By Oliver Libby
The world of venture capital is defined by its own carefully constructed mythology: hoodie-wearing billionaires, unicorns and Midas touch investors. But the numbers tell a very different story: Most VC firms operate on at least a 20 percent loss ratio in their investments.
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A number of new, innovative VC models have cropped up in the industry, but the existing mythology has continued, to the detriment of the innovation economy that is so crucial to the United States, and beyond.
Let’s walk through the five most prevalent myths in the VC industry, and discuss how to rewire the industry for growth that brings together financial performance, positive impact on the world, and a more inclusive sector.
Myth No. 1: Pattern recognition
It sounds like a good idea at first: An idea worked for you in the past, so you invest in products that look like it again.
This is your selection bias working against you to the detriment of your own success. I hear it all the time in meetings: “It just doesn’t remind me of anything that has worked before.”
This isn’t to say you can’t find a niche—if an industry resonates with you, stay with it. But if your entire portfolio is led by white men or people from a specific top-tier university, it’s safe to say you have a pattern recognition problem.
Myth No. 2: Fail forward, fail fast
Any entrepreneur out there has a story about a time they ran full steam ahead into a brick wall, only to dust themselves off and try again—but what often goes unmentioned is the privilege of being able to fail and still be trusted for a venture right after.
For most entrepreneurs, failure can destroy lives, lose money and let down communities. When the stakes are that high, wouldn’t you choose to play it safe?
The industry needs to provide better access to early-stage funding and portable benefits for entrepreneurs. So many entrepreneurs today are successful because of familial safety nets—but that is simply not the case for every entrepreneur.
Myth No. 3: Failure rates and the power law
Many venture capital firms operate under what is referred to as the “power law.” This essentially means that of 10 deals, you should expect to lose money on seven, find moderate success in two of them, and have one crown jewel that returns all of the funds.
This works for some funds. But this is no way for the entire sector to work. There are multiple versions of success within entrepreneurship. In my experience, if you can turn a $1 million investment into a $5 million investment, it’s a good day. If you do this consistently, you can build an excellent portfolio across the board, without any unicorns.
Does this sound boring? If it does, that’s okay. While this tactic might not get you regular cover stories in Forbes, it’s a necessary shift for the industry. VC as a sector cannot rely only on the companies making splashy headlines to be successful.
Myth No. 4: Entrepreneurs as the customer
Entrepreneurs, this may come as a rude awakening, but in your relationships and negotiations with venture capitalists, you are not the customer: You are the product.
It’s easy to forget that all VC money comes from the LPs who supply the cash, and a VC’s job is to look for the entrepreneur and product that will help them return that money to the LPs.
In most cases, this dynamic continues throughout the business relationship. Even as you gain more power and grow a successful enterprise, you are still the product–just the one that works.
Myth No. 5: The ‘it’ factor
To the layperson, technology entrepreneurs might seem like a group of charismatic, hoodie-wearing heroes who know exactly what to do or say in any situation—and if they show any weakness, they don’t have what it takes to succeed in business.
When we launched our venture studio in 2009, I got feedback early on that any founder who would agree to be a part of a studio might not have “it,” because they admitted they needed additional support. The myth of the charismatic genius is dying out. Now, the most successful VCs in the industry are those who understand that even the strongest founders need support from their teams.
The Future of VC and Entrepreneurship
We’re at a turning point in VC. We can stay stuck in the cloud of mythology surrounding the work we do on a daily basis, or we can continue growing, innovating and expanding on the types of ideas and entrepreneurs we work with.
Some of the most important solutions to the biggest problems facing humanity as a whole come from the startup economy. We have to jump on this opportunity to do better by founders and entrepreneurs.
Oliver Libby is co-founder and managing partner at H/L Ventures, a venture studio and firm that helps mission-driven founders build inspiring, valuable companies.
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Illustration: Dom Guzman
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