The Ford Foundation’s president, Darren Walker, noted that we need a “new kind of capitalism” to “level the playing field.”
Perhaps. But until that day arrives, and I don’t expect it in my lifetime, the Ford Foundation can create more unicorns among women and minorities by helping them succeed with what we have today.
Concurrently, there seems to be a strong push to get more VC for women and minority (especially African-American) entrepreneurs. An interesting article seems to conclude that women and minority entrepreneurs can get more VC funding:
· By pushing for an increase in VC funds controlled by women and minorities.
· By becoming “twice as good,” “becoming really active on social media,” thinking of raising VC as a “numbers game” or sell “your stuff.” Sarah Kunst of Cleo Capital notes that “There are so many brilliant, amazing Black women starting companies and not nearly enough capital for them.”
Yes. But there are also so many brilliant, amazing Black men and not nearly enough capital for them. And Hispanic men and women. And Indian men and women. And Chinese. And dare I say it, white men and women?
In fact, VC is available to only about 100/100,000 entrepreneurs. That means 99,900/100,000 ventures do not get VC. And getting angel capital is no guarantee of getting VC. Studies suggest that only about 2,000-10,000/ 100,000 ventures get angel capital. And only 100 get VC. Also, as noted earlier, 80% of VC funding fails. So, business editors of the world, let’s get real. VC is for the few. And few succeed with VC.
If anyone really wants to help more women and minorities succeed – rather than get VC, which is a false indicator of potential (false because 80% who are so chosen end up failing), first understand how entrepreneurs really built unicorns and how VCs really fund unicorns.
Reality #1. Most Successful VCs Invest mainly in Emerging Industries.
To get their high returns, VCs mainly invest in emerging industries, from semiconductors in the 1960s to Internet 3.0 in the 2010s. Emerging industries offer ventures the potential to grow big and build unicorn fortunes, offering a high return to VCs. Investing in existing industries means that emerging ventures have to deal with higher probabilities of risk and compete with established businesses who offer stiff competition. The question is will all these new funds for women and minority entrepreneurs find enough entrepreneurs with the skills needed to dominate emerging industries? Or do we need more trained entrepreneurs who can build unicorns from idea to VC?
Reality #2. Most Successful VCs Invest in Ventures that Dominate Emerging industries
VCs need home runs. Most home runs are in emerging industries. But few entrepreneurs enter succeed and dominate in emerging industries. From Intel to Airbnb, VCs have made a killing when their investments have dominated the emerging industries and become home runs. Will these new funds for women and minorities find enough dominating ventures, and thereby home runs? Or do we need to teach women and minority entrepreneurs the skills to find and dominate emerging industries?
Reality #3. Most Successful VCs Wait for Aha!
VCs wait until potential is proven, i.e. till Aha! Entrepreneurs who want or need VC have to find a way to bridge the gap from idea to Aha. Are these new funds going to invest before Aha – before anyone can see potential? Will they take more risks, and risk failing, or will they train women and minorities in the skills to start the next generation of unicorns to get to Aha? Or will they be like many VCs who don’t know how to get to Aha?
Reality #4. Most Successful VCs Seek Control and Replace CEOs Before Leadership Aha!
There are two kinds of VC investments. In one, VCs take control of the venture and replace the entrepreneur with a professional CEO. That’s what happened to Pierre Omidyar of eBay. In the other, entrepreneurs build the venture to the point where their leadership is evident and VCs jump on the bandwagon to make money with the entrepreneur, not with a professional CEO. This is what happened to Mark Zuckerberg of Facebook. If the idea is to build unicorns that are controlled by women and minorities, do we need to teach them how to get to Leadership Aha?
Reality #5. About 20 VCs are said to Earn 95% of IPO Profits.
Andy Rachleff, a very successful VC, noted that about 20 VCs earn about 95% of IPO profits, which is the highest strategy for VC profits. The rest are mediocre or fail. Will these new funds be in the top 20?
Reality #6. History shows that those who forget Realities 1-5 learn Reality #6 – they fail.
As noted earlier, few VCs do well. When the federal government wound down the MESBIC industry, about 4-5 funds accounted for most of the profits. This is because VC funds fail when they have no home runs. Where will this new crop of women and minority funds fit? We will know in a few years. But one truth has always prevailed – those who forget history are doomed to repeat it.
MY TAKE: To the Ford Foundation, we don’t need a new kind of capitalism. We need to train women and minorities to succeed in this one – and the key to this is training them to develop unicorns. Unicorns are started by unicorn-entrepreneurs –not by VCs. VCs only add fuel to an already burning fire. 99% of America’s billion-dollar-entrepreneurs succeeded due to their business skills. Capital, ideas, and good intentions are not enough. To build unicorns, entrepreneurs need business skills and smart strategies. Train them. Please.