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The Myth of Venture Capital

7 May 2008 3,359 views 8 Comments

In highly entrepreneurial hot spots like Silicon Valley, San Francisco where I grew up, Route 128, Washington DC, Seattle, Los Angeles where an impressive raft of social networking and new media startups has sprouted, and biotechnology-focused San Diego, critical mass of entrepreneurial activity organically attracts venture capital. In other words, a rich “ecosystem” – where entrepreneurs can assemble readily available capital, talent, and relationships – can only come about when entrepreneurs first satisfy the initial criterion of creating innovation and value to a significant degree. In emerging hot spots such as Colorado, Utah or “Silicon Slopes” where I currently reside, New Mexico, and Pittsburgh, the march towards critical mass is accelerating and their ecosystems are becoming more robust.

NVCA Report - Fastest Growing Regions for Venture CapitalWhen critical mass is achieved, the eagerly welcomed venture capital that forms to service innovative startups becomes a hot topic of conversation. Networking groups begin to get together to talk about how to raise money from venture capitalists. “Consultants” come out of the woodwork claiming expertise in helping new companies attract venture capital. Venture capitalists are looked upon as “masters of the universe” and treated like rock stars. University business school programs institute curricula aimed at instilling students with an understanding for the process. MBA grads and finance majors from those same university business schools decide they want to become venture capitalists. Local business magazines hyperventilate upon the sexy subject. Entrepreneurs talk in awed tones about their peers who have successfully attracted funding. Angel groups form and hold workshops or seminars about the process of fundraising. Websites with glossaries of mysterious VC lingo spring up out of nowhere.

We have glamorized venture capital beyond reasonableness. We spend an inordinate amount of time, energy, and attention on the subject of venture capital and end up mythologizing it. Because we talk about it so much – in such reverent tones – entrepreneurs unfortunately fixate on it at the expense of other critical components to building great companies. Would-be entrepreneurs start to reason that they must get venture funding in order to “really do something.” It is a convenient excuse to do nothing. Because we talk about venture capital so much, some of us start to see raising capital as the ultimate measure of success. “If I could just raise one million dollars, things would be different.”

Cartoon - Venture Capital and Square Wheel

Can we talk less about venture capital and more about great ideas and business building? Sure there are some programs that mix in subjects like building a great management team, hiring best practices, networking and relationship building, but venture capital gets the overwhelming majority of attention. What we need more of are entrepreneurs with the ability to figure out if their pet idea is something worth pursuing. At the very least, we need workshops and seminars that help entrepreneurs figure out if their idea, frankly, sucks. We need to talk more about making sure that our ideas are unique and bring some sort of new value to the world. We need to talk about how to execute better than your best competitor. We need entrepreneurs that can focus on the essentials of building great companies.

What entrepreneurs ought to realize is that venture capital follows true innovation and execution. It goes where the action is. It does not precede the action. Entrepreneurs who are willing to put the work in to become savvy about the whole process will come to understand that raising venture capital is relatively easy when compared to out-thinking and outrunning your best competition. It is much easier than keeping customers ecstatic. Raising venture capital is immensely easier than finding and acquiring the scarcest resource of all, great talent. Raising venture capital is not the end game. We need to stop perpetuating the myth.

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  • Matthew Reinbold said:

    Another great post.

    I agree, in a perfect world venture capital follows true innovation and execution. But what about those venture capitalists who invest based on buzzwords? Who are more concerned that their portfolio ‘has a Facebook-play’ than the opportunity to create real value?

    Is that just proof that fools and their money are soon parted? Or am I assuming that copycat deals and investing in the flavor of the week is a bigger problem than it really is?

  • Allan (author) said:


    You’re absolutely right. There are VCs out there that behave like lemmings. There are also a select few funds that think independently and find the best entrepreneurial teams and opportunities. But that’s not the entrepreneur’s problem is it?

  • Matthew Reinbold said:

    Actually, I think that’s a big part of the problem. Bad behavior is rewarded by lemming like funding. Bubbles arise because those with money are no longer making prudent decisions with their dollar votes. And because the carrot (sometimes) is to parrot the last thing that had an exit (rather than true value creation) entrepreneurs go where they’re led.

  • Grace Chen said:

    Allan, you make a splendid argument. Being intellectualized in the Bay area really demonstrated to me how glorified venture capitalists were. Whereas exit strategy is indeed important, the tremendous emphasis VCs place on this element does not necesarily bode well for solid business ideas or longevity. With the increasing competitiveness of VC firms themselves, perhaps the tables will turn in favor of the great entrepreneur.

  • DJ Burdick said:

    Well said. We just raised a round from a VC in the valley. There are positives and negatives to everything and the negatives of the VC industry definitely get overshadowed by the myth of VC funding = success. The bottom line is: Focus on your company, make it great and the money will come.

  • Don’t Pitch VCs Early « said:

    […] your side and at that point, you can get a deal done that you want. The industry tends to have an inordinate amount of hype around it. Remember that there are just as many positives as there are negatives with taking investment […]

  • Don’t Pitch VCs Too Early « said:

    […] your side and at that point, you can get a deal done that you want. The industry tends to have an inordinate amount of hype around it. Remember that there are just as many positives as there are negatives with taking investment […]

  • DJ Burdick said:

    PS: hope you don’t mind, I grabbed the same comic for my post. Best, DJ

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