Where will you fit into the VC portfolio?

Contrary to the popular, and much touted, assumption that unicorns wouldn’t be possible without VCs and that getting VC means unicorn success, the reality is that most unicorn entrepreneurs take off without VC interference because the VC portfolio has a lot of flops and very few flips and unicorns.

· The Flop: These are VC failures. Some never live up to hope, while others, like WeWork, Theranos, and FTX, don’t live up to the hype. VCs may have hoped for a Unicorn or a Fast Flip but ended up with a Fast Flop.

· The Flip: These are VC-Successes sold on a “quick” flip to corporate buyers. There are some successful quick turnarounds like Instagram bought by Facebook for twice the valuation VCs paid a week earlier. The annual performance is staggering. Some twists are perfect for companies, like Instagram and Facebook. Many are not, as evidenced by the high rate of failed corporate takeovers – 70-90% of takeovers 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 very large wealth.

Ratio of Flops, Flips and Unicorns

To evaluate VCs and VCs, entrepreneurs need to consider the percentage 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’s rare for VC funds to have unicorns in their portfolio, and when they do, they’re mostly in Silicon Valley. Non-Silicon Valley VCs mostly have flops and flips in their portfolio:

· Many VCs do not have unicorns in their portfolio. According to Marc Andreessen, about 15 investments are said to account for ~97% of VC returns. Home runs and top VCs are mostly in Silicon Valley

· A typical early-stage VC portfolio has about 80% failures (mostly flops), about 19% considered successes (mostly flips), and about 1% home runs (mostly unicorns). However, while every VC fund has failures, unicorns are not evenly distributed. This is 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 that were formed with good intentions to help those who would otherwise not get VC.

The key question for you is whether your venture will be:

· VC-Unicorn with long-term potential and very profitable exit – about 1% of VC-ventures.

· VC-Flip, which is usually sold to a large company or industry leader for a profitable VC exit.

· VC-Flop, meaning VCs will quickly lose interest, try to get what they can and move on.

Here are 5 strategies to increase your chances of becoming a unicorn:

· Find the right high-potential emerging trend. If you are early in a high-potential trend, have maintained 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 turn the tide.

· Take off without VC interference. That way you can keep control of the venture and decide if your chances of success are better with VC as rocket fuel. If you are not in control of the venture and if you have to pivot to find your growth strategy, you may have a flop because VCs may not stick. This is why 94% of billion dollar entrepreneurs delayed or avoided VC to maintain control (The truth about VC).

· Focus on business strategy, not product innovation. Entrepreneurs like Sam Walton, Bill Gates, Brian Chesky, Jeff Bezos and others failed by creating 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 on smart movers.

· Pray for a good time. Pay attention to the phase of the stock market cycle. If you are in the middle of a hot market when pigs can fly, you may be able to sell a mediocre company as a highflyer and have a flip or unicorn in your hand. If you’re in a bear market, watch out below.

· Prove your capabilities. Can you prove that you can dominate the main category of an emerging trend? VCs want proof of potential – not pitch promises. Get the skills to prove potential. Wait until you have proven your leadership potential for your venture and maintain control over your venture and the wealth you create.

MY TAKE: If you need VC to grow and want to avoid being a flop, wait until you take off and prove you have the potential and skills to dominate. Then your chances of making a flip or a unicorn are greater. But, even after the Aha, make sure you’re getting VC from a fund that has a track record of building unicorns. Very few funds create unicorns. Finally, stay in control if you want to improve your chances of creating wealth and keeping more of it. Get unicorn skills like Michael Dell.

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