Have you ever heard of Roy Sullivan? He was a Virginia park ranger who was struck by lightning seven times during his lifetime, a world record. He’s also, in my view, the epitome of an outlier.
As businesspeople, it’s critical for us to be able to differentiate the outliers from everyone else. Otherwise, it’s tempting to follow those at the fringes — which can lead us to make some pretty bad decisions.
Venture capital (VC) is a great case in point. If you read businessnews headlines, you probably think that it takes millions of dollars from a high-profile VC fund to get a business off the ground. But companies like Facebook, Twitter and Uber are outliers, not benchmarks that the average entrepreneur should follow. Outliers generate great ratings and receive a lot of media attention, but they are less valuable for career advice.
Here are three reasons why you shouldn’t count on VC:
- You won’t get it.
Less than 2 percent of all small businesses receive venture funding. So if your business plan depends on raising VC money, you are starting the entrepreneurial process with only a 2 percent chance of success. And that is before even taking into account the inherent risk of failure that already exists with starting a business.
Because VC funds generally look for extremely high returns, most business ideas simply won’t interest them. It’s a game of high risk and high reward, only allowing for huge outcomes or total failure — moderately successful businesses are not part of the VC scheme. You may have a great idea that will turn into a profitable company, but unless it promises to be worth hundreds of millions or even a billion dollars, you’re not likely to even be a blip on a VC firm’s radar. And your odds of starting a $1 billion business are even longer than the odds of that lightning strike: around 1 in 1.6 million.
- You don’t need it.
The good news is that you don’t need to raise VC funding to build a successful business. In fact, 93 percent of Inc. 500 companies — the fastest growing private companies in the United States — are notventure backed. Even more surprising: 60 percent of Inc. 500 CEOs launched their businesses on less than $10,000.
If that fact alone is not enough to convince you, consider this: more than 75 percent of venture-backed startups fail no matter how much funding they receive. Despite gathering $340 million, chances are you’ve never heard of Pay By Touch. And the list is endless. For every Facebook, there is Friendster. For every Instagram, there is Color. And for everyGoogle, there is SearchMe and Cuil.
- The best VCs are your customers.
The far better way to start your business is to do just that: start your business. Start providing a service. Start selling your product. Start generating revenue.
Instead of looking for large infusions of cash, look for people who want to pay for your service. People are willing to pay money if you can solve a real problem for them, so relying on revenue right off the bat is the surest way to know whether your business can succeed. It’s instant validation of your concept, regardless of whether you actually need the cash.
It also allows you to scale as you grow. As more customers pay for your service, you can hire help to meet the growing demand. You get to put your all into your company instead of fundraising. Success does not have to look like hundreds of millions or a billion dollars; it can be creating a business that can sustain itself at any level.
I’ve written before about how Papa John’s got its start. Founder John Schnatter decided to start his own pizza delivery service in an Indiana town with plenty of competing pizza delivery services. But Schnatter knew he could make better pizza than the others using fresher ingredients — and customers agreed. He started out in 1983, working in the broom closet of his dad’s tavern. In 2013, his company generated $1.4 billion in revenue and had more than 4,000 restaurants worldwide.
So rather than spending time dreaming about that $1 billion valuation, find a niche and provide a service better, faster or more affordably than anyone else. The clearest path to success is to grow as demand grows. It may not be as glamorous as the headline with the mind-blowing VC deal, but in the end, slow and steady wins the race.