Whenever the topic of small business and entrepreneurship comes up, someone always has to mention the failure-rates of those ventures. So when I picked up the The Technology Entrepreneur’s Guidebook and started reading the first article, I rolled my eyes when the author unsurprisingly started off with this mumbo-jumbo:
"Only 1 in 6,000,000 high-technology business ideas wind-up in an IPO"
High-technology business idea - that's a pretty general description! Are these real businesses? Or are they just ideas? If they're real, are we including every business in that number or just the ones that attempted an IPO and failed. There are a buttload of real businesses that were never meant to attempt an IPO, do we consider them a failure because they couldn't reach that size? Does having an IPO mean the business is awesome and profitable? No it doesn't. So what does 1 in 6,000,000 actually tell us? Squat! It means squat.
How about this one:
"Less than one percent of business plans received by venture capitalists get funded"
Really? Are we to assume that 99% of businesses are never funded? What about bootstrappers? What about angels? I'll bet they're double-counting here too. For example, entrepreneurs share their business plan with more than one VC, but may only accept an investment from one or are only offered an investment from just one. I also think there is enormous amount of deals that are done that never involve VCs. What about the businesses that would have succeeded had they been funded? This last question reminded me of something Jay Turo from Growthink, Inc. once explained regarding venture capitalists. He said,
"Venture capital funds are usually 7 - 10 year partnership structures whereby the general partners, the VC’s, manage the capital of the limited partners, usually institutions (endowments, pension funds, etc.). And at the end of the period, all profits and proceeds are distributed to the various partners on a pre-determined split. These splits are normally such that the general partner professional money managers need to obtain a “highwater” return for their limited partners before they, as the general partners, see any return. beyond their management fees In practice, this creates a huge incentive for the general partners to hold on for home runs, and to be reasonably indifferent regarding smaller (less than 3x returns). As a result, the VC will often block a portfolio company from harvesting a very attractive, but not a home run, investment return."
The next time entrepreneurship comes up in a conversation and some naysayer starts spouting off 'facts' about businesses failing, just tell them to [insert witty rebuttal here]. And that concludes my first blog assignment.
