Entrepreneurs seeking growth with control should shift their focus from the Venture Capital (VC) ecosystem to the proven financing strategies of the Unicorn-Entrepreneur ecosystem. Venture development today focuses heavily on the VC ecosystem, which emphasizes the idea, the pitch, angel investors, and venture capital funding. However, entrepreneurs are discovering better ways to finance their ventures—by avoiding or delaying VC and adopting the strategies used by 94% of billion-dollar entrepreneurs and nearly all hundred-million-dollar entrepreneurs. These strategies not only improve their odds of success but also help them retain control over their ventures and the wealth they create.
Disadvantages of the VC Ecosystem
The VC Ecosystem has several disadvantages, including:
· Limited VC financing: VCs finance only about 100 out of 100,000 ventures, making access to VC funding highly exclusive.
· Delayed VC funding: Entrepreneurs must first get to Aha, i.e., prove their potential before they can attract VC interest.
· VC control: Leading VCs, especially those in Silicon Valley, often invest before the venture reaches Leadership Aha, when the entrepreneur’s potential is evident. They seek control of the venture by sidelining or eliminating the founding entrepreneurs, and replacing them with professional CEOs in up to about 85% of funded ventures.
· VC-caused wealth dilution: Entrepreneurs who delay or avoid VC and remain as CEOs can reduce dilution, often retaining 2x to 7x the proportion of wealth created compared with those who get VC early and are replaced (The Truth about VC).
· High VC Failure Rate: About 80% of VC-funded ventures fail; only ~1% is a home run.
Proven Finance Strategies to Outsmart VC
To increase their chances of success and maintain control, entrepreneurs should imitate the strategies of Unicorn-Entrepreneurs, who largely avoided or delayed VC. Here are their strategies:
#1. Look Inward First
The best option for most entrepreneurs is to make their strategy financially efficient and cash smart. This involves:
· Improving strategy: Prioritize refining and executing your potentially dominant strategy over relying on a “first-mover” product. Few billion-dollar entrepreneurs succeeded by being first movers.
· Enhancing skills: Focus on developing skills to out-execute competitors. Michael Bloomberg, Richard Burke (United Healthcare), and Jeff Bezos are prime examples of great execution who leveraged their expertise and outperformed the competition.
· Creating a cash-flow business model: Develop business models that enable rapid growth while generating positive cash flow, as Michael Dell and Niraj Shah (Wayfair) did.
· Learning finance-smart growth skills: Learn the skills to grow with less capital. Dick Schulze built Best Buy with just $9,000 using smart bootstrapping techniques.
· Using effective sales drivers: Focus on the most productive sales drivers, as Gaston Taratuta did.
· Strategic bootstrapping: Allocate resources wisely by investing in key areas while bootstrapping others. Bob Kierlin (Fastenal), for instance, invested in employee development.
#2. Look for Non-Controlling Financiers.
· Cash-Flow based debt. Leverage financing options like accounts payable, which proved crucial for entrepreneurs like Sam Walton and Dick Schulze. The key is to control inventory, optimize the sales cycle, and reduce accounts receivable.
· Strategic alliance. Forming a strategic alliance can be a great strategy so long as you retain control of your venture. Michael Bloomberg allied with Merrill Lynch, who invested in Bloomberg and became his first customer.
· Customer pre-payments. Leverage customer prepayments as a source of funding, as Joe Martin of Boxycharm.com did.
· Crowds, angels, friends, and family who do not control. Seek funding sources like crowd financing, angel investors, family, and friends who can offer capital and expertise without demanding control. Bob Kierlin raised $31,000 from friends to build Fastenal.
Advance in Crowdfunding
Crowd funding has become one of the most rapidly innovating areas of venture finance. David V. Duccini, a leader in the field and CEO of Silicon Prairie, has developed the SAFE+R financial instrument to address the shortcomings in traditional crowd funding agreements.
The popular SAFE (Simple Agreement for Future Equity) instrument can be criticized for being too “simple” and one-sided. It grants the entrepreneur significant control over the investor unless there is a subsequent VC financing round, which may be unlikely outside Silicon Valley.
According to Duccini, SAFE+R “re-balances the relationship between entrepreneurs and investors.” It “gives the investors some means to be made whole.” Duccini’s key innovation adds the liquidity option to SAFE along with retroactive returns. As he notes, “an investment without an exit is just a donation!”
#3. Attract Top 20 VCs After Leadership Aha… If You Need VC to Dominate.
If your strategy is capital-intensive and requires VC, aim to get it from the Top 20 VCs who are said to earn about 95% of VC returns. However, timing is critical – seek VC after Leadership Aha when your venture’s potential and your own leadership skills are established, and when VCs are more likely to seek you out, and less likely to have you replaced by a professional CEO. Maintain control to keep more of the wealth you create, as was demonstrated by Jan Koum of WhatsApp.
MY TAKE: Financing and finance strategies are crucial to entrepreneurial success. In 2025, entrepreneurs will increasingly turn to smarter financing strategies instead of just relying on the traditional VC route that helps about 20 out of 100,000 entrepreneurs. By avoiding or delaying VC, and using finance-smart skills and strategies, they can take off successfully, create wealth, and retain control over their venture. By learning from billion-dollar and hundred-million-dollar entrepreneurs who have successfully navigated these challenges, today’s entrepreneurs can pave the way for long-term growth and stability.
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