors on the objective and then back-plan to what steps and investments are needed to achieve that public trust.

Social economic value is not proven by first building technology (the least of our venture risks) and will not evaporate anytime soon, so entrepreneurs should not leave their jobs just yet, before they are adequately able to sell the viability of reaching the end-point to a prime investor.

Groundbreaking entrepreneurs follow their own compass
The definition of the compass, the pin-pointing of socioeconomic value can best be established by the entrepreneur (not investor) with the unique vision for a better world. By the groundbreaking entrepreneur who by definition does not subscribe to the populist view, who has the vision and ability to enable change, and an unwavering passion to improve the way the world works (as Craig Ferguson says “reminds you of anyone?”).

All Venture investors need to do is assess whether the vision and ability to execute of the company, started by the entrepreneur is plausible in generating the large socioeconomic value that was promised. Cost is highly relevant only to those investors who have nothing to hang on to but downside protection. The opportunity for creating large social economic upside in technology remains priceless.

When life gives you lemons
Raising money is just like dating, those who pretend to be someone they are not will find themselves inevitably failing, and unhappy with what they submitted to. So, they key to raising money is to keep looking for an investor who has the merit and money, and can subscribe to what the entrepreneur is selling (by virtue of its goal). If none do, and one has clearly defined the path to large socioeconomic value, stay firm and keep at it.

Only groundbreaking entrepreneurs make orange juice when life gave them lemons.


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About Georges van Hoegaerden

Georges is a serial entrepreneur, venture catalyst, 4x CEO, board director turned innovation economist (by fate). His ideas have raised $14M in venture capital and produced over $100M in returns. More.