Elizabeth Holmes of Theranos with the Rich and the Powerful (Photo by Andrew Burton/Getty Images)
Silicon Valley has built great companies and created huge wealth. But does Silicon Valley lie?
#1. Truth or Lie: VCs invest in startups? They do not. VCs wait for Aha when potential is evident. Then, no matter the size of the venture, they call it a startup. Is a 6-year-old company with 700+ business customers a startup? What would you call a company just starting out with no sales? The latter has little credibility – unless they have developed a revolutionary product, such as a miracle drug or medical device. The former has lots of credibility. This can matter because many entrepreneurs think they can get VC to start their venture – at no sales. The reality is that they have to bridge the gap from idea to Aha – with skills and smart strategies if they want to keep control of the venture and the wealth created.
#2. Truth or Lie: Getting VC means success? It does not. 80% of VC funded ventures fail to reach their goals. Getting VC does not mean success. The odds are that it means failure. And dilution. And loss of control.
#3. Truth or Lie: VCs know how to build big businesses? Some do. Sometimes. About 3% of VCs are said to earn around 95% of VC profits and these top VCs are mainly in Silicon Valley – because that’s where most unicorn entrepreneurs are located. And these unicorn entrepreneurs are the ones who obtain the skills, find the opportunity, develop the strategy, and use limited capital to bridge the gap from idea to Aha, at which point the VCs enter and seek control – and mostly fail. According to Foundation VC, one venture, Netflix, earned more for them than their 199 other ventures combined. Is that skill, or a combination of chance, coordinates, and circumstance?
What about “fake it till you make it?”
One interpretation of the above is that entrepreneurs should pretend to be successful before there is proof of success. This assumes that investors and VCs are gullible and can be deceived by the appearance of success.
Does this work? Here are a few iconic unicorns who did not have to “fake it” if you consider faking it as conning others about the venture’s status and potential:
· Airbnb was started with a unique business model that assumed that people would rent rooms in their homes on a massive scale. Others had done this, but Airbnb was the first to make it into a global trend and allow anyone to become a hotelier. Interestingly, when Brian Chesky tried to get angel capital, he did not attract anyone until he was able to prove that renters were interested, that Airbnb could earn revenues, and that the concept had growth potential.
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· Facebook was started by Zuckerberg to allow Harvard students to connect with each other, followed by students in other universities, and then the world at large. The initial investors were friends and family, who usually invest for love or friendship, and don’t have to be fooled with fake moves. After the concept was proved, Facebook attracted angels from Silicon Valley. And then VCs.
· Google was started by Page and Brin, two students at Stanford with excellent credentials. They got angel capital from investors who were very successful in the computer industry and could understand the genius behind the algorithm.
· Microsoft was started by Gates and Allen without VC. They started by writing programs for others. Then convinced IBM to license the operating system they had acquired on a non-exclusive basis. Then they got VC after they started to take off, not for the capital but to get some venture experience on the board. And the VC could see the proof.
· Amazon.com was started by Bezos with funding from his family and small investors from Seattle. He got VC from a Silicon Valley firm after he launched and was earning thousands in revenues. Bezos had real proof – Aha!
· Walmart was started by Sam Walton with $25,000 from his father-in-law. He developed his brilliant business and financing strategy and used his skills to become one of the world’s most successful companies.
Here are examples where the venture seems to have been more about faking than making.
· WeWork was able to attract a lot of VC, until the house of cards collapsed when they could not sustain the momentum of exaggeration and constant fund-raising.
· Theranos failed when an investigative reporter questioned whether the technology works. Why did a reporter have to ask this question? What about the sophisticated investors who contributed nearly $1 billion in capital?
Based on the above examples, faking does seem to work. Sometimes. For a while. In the case of WeWork, it seems as if the entrepreneur knew how to sell value to investors. Could he have sold value to customers and convince them to pay the rent needed to show a profit?
Theranos seems to be in a class by itself. How can a venture raise nearly a billion to commercialize a miracle technology, suck Walgreens in, and not have to prove that their technology works? Is it the blue-blood pedigree? Is it the Stanford connection that is mentioned in every article about Holmes? Is it the Silicon Valley location where the streets are paved with capital? Is it the looks, race, or gender? The closest comparison seems to be to Bernie Madoff. They both had the talent to convince many investors that they had a unique sauce. But there was no “there there.”
MY TAKE: If you are going to fake it till you make it, make sure you are not faking it to yourself. If fakery is confidence, go for it. But if fakery is lying, reality is likely to catch up.
