by Oliver Libby
The world of venture capital is defined by its carefully crafted legends: hooded billionaires, rhinos, and Midas investors. But the numbers tell an entirely different story: most venture capital firms are at least working on a 20% loss rate on their investment.
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A number of new and innovative venture capital models have emerged in the industry, but current myths have persisted, at the expense of the innovation economy that is so important to the United States and beyond.
Let’s explore the five most pervasive myths of the venture capital industry, and discuss how to reconnect the industry with growth that combines financial performance with positive global impact and a more inclusive sector.
Myth #1: Pattern Recognition
Sounds like a good idea at first: An idea has worked in the past, so invest in products that look like it again.
It is your selection bias that works against you at the expense of your success. I hear it all the time in meetings: “It doesn’t remind me of anything that has worked before.”
This doesn’t mean you can’t find a niche – if the industry resonates with you, stay with it. But if your entire portfolio is led by white men or people from a particular first-rate university, it’s safe to say that you have trouble recognizing patterns.
Myth 2: You fail to advance, you fail quickly
Any entrepreneur has a story about a time when he ran full force forward into a brick wall, only to dust himself off and try again – but what is often not mentioned is the privilege of being able to fail while still being trusted about the right to venture yet, After.
For most entrepreneurs, failure can destroy lives, lose money, and let down communities. When the stakes are high, wouldn’t you choose to play it safe?
The industry needs to provide better access to early financing and portable benefits to entrepreneurs. Many entrepreneurs succeed today because of family safety nets – but this is not the case for every entrepreneur.
Myth 3: Repetition rates and the law of power
Many venture capital firms operate under what is referred to as the ‘authority act’. This basically means that out of 10 trades, you should expect to lose money on seven, find moderate success on two of them, and get one crown gem that returns all the money.
This works for some funds. But this is not how the entire sector works. There are multiple versions of success in entrepreneurship. In my experience, if you can turn a $1 million investment into a $5 million investment, that’s a good day. If you do this consistently, you can build an excellent portfolio across the board, without any unicorns.
Does this sound boring? If so, that’s okay. While this tactic may not get you regular Forbes cover stories, it’s a necessary industry shift. Venture capital as a sector cannot be relied solely on companies that make headlines to be successful.
Myth 4: Entrepreneurs as a customer
Entrepreneurs, this may be a rude awakening, but in your relationships and negotiations with venture capitalists, you are not the customer: you are the product.
It’s easy to forget that all venture capital money comes from LPs who supply them with cash, and venture capital’s job is to find the entrepreneur and producer who will help them return that money to the LPs.
In most cases, this dynamic continues throughout the working relationship. Even as you gain more strength and grow a successful business, you are still the product – only the product that works.
Myth #5: “it” operator
To ordinary people, tech entrepreneurs might seem like a bunch of cute hoodie-clad heroes who know exactly what to do or say in any situation — and if they show any weakness, they don’t have what it takes to succeed in business.
When we launched our studio in 2009, I got feedback early on that any founder who agreed to be part of the studio might not have “that,” because they admitted they needed extra support. The myth of charismatic genius is fading. Now, the most successful venture capitalists in the industry are those who understand that even the most powerful founders need the support of their teams.
The future of venture capital and entrepreneurship
We are at a turning point in VC. We can stay stuck in the cloud of myths surrounding the work we do on a daily basis, or we can continue to grow, innovate, and expand on the kinds of ideas and entrepreneurs we work with.
Some of the most important solutions to the biggest problems facing humanity as a whole come from the startup economy. We must conquer this opportunity to achieve better results from the founders and entrepreneurs.
Oliver Libby He is co-founder and managing partner of H/L Enterprise, is a studio and project that helps mission-driven founders build inspiring and valuable companies.
Illustration: Dom Guzman
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