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Where Is Entrepreneurship Headed? | Technological Leadership Institute

Posted on
September 30, 2019
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Do a Google search on the future of entrepreneurship and 129 million results show up. There seems to be a common theme to many of the articles, and the one by the Kauffman Foundation, seems to be a good summary. In essence, most are doing evolutionary forecasting and extending current trends, which seem to be pointing in three directions.

The first is on the number of ventures started and the impact of demographics. Although many lament about declining interest in entrepreneurship as evidenced by an occasional fall in the number of new ventures, my previous observation was that entrepreneurs are not fools – they launch ventures when there are more opportunities. And there are more opportunities when high-potential industries, such as the Internet, are emerging.

The second direction is the geographic dispersion of high-potential venturing, including the availability of venture capital, which looks at how to increase the availability of venture capital outside the top three centers of California, New York, and Massachusetts. While discussing the "shortfall" in venture capital, these analyses mostly neglect the fact that high-potential opportunities are needed for VCs to succeed. And high-potential opportunities are created by high-performance entrepreneurs, not VCs. VCs add fuel to an existing fire.

The Kauffman article also covers the “new nature of entrepreneurship” and one of the points made is that the number of jobs created per billion in sales has changed over the years. It points to the difference between Kodak (75,000 jobs when it reached $1 billion in sales) and Facebook (6,300) jobs) and adds that the dollars are not adjusted for inflation. When you do adjust the dollars for inflation, the difference is minimal. A dollar in 1962 when Kodak reached $1 billion is worth about $8.30 today. Divide 75,000 by 8.31 and you get about 9,000 – not far from Facebook. And Kodak sold a product. Facebook does not sell a product. Only eyeballs.

But these are small points when compared with the major point that most of these articles are missing and entrepreneurial educators who are concerned about the future of entrepreneurial education should consider.

The current model of entrepreneurial education is the opportunity-based, innovation-focused, VC-funded method, which has infiltrated the world of entrepreneurship and entrepreneurial education to such an extent that winning a pitch contest and getting financing from investors, especially at a unicorn valuation, is considered a mark of success. But are we nearing the end of this era?

To evaluate this issue, it would be useful to understand the previous four eras:

  • Pre-VC: Pre-1946, ventures, like GE, had to fund their ventures with funds from savings, family, cash flow, angels, wealthy families, or investment bankers.
  • 1946-1958: The VC industry started with the founding of American Research & Development, the first VC fund. VCs could provide large amounts of funds to accelerate high-potential ventures. These funds laid the foundation of the present-day VC industry.
  • 1958-1979: In 1958, the U.S. government-funded the SBIC program to expand the VC program. The SBIC program had many successes, including Cray Research and Bank SBICs offered early stage VC and the others mainly offered late-stage funding. MESBICs offered VC to minority-controlled ventures, but this program was terminated due to a high level of failures.
  • 1979-Today: The current-day institutional VC industry, with VC limited partnerships, started in 1979 with the change in ERISA that allowed pension funds to invest a small part of their assets in VC funds.

This fourth era of entrepreneurship, that focuses on the opportunity-based, VC-funded method, cannot last much longer because:

  • VCs are very selective and only fund about 0.1% of ventures – 99.9% do not get VC
  • 97% of VC funding is provided after Aha – entrepreneurs need to know how to get to Aha with skills
  • Despite being so selective, 80% of VC-funded ventures fail – VC helps 0.02% of ventures
  • Only about 1% of VC-funded ventures are home runs, and early stage VC funds mainly fail if they don’t fund home runs. Interestingly, one of the funds that was an early investor in Google ended up breaking even
  • About 20 VC firms earn most of VC profits because they finance these home runs. These 20 are mainly located in Silicon Valley because that’s where most home runs are
  • Entrepreneurs who do get VC do better by delaying it and keeping control of both the venture and the wealth created. They do so by using skills to improve the opportunities, by developing the best strategies, and by executing to dominate.
  • The VC industry has become a very selective Silicon Valley casino where a few ventures get VC, and even fewer ventures, most of which are in Silicon Valley, win the jackpot

This suggests that VC success has concentrated to the point where very few VCs fund very few ventures, and even fewer VCs and ventures succeed. The 0.1% of ventures that get VC can do better by using skills to delay it. The 99.9% that do not get VC can do better by acquiring the skills to be capital efficient, grow with limited capital, and take off without VC. That’s what 94% of unicorn-entrepreneurs did.

This suggests that the next era of entrepreneurship will be skills based. Although the VC-funded method has garnered a lot of attention, the skills-based method has a longer record of success and is more useful for all entrepreneurs. Unicorn-entrepreneurs, from Sam Walton to Thai Lee, built unicorns without VC. Unicorn-entrepreneurs, from Jeff Bezos to Jan Koum, built unicorns with delayed VC. All used finance-smart skills and capital-efficient strategies to take off without VC.

Blending of finance-smart skills and alternate-financing strategies can allow more unicorns to grow outside Silicon Valley. Teaching the right skills and smart strategies can help more entrepreneurs develop more growth ventures. By teaching skills to grow more with less, to get controllable financing before Aha, and growth financing after, entrepreneurs can keep control of their venture and of the wealth created – like Zuckerberg.

MY TAKE: Having spent a lot of time in entrepreneurial education after financing ventures for 23 years, I have found that academics follow practitioners. Currently, academics use the innovation-focused, opportunity-based, VC-funded method. They will start following the skills-based, entrepreneur-focused method after the practitioners start to use it. Entrepreneurship will change first. Entrepreneurial education will follow. The hallmark of entrepreneurship seems to be that do-ers are leaders and teachers are followers.

Dr. Dileep Rao has more than 20 years of experiencing financing businesses and ventures using venture capital, leases, debt and subordinated debt. He also bought and turned around several companies. Since retiring, he has been writing, teaching, and hopefully thinking. He has also interviewed extremely successful entrepreneurs such as Glen Taylor and Bob Kierllin. Currently, he is writing books about how to build giant businesses without capital. Dr. Rao teaches in the Master of Science in Management of Technology degree program.

This article was originally written for Forbes, and republished with the author's consent.

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Dileep Rao, PhD

TLI Faculty

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