Idiots are those people who continue to participate in a marketplace that was designed to marry the two most important assets in Venture, Limited Partners with money and entrepreneurs with ideas, governed by Venture Capitalists (VCs) to the dissatisfaction and under-performance of them both. Not even the public is interested (and certainly not for the right reasons, short sellers are not too picky and may artificially boost its initial IPO value).
We know that the real problems in Venture stem from how risk is applied to the creation of early stage companies, and that more discipline deployed by Limited Partners (the investors in Venture Capital) to a new Venture model will fundamentally improve the governance of innovation in the Venture marketplace.
Until then the only constituent in the Venture marketplace who cannot be called an idiot is the Venture Capitalist who without any personal downside can continue to apply the power of someone else’s money to define what innovation is and continues to get away with feeble attempts to convince the public of their value for more than ten years.
Perhaps now you understand how the adjective “idiot” is a compliment of sorts. Rest assured, the behavior of and attraction to idiots can easily be fixed.
Life is hard when you follow
Life is tough for entrepreneurs, especially for those who continue to listen to the compass of Venture Capitalists, ignoring the miserable performance of that compass for the sake getting a little bit of money. With a continued dysfunctional deployment of Venture Capital many entrepreneurs continue to succumb to an arbitrage of innovation that, by default, will never lead to achieving groundbreaking upside. Even when the idea holds merit, the flawed deployment of risk by VCs is sure to suck the life out of it.
So, here is a list of attributes by which you do not want to be recognized as an entrepreneur. An idiot entrepreneur is someone:
- Who believes that technology creates markets, rather than facilitates an electronic distribution mechanism to serve existing macro-economic marketplaces and behavior.
- Who believes and accepts money to build a gating technology proposition in search of a marketplace or without a clearly defined attachment to macro-economic behavior and upside.
- Who believes that they or VCs can actually derive foresight from studying statistics and hindsight intensively, forgetting that unique foresight is the only differential and investable attribute to successful companies.
- Who believes that capital efficiency is a unique business or investment strategy available only to them or the VC and therefore delivers any differential business or investment value.
- Who believes that market execution makes up for a dysfunctional “driving experience” and takes little streams of money to keep trying.
- Who blindly believes that raising money is the first step to acceptance of his idea. Not realizing that the compass of most VCs (95%) does not lead to the creation of value to their investors nor the public, and therefore their willingness to provide money is likely to mean absolutely nothing (or quite the opposite).
- Who calls himself an entrepreneur simply because he follows VC governance of what a hot innovation wave is.
- Who thinks that raising money makes him an entrepreneur, not realizing that raising money is not a vote of confidence from the public.
- Who thinks that raising money is an asset, yet with defunct investor performance across the board and in no less than 95% of cases turns out to yield a significant deficit.
- Who takes money from a VC, without getting to know the investment partner (General Partner at the VC firm) personally.
- Who takes money from a VC, without knowing the vintage and performance of their current or stacked funds. Ignoring blissfully any irrational behavior and panic that is about to come their way soon.
- Who engages with an investor who communicates through the valuation and cap table that majority ownership by the investor is ever a good thing in an early stage company.
- Who engages in fundraising efforts without a good understanding of the product conversion rates and operating credentials, offering many opportunities to VC of shooting holes in the proposition, to say no to the deal or drop the valuation just so you lose control of the company the moment one of your predictions do not pan out.
- Who partners with a first venture investor who cannot lead the complete funding runway, setting himself up for excessive segmentation of rounds, fragmentation of ownership and increased dilution.
- Who believes that authentic IPO value can be built for less than $25M, and dicks around with micro-VCs and well-meaning Angels.
- Who does not know the difference between micro private equity and Venture, praying to beat the simple economics of input and output.
- Who takes money to drive Venture growth, but has no $1B upside strategy defined.
- Who attempts to raise money from a VC without a real CEO, leaving the inmates to run the asylum and turning the company over to the VCs at the quickest pace possible.
- Who prefers to take $250K of subprime VC money in return for 30% of the company, instead of getting a line of credit on your $1.4M house in Palo Alto (with a median house price $750K in the bay area). By the way, neither one is a good idea.
- Who creates an iPhone application using Venture money, not realizing iPhone apps do not create venture returns and the top 1,000 applications on the Apple Store make no more than $350K average per year. You and your Venture investor deserve each other, including the idiot adjective.
- Who raises money from a (government) small business fund, not realizing that a venture trajectory is incompatible with small business funding.
What to do?
Truly groundbreaking innovation is no longer recognized by the majority of Silicon Valley investors. The Venture business has turned subprime more than 20 years ago and only the delayed response by Limited Partners makes it seem like it has some of its former gusto left.
Entrepreneurs are relegated to the investment thesis emitted by overwhelmingly subprime VCs (some refer to using the oxymoron: micro-VC, which in actuality is not Venture but micro Private Equity) and Angels who, each with their own performance issues, have turned innovation into a commodities business.
Groundbreaking innovation that taps into attachment of existing macro-economic behavior does not evaporate easily and has plenty of time to wait until a new Venture model capable of attracting prime risk (and rewards) is up and running again. That type of innovation can simply not be discovered by subprime VC (let alone Angels), plenty of examples in the past have proven that out.
So, unless you know how to get to the 35 out of 790 VC firms that do know how to deploy risk and produce returns, of which we estimate 3/4 do so by deploying diversification, alternative investment strategies or similarly subprime gating tactics, you should keep your job until this subprime VC maelstrom has lost its strength — or until our systemic fix to Venture is in place.
For those people who aim to follow the investment waves of the current investors, by all means keep trying. Maybe, just maybe your pot of gold will be at the end of a rainbow.