In Silicon Valley’s Unchecked Arrogance, Ross Baird (Executive Director of Village Capital) and Lenny Mendonca (Director Emeritus at McKinsey) boldly ask an important question that’s becoming a white elephant in the Silicon Valley pitch room: How can we enable great people, regardless of zip code, to solve messy societal problems?
To get to an answer, as investigative journalists would say, we need to follow the money. Baird and Mendonca ask, “How do we change ownership structures to prevent Snapchat, Instagram, and WhatsApp from distributing billion-dollar windfalls among only a couple dozen people?”
Perhaps we need to go further back — before the big valuations — to the inception phase of a startup, and ask the question: Why are startups seeking venture capital rather than other types of funding?
Let’s start by saying that venture capital is, of course, an essential component of a flourishing entrepreneurial ecosystem, giving companies the means to grow exponentially over a short period of time. But here in Silicon Valley, we’ve propagated the myth that value (i.e. market cap) and success (i.e. exit) can only be tied to venture-backed startups. We espouse that more venture money needs to flow to more businesses — full stop.
But this philosophy is inherently flawed. If we want our brightest minds to tackle society’s biggest problems, we need to move away from the notion that being venture-backed is the only way to build a successful company.
This is partially because venture capital has its limits. It’s almost exclusively available in cities like San Francisco, New York and Boston. As Baird and Mendonca note, “78% of investment in startups goes to three states (New York, Massachusetts, California). While in the past 20 years startup investing has increased 300% in those states, it has actually declined in the other 47 across the country.” As a result, entrepreneurs inherently become geographically siloed from problems that need solving in the rest of the country.
And perhaps more importantly, being venture-backed often encourages entrepreneurs to chase disconnected valuations and single paths of growth strategy that may not be in the best interests of the founders, their businesses or the industry overall.
It doesn’t have to be this way. What if entrepreneurs were told that success is actually determined by how you define it? Being venture-backable implies certain characteristics: a $1 billion-plus market, exponential growth, spending excess capital and having a strategy for a major liquidity event within a predefined time frame.
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