Experiences with venture capital as non-pattern matching entrepreneur
As a result of the recent Alley Boost diversity in technology event, I have been asked to write about my experiences as a minority Entrepreneur in the Start-Up World and my opinion on how to solve the lack of diversity problem. What I am coming back with is addressing a problem that is bigger than just black and white(literally and figuratively) but a systematic approach that leads to the infamous tech bubble and it’s bursting.
Today we can use sites like Crunchbase, Angellist, and LinkedIn to gather data and find patterns. Statistics stand that 1% of minorities and 3% of women are able to raise capital. But looking deeper at the data, aside from gender or race, there is an obvious trend where 70% of founders that get funded went to the same 15 schools in the country. According to this Quora response, you should try and match a Zuckerbergian archetype. The problem of Entrepreneurship and Venture Capital is about pattern matching pedigree over the idea and execution, in which women and minorities suffer the most. Many entrepreneurs regardless of race, age and gender, who have been successful in their own rite will be able to relate to the experiences below.
My Experiences in Start-ups With Pattern Matching Founders
I have worked for several start-ups and have been interviewed by several start-ups that I elected not to join. I have seen “the good, the bad and the ugly” and learned the warning signs of what to avoid.
The first start-up I joined after college was an incomplete concept to help businesses get feedback on ideas for potential products before creating them. The founder, a young white male, managed to raise around $1 million in funding just from an idea in ‘stealth mode’. The product had 2 unsuccessful rebuilds & launches, I left a year after working there. While working there, I realized that leadership ‘solved’ problems by throwing money at it. Today, the original founder never got his idea off the ground and is no longer the CEO.
Instagram and Uber
As a developer I’ve been asked to join several other start-ups founded by young white males with great pedigrees that got funding with just an idea but no product, traction or experience leading. One was a mobile app like Instagram(Harvard Graduate), another was a betting application, and there was also a car service like Uber(MIT Graduate). All big ideas that another start-up successfully executed. Out of curiosity I followed them, 2 of them never launched and none of those start-ups are around today.
While I can name a dozen more examples like the recent Stanford graduate I connected with this past week that raised $10 million for a 3-year runway for a product that is not yet launched, there are larger public ones you can read about in the news like Clinkle (Zuckerbergian Stanford student again) that raised $30 million for an idea in stealth mode. While Clinkle and it’s 30 million dollar investment went up in flames, there is an obvious disparity when on average minority women struggle to raise 36k,and no one is making noise that some of that 30 million could go into equally deserving companies.
Stanford, MIT and the Ivy Leagues are all great schools.Good ideas are nice but running a company, executing, facing challenges and competing is hard. Having a great pedigree in the form of great job, great education and the right connections does not qualify a person as an Entrepreneur. As the saying goes “just because you are a great Indian does not make you a great chief.”
My Experience With Sprout Connections
My current Start-Up, Sprout Connections, is not my first start-up, it’s my fifth. Since college, I have brought several products to market and gained traction, without funding. Some ended because I ran out of money, others ended because a competitor gained an extreme unfair competitive advantage, and some because of a lack interest. But each time I have come back, the ideas and execution improve.
My experience trying to get funding can be described as a never ending carrot chase and a never-ending supply of contradicting opinions. If you are an entrepreneur, how many of these can you relate too?
I Was Told: Build an MVP with some users and you will get funding.
What I Did: When I first started Sprout in late 2014, I wanted to solve the problem of businesses making connections. The first niche I went after was the Chamber of Commerces. After about 3 months of chasing several chambers down I finally managed to wrangle one in. I thought others would follow suit but I discovered Chambers are a slow moving, declining industry and I needed to go after something that was open to innovation and growth.
After I conducted a focus group, I started to go after networking groups in the Fairfield County area. At this point I had some revenue coming in and I had gotten about 15 organizations and 10,000 users.
What I Was Told Next: You have to be able to scale the platform and not be there for a sale. Prove that and you will be fundable.
What I Did: I pushed forward and started to expand into NYC and then into San Francisco. San Francisco was purely to prove I could grow the product without being there. 190+ organizations have signed up with Sprout Connections, many through the network effect. Yes I created a network effect. 65k users have signed up as well — which is high for a B2B product. So I went back thinking I was ready.
