Not Just Smart. Finance-Smart
Many growth-seeking entrepreneurs seek venture capital (VC). VC is large amounts of equity funding from institutional VCs to build your growth venture. Reverse-VC (R-VC) is a finance-smart mix of internal and external financing for each stage of the venture that was used by more than 9/10 unicorn-entrepreneurs to takeoff without VC, to grow with control of the venture, and to retain more of the wealth created.
Here are 7 reasons why entrepreneurs would do better using R-VC.
#1. VCs wait for Aha. R-VC helps you get there. The demand for VC is much greater than the supply so VCs can afford to be choosy and wait until the venture shows proof of potential, i.e., Aha. Waiting for proof also helps VCs reduce their risk. R-VC helps entrepreneurs get to Aha, of which there are four types:
· Previous Unicorn Aha: When the entrepreneur has a great track record, like Elon Musk, the VCs line up
· Tech Aha: When the technology’s unicorn-potential is proven, like Genentech splitting the gene, the VCs will come
· Strategy Aha: When the entrepreneur uses R-VC to prove the strategy’s unicorn potential, such as eBay and Apple, VCs show up
· Leadership Aha: When the entrepreneur uses R-VC to prove the venture’s unicorn strategy and the entrepreneur’s own unicorn potential, like Gates, Chesky, Koum, and Zuckerberg, VCs ask to invest.
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#2. VCs use finance-as-a-weapon after Aha. R-VC uses skills-as-a-weapon before and after Aha. VCs invest heavily to dominate an emerging industry with brute force after Aha. R-VC helps entrepreneurs use skills to get to Aha without VC and to dominate after Aha with control. Entrepreneurs who get early VC and do not prove their leadership skills get replaced by professional managers.
#3. VCs finance a few elite ventures, estimated at about 100 out of 100,000 ventures. R-VC helps all.
#4. VC is expensive. R-VC is more reasonable. R-VC includes an optimal mix of financing by:
· Stage of the venture: Risk is high in early stages. R-VC helps entrepreneurs bridge the gap from the high-risk idea stage to the lower-risk takeoff stage
· Financing Sources: Unicorn-entrepreneurs used a lower-cost mix of more than 10 types of financing sources to takeoff without VC
· Financial Instruments: VC uses preferred stock, which gives the edge to the VCs. R-VC uses a mix of financial instruments, including debt, equity, and hybrid, that can help financiers manage risk and entrepreneurs reduce dilution
· Business and Financial Strategy: VC-seeking entrepreneurs focus on finding the right opportunity and business strategies, even if capital intensive, and assume the costs of losing control, being diluted, and an 80% probability of failure. Unicorn-entrepreneurs focus on finding the right opportunity, business, and financing strategies to takeoff with control of the venture and of the wealth created.
#5. Early-VC was used by 6% of U-Entrepreneurs. R-VC was used by 94%. U-Entrepreneurs mainly used R-VC. 18% got VC after takeoff but stayed in control, like Brian Chesky of Airbnb or Jeff Bezos of Amazon.com. 76% avoided VC like Michael Dell, Michael Bloomberg, and Joe Martin of Boxycharm.com. To use R-VC, U-Entrepreneurs needed to use finance-smart skills and strategies.
#6. VCs seek control. R-VC allows entrepreneurs to keep it. VCs seek control and replace the entrepreneurs when they have not proven their leadership skills. R-VC helps entrepreneurs to get to Leadership Aha, and to stay as CEO.
#7. VC dilutes more than R-VC. In a sample of 22 unicorn-entrepreneurs, those who delayed VC kept 2X the wealth created than those who got VC early and were replaced as CEO. VC avoiders kept 7X the wealth created than those who got VC early. To control your venture and the wealth created use Reverse-VC.
Using R-VC requires using finance-smart strategies, financial structure, and skills to grow more with less. R-VC is better for 100% of entrepreneurs before Aha, and for 99.98% of entrepreneurs after Aha.
MY TAKE: VCs use finance-as-as-weapon, which helps about 20/100,000 ventures. Unicorn-entrepreneurs use skills-as-a-weapon, which helps 100% of entrepreneurs. The skills include developing the right opportunity and finance-smart strategy, finding the right financing, and knowing how to use it. Sam Walton started with limited capital from his family and beat the mighty Kmart. “All he did” was develop one of the greatest unicorn strategies to first dominate rural America with his big-box stores, and then use this base to dominate the rest of the country. Can this genius be taught? Maybe, but only if business schools shift their focus from pitch competitions and shark contests to finance-smart strategies and skills.
