Unlocking the Top 20 VC Club
I recently spoke to a group of corporate early-stage venture capitalists (VCs) about strategies to improve their performance. Corporate VCs – like Area VCs, Minority-Focused VCs, and Women-Focused VCs – are Constraint-Led VC (CLVCs). They often have a goal of high returns but with constraints. It’s like fighting against a world-class boxer with one hand tied behind your back.
Here’s why. The common belief is that there is a shortage of VC, and that this shortage can make all VCs successful by financing the unicorns that are waiting to be developed.
This belief is a myth. Most VC track records are anything but exemplary. A handful of VCs do well and do so because they have no constraints – and are focused on financing potential unicorns.
Is there a VC shortage?
If the goal of VC is to earn an attractive return, there seems to be no shortage of VC. As I have noted before, the Top 20 VCs are said to earn about 97% of VC returns because most of their profits are said to come from about 15 homeruns. And the Top 20 are the VCs that consistently fund them. These Top 20 are either based in Silicon Valley or have offices there.
This suggests that most VCs who not in the Top 20 most likely are close to breakeven or lose money. If CLVCs want to earn a higher return, one strategy to finance the few home runs would be by eliminating constraints, which however would remove the reason for their existence, and moving to Silicon Valley. Or they could learn how the 94% of billion-dollar entrepreneurs who avoided or delayed VC developed homeruns using more skills and less capital.
Here are 3 strategies that CLVCs can follow to succeed with constraints.
#1. Rethink the VC role.
Since most technologies can be imitated and improved, as was demonstrated by entrepreneurs like Saw Walton and Steve Jobs, the unicorn-strategy is key – not the “first-mover” idea. Silicon Valley VCs can rely on their rich talent of entrepreneurs to bring ventures to Strategy Aha. CLVCs need to train entrepreneurs to get to Strategy Aha – without VC. Pitch competitions will not do this because no one can predict potential from a pitch. CLVCs need to add the right training to their repertoire and promote skills.
#2. Develop a Skills-based Unicorn-Entrepreneur Ecosystem (UEE).
No one can predict a Unicorn-Entrepreneur. No one. Steve Jobs was rejected by more than 10 VCs and so was Google. Even Mark Cuban, perhaps the most successful angel-shark, has admitted to being underwater. If CLVCs want an edge in VC, they need to develop their UEE. This means train everyone to takeoff with skills rather trying to pick winners based on pitches and instinct. 94% of 85 billion-dollar entrepreneurs took off with skills, including Bill Gates, Michael Dell, Michal Bloomberg, Mark Zuckerberg, Brian Chesky and many more. Teach skills. Evaluate skills. Reward proven skills.
#3. Develop Unicorn-Entrepreneurs and Finance Potential Unicorns Before the Top 20 Do.
To do better, CLVCs need to beat the Top 20 for the few home runs, which are mainly in emerging industries. The Top 20 get an edge over other VCs by financing large amounts after Strategy Aha because they can reduce risk and see a path to a homerun. When Mark Zuckerberg launched Facebook and took off, the Silicon Valley VCs swooped in. When Jeff Bezos launched Amazon.com with family and friends’ capital and was expecting annual sales of more than $100 million, a Silicon Valley VC financed him. To get an edge over the Top 20 VCs, CLVCs need to be the first financiers with reduced risk and proven potential. They need to train all in their emerging industries of interest and finance entrepreneurs who prove unicorn skills to bridge the gap to takeoff.
MY TAKE: CLVCs can beat the Top 20 VCs by changing the rules of the game. They can develop the Unicorn-Entrepreneur Ecosystem and train unicorn-entrepreneurs to bridge the first mile from idea to Aha!
