Flopping Ventures
Unlike the popular, and heavily hyped, assumption that unicorns would not be possible without VC and that getting VC means unicorn success, the reality is that most unicorn-entrepreneurs takeoff without VC interference because the VC portfolio has lots of flops, and very few flips and unicorns.
· The Flop: These are VC failures. Some never live up to the hope, while others, like WeWork, Theranos and FTX, don’t live up to the hype. The VCs may have been hoping for a Unicorn or a Fast Flip but ended up with a Fast Flop.
· The Flip: These are VC-Successes that are sold in a “fast” flip to corporate buyers. There are some successful fast flips like Instagram that was purchased by Facebook for 2x the valuation paid by the VCs one week earlier. The annualized return is mind boggling. Some flips are great for corporations, like Instagram and Facebook. Many, as evidenced by the high proportion of failed corporate acquisitions are not – 70-90% of acquisitions are estimated to fail. Some of these failures are likely to be VC flips.
· The Unicorn: These are VC home runs when the venture lives up to expectations and creates lots and lots of wealth.
Proportion of Flops, Flips, and Unicorns
To evaluate VC and VCs, entrepreneurs need to consider the proportion of flips, flops, and unicorns in the VC’s portfolio (Designing Successful Venture Capital Funds for Area Development: Bridging the Hierarchy & Equity Gaps Dileep Rao, Applied Research in Economic Development, 2006. Volume 3. Number 2). It is rare for VC funds to have unicorns in their portfolio, and when they do, these are mainly in Silicon Valley. VCs outside Silicon Valley mainly have flops and flips in their portfolio:
· Many VCs have no unicorns in their portfolio. According to Marc Andreessen, about 15 investments are said to account for ~97% of VC returns. The home runs and the top VCs are mainly in Silicon Valley
· A normal early-stage VC portfolio has about 80% failures (mainly flops), about 19% are deemed successes (mainly flips), and about 1% are home runs (mainly unicorns). However, although every VC fund has failures, the unicorns are not evenly distributed. That’s why Andy Rachleff, a successful VC, estimates that the top 20 VC funds (about 3%) generate ~95% of the industry’s returns.
· Analysis of a VC portfolio shows that without home runs, VC portfolios have low or negative annual returns (Designing Successful Venture Capital Funds for Area Development: Bridging the Hierarchy & Equity Gap, Applied Research in Economic Development, 2006, Volume 3, No. 2). This means that most VC funds fail, including many formed with good intentions of helping those who would not otherwise get VC.
The key question for you is whether your venture will be a:
· VC-Unicorn with long-term potential and a very profitable exit – about 1% of VC-ventures.
· VC-Flip, which is usually sold to a large corporation or an industry leader for a profitable VC exit.
· VC-Flop, which means that the VCs will quickly lose interest, try to get whatever they can, and move on.
Here are 5 strategies to increase the chances of becoming a unicorn:
· Find the right high-potential, emerging trend. If you are early on a high-potential trend, have kept control of your venture and are following unicorn strategies to find the fulcrum of the emerging trend, you have a shot at the brass ring. If you entered after the trend has taken off and the leaders have built a strong position, you may still be able to dominate a niche market and flip the venture.
· Takeoff without VC interference. Doing so allows you to keep control of the venture and decide whether your chances of success are better with VC as rocket fuel. If you do not have control of the venture, and if you have to pivot to find your growth strategy, you may have a flop because the VCs may not hang around. That’s why 94% of billion-dollar entrepreneurs delayed VC or avoided it to keep control (The Truth about VC).
· Focus on the business model, not product innovation. Entrepreneurs like Sam Walton, Bill Gates, Brian Chesky, Jeff Bezos, and others did not succeed by coming up with a “better” product. They came up with a better business strategy for the emerging trend. In fact, about 9 out of 10 first-movers fail to smart movers.
· Pray for good timing. Watch out for the phase of the stock-market cycle. If you are in the middle of a hyped-up market, when pigs can fly, you may be able to sell a mediocre company as a highflyer and have a flip or unicorn on your hand. If you are in a down market, watch out below.
· Prove your potential. Can you prove that you can dominate the prime segment of an emerging trend? VCs want proof of potential – not promises in pitches. Get the skills to prove potential. Wait until you prove your leadership potential for your venture and you to keep control of your venture and of the wealth you create.
MY TAKE: If you need VC to grow and want to avoid becoming a flop, wait until you take off and prove that you have the potential and the skills to dominate. Then your chances of building a flip or a unicorn are higher. But, even after Aha, make sure that you get VC from a fund that has a track record of building unicorns. Very few funds build unicorns. Lastly, keep control if you want to improve your odds of creating wealth and keeping more of it. Get unicorn skills, like Michael Dell.