What I Was Told Next: You need a team. We invest in teams. Build a great team and we will invest in that.
What I did: That’s when I started to make a few mistakes. I built the wrong team, which had to be disbanded because they lacked experience and needed a lot of micromanaging. I tried to build too much into the product and started to lose customers, and I started to run out of money. So I decided to stop selling and work on the product and went back to work to build my reserves.
I brought on a new partner who is great to work with. We’ve pivoted again to have a clear and unique value of being a social lead generation platform, we have a clear exit strategy, and have even developed intellectual property. I’m a programmer who:
- Built an entire product by himself
- Taught himself to market and sell
- Established an executable growth plan and exit
- Then had to be charismatic enough to build a team with no money.
Ok I think I’m ready to go raise
What I Was Told: We want revenue of at least 10k a month.
What We Are Doing: We already had revenue before we were asked to produce any, it just was not 10k. So now we are 2 guys, one programmer and one sales guy, in our spare time growing the platform in both revenues and users. The silver lining is I’ve learned an incredible amount because I figured a lot out without any money.But the question that burns in the back of my mind is, ‘Am I being held to the same standards as other founders?’
The Meritocracy Myth & Big Picture
The Mind Blown Moment
If this article turns into a rash of super charged unfocused comments, focus on this key point. Depending on pedigree and how you pattern match, you are more likely to be given “money to figure it out”, which can often determine which companies become ‘successful’ irrespective of the validity or quality of the idea. Without the pedigree, you are not given the same opportunity and resources to “figure it out” but are required to meet a higher level of success. This disproportionality supports a perception of where ‘successful companies’ come from through a pattern matching system that erroneously validates itself.
The above is the opposite of what an achievement based meritocracy should look like.
Let’s look at the bigger picture. LinkedIn received funding when it had only 80k users and no revenue. Facebook, Twitter, and many other large tech start-ups went years without any revenue. For example, the successful app Instagram which was founded by 2 Stanford graduates (see the pattern) had 500k invested before they had proven people wanted to share photos and initially (before a pivot), it was a check-in app called Burbn.
Three questions that should be asked is:
- Would my counterparts be able to execute if they had the same lack of resources as me and other non-pattern matching founders?
- Would I and other founders be more successful if we had the same amount of resources as the founder that have received funding?
- Am I a better entrepreneur because of the amount I’ve learned and accomplished without money?
How To Solve The Problem
The reason why change does not occur is because it does not hurt nor is there is a perceived problem. At the diversity in technology event that prompted this article, only 1 VC was present.
VCs want a return in 1 out of every 10 companies they invest in. It’s really 2 in 10 because they want one exit at 30x and another exit at 100x. But 2 for 10 is still low, I wish I could pass school with a 20% average. There is enough data today where they could adjust their pattern matching (stereotyping) and that would likely increase their results to 6 out of 10. When that happens, 1 out of 10 success rate would be considered a failure.
To solve the problem, minorities, women and other non-pattern matching entrepreneurs have to come together as a community first and change our strategies. Because VCs want a 10–50x return on their investment, they will likely block smaller exits, wait around 10 years for what they deem as the right exit strategy, and a 75% chance of you getting replaced as CEO. We should avoid venture capital and only go for angel and seed rounds with the aim for short exits within 2–4 years and under $30 million. Yes I said it, ‘build to flip’ — a strategy that can be life changing to the Entrepreneur but does not align with a VC’s goal.
Afterwards we should then re-invest our smaller gains back into the community to produce the same kind of exits and grow from there. We can create our own self-sufficient start-up ecosystem if we find a way to execute together. If Venture Capitalist see there is a success outside their pattern matching and they are not part of it, we have successfully created a pain point.
To be blunt, when investors say they invest in “people and team”, according to the statistics that is clearly translating to pedigree and arguably gender and race. But to any entrepreneur reading this I want you to think like this: pedigree greatly improves your chances of getting VC funding as an entrepreneur, it does not define you as a successful entrepreneur as the many problems you will face cannot be solved by throwing money at it.