There’s a concept that is reinforced within the startup community. A pernicious thought reinforced by the Arthurian Quest to obtain funding from venture capitalists. It’s ever present and even divides entrepreneurs into “true startups” and small businesses aka “lifestyle businesses”. This self imposed schism is derived not by the courage, intelligence, or hardwork of an entrepreneur, but rather by whether or not a venture capitalist believes that there is the slightest chance of a large exit.
Venture capital investing: the equivalent of throwing spaghetti up against a wall and seeing what sticks
It should not surprise anyone in the startup scene that entrepreneurs are chasing investors rather than consumers. A review of the recent list of events in Austin’s startup scene found that over 50% of events were related to funding, while less than 10% of events were related to consumer acquisition or customer discovery. While attendance data is unavailable, anecdotal experiences are, and what these experiences have shown is that funding events are much more heavily attended than any other type of event on average.
As Danny Devito once said, “Everybody needs money. That’s why they call it money.”
Yet, the question that entrepreneurs should answer for themselves is a simple one, “How do I define success.” Is success building a company that lasts longer than a decade? Is success building a company that is acquired? Is success not losing your shirt? The definition of success allows an entrepreneur to understand the end goal and the way in which that end goal can be achieved.
This definition is important because it will guide the entrepreneur’s pursuit rather than letting external forces guide what type of business the entrepreneur will build. That said, the statistics behind venture backed companies is not appealing. According to a Harvard study, 75% of venture backed startups failed, while “the failure rate of all U.S. companies after five years was over 50 percent, and over 70 percent after 10 years.” Digging deeper into the data, with only 37% of “Information” companies still operating after 4 years, one must question the entrepreneurial hype around startups.
Beyond questioning the entrepreneurial hype around startups, one needs to also question the hype around venture capital firms themselves. If all the smart money is going into venture capital, one has to wonder how smart the smart money actually is? Depending on how you slice the data, it’s difficult to tell how smart the money is. More importantly the ability to tell if the money is smart or not is impacted by both the management fees within a firm and also the lack of reported earning by venture capital firms.
Regardless of the performance of venture capital, entrepreneurs and the entrepreneurial community should build and promote a community that is dedicated to helping brave men and women get their companies off the ground. We should be promoting the pursuit of business versus the pursuit of venture capital. We should be invigorating entrepreneurs to build businesses that have profitable business models rather than mainly focusing on hyper growth strategies.
And yet, it’s the hyper growth siren call that traps and catalyzes so many entrepreneurs to take risks, or at least go through the motions of taking the big leap of faith. It’s the big exit that defines the entrepreneurial culture, specially the one that we find in Austin. It’s the unicorn company that accelerators and coworking spaces try to attract. It’s this vision of entrepreneurial pursuit that informs so much of the city and state policies towards small businesses.
It’s easy to fall into this trap because it’s the same trap that we constantly find ourselves in. Even though 11.1% of Americans will become part of the 1% of earners, only 0.1% of them will stay within the 1% for a decade. Yet according to CNN, 17% of Americans believe that they will become part of the 1% permanently.
Are you an American that believes this? Don’t worry, 7% of Americans believe that chocolate milk comes from brown cows.
At the end of the day, the question is not whether an entrepreneur is aiming small, the question is whether or not that entrepreneur will hit the target. The hope for entrepreneurs is not to believe that they will become a unicorn, the hope is that they believe that they can obtain and keep customers. Rather than focusing solely on the hyper growth model and venture capital funding, all of us should focus on what has and continues to make America the world’s economic engine: small businesses.