Untangling Two of Today's Most Unnecessary Startup Fundraising Myths
Riz Virk is an entrepreneur, angel investor, bestselling author and founder of Play labs @ MIT.
If you are building a startup, you’ll find no shortage of people who are willing to give you advice, particularly when it comes to raising financing. Unfortunately, much of this advice is wrong.
Well not, wrong exactly.
Most startup advice, like most myths, have a kernel of truth to them, but you have to know when to apply these truths, and when not to.
We start our series with several myths about financing that are tossed around Silicon Valley as if they are gospel, but they are really Startup Myths. We'll then continue the series with other myths.
Myth #1: Build a Billion Dollar Company
I don’t know exactly when it happened – but at some point, Silicon Valley became obsessed with the word “Billion”. Some people blame it on
Justin Timberlake (playing Sean Parker) in the movie The Social Network, who famously said that one million wasn’t cool, one billion was. I personally blame my MIT classmate Aileen Lee, formerly with Kleiner Perkins, who coined the term Unicorn, a private company valued at over a billion dollars.
Today the conventional wisdom is to not approach VC’s unless you can build the next Unicorn. To do that you have to show how your market is big enough (a multi-billion dollar market) to support that kind of
The truth is if you look at many of the traditional companies that went on to be worth over a billion dollars, it wasn’t at all clear when they started the company that they had a billion dollar idea.
Going all the way back to Yahoo or Microsoft, the initial products (a directory for a nascent tech called the World Wide Web, and Microsoft BASIC,) didn’t look like billion dollar products at all. The same is true of recent Unicorns like Facebook, Twitter, Slack, Discord, Minecraft and many others.
The real issue here is that if an entrepreneur comes into a pitch and goes on and on about how he (or she) is going to build a billion dollar company in just a few years, most investors eyes tend to glaze over. We’ve heard it all before.
So, then how do billion dollar companies get built? Like Jerry Yang who started Yahoo, we are looking for entrepreneurs who are obsessed with a new technology. Like Mark Zuckerberg, who built a site for college students only, we are looking for a small, protected market that you as an entrepreneur, can dominate.
Like Markus Persson, who created Minecraft, who was just trying to build an idea that he could sell for $6.99 a game, we are looking for a product that ends up becoming wildly popular, more popular than anyone
thought it could be in the early days.
The real key is to have an entrepreneur that is obsessed with what appears to be a small market. Why does it need to be a small market? Because that’s what an entrepreneur with a small amount of money and a lot of talent, can dominate. If, like Microsoft and Facebook did, you can dominate your small market, you can then move on to other products or markets that are adjacent.
Moreover, if the market grows and you are the leader, then you can find
yourself at the helm of a billion dollar company.
Even when there a market that is large, most entrepreneurs that are successful are attacking a small portion of it at the beginning. So, while everyone wants to get in on the next Unicorn, the way to get there is to make sure you have a product that meets the needs of a growing, but still very small, segment of a newly emerging startup market!
Myth #2: Talk to As Many Investors As You Can
For some entrepreneurs, raising financing can seem like a full time job, particularly in these trying times. Anyone who’s been through the process will tell you that you have to go through a lot of “No’s” before you to get to a “Yes”.
Like most myths, this one definitely has a kernel of truth to it. But if talking to investors is turning out to be a full time job, it’s possible that you are talking to too many investors, or that you need to refine your pitch before talking to any more because the pitch is not working.
Gurinder Sangha, who was a securities lawyer who started Intelligize (which was sold to Lexis-Nexis) put it best when he said that you want to go after investors that are “in your tribe”.
What is your tribe? In the US, it’s often your alma matter. In his case, he was a graduate of UPenn, and his first venture capital investor turned out to be, you guessed it, another Penn alumni. It doesn’t have to be alumni per se. My first institutional financing came from people who were in the “MIT” network.
But tribe can be other things. I remember a few years ago, an entrepreneur was building an automated job matching site in Latin America. He would fly into Silicon Valley, meet with many investors, and having read in places like TechCrunch and elsewhere that raising money was easy here, go away disappointed. In the end, the fund that led his series A was a fund that focused on Latin America.
This might seem obvious, but it’s not. Many entrepreneurs waste time talking to investors who are the wrong stage or sector or tribe. Just because a VC’s website says they do “early stage” – to a VC that mans a product has already been built and generating some revenue, while to an entrepreneur that means “just an idea”.
So, when raising institutional financing, while you will have to talk to investors, you are actually better off finding your tribe and focusing on investors that are more likely to invest in your particular market or stage or team. To do this, talk to less investors, not more!
These are two of myths that are so common that you'd think they have to be true. Like most myths, they have a kernel of truth to them, but without understanding why they are true and when they don't apply that you can really get yourself into trouble!
A graduate of MIT and Stanford, Rizwan Virk is an
entrepreneur, venture capitalist, video game pioneer, indie filmmaker and bestselling author. His new book is Startup Myths & Models What You Won’t Learn in Business School, and
he is also the author of Zen Entrepreneurship and The Simulation Hypothesis. He is the founder of Play Labs @ MIT, and is a venture partner at several venture capital firms. Visit his website at www.zenentrepreneur.com
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