The Rich Boys Club
Hasan Shami- Entrepreneurship has always been an exclusive club, and when I joined the investment world - what feels like a few lifetimes ago - my goal was to make this club more inclusive and empower the non-ivy-league camp.
Funnily enough, over 90% of the investments I made have been with those who are quite privileged; i.e. ‘the rich boys club’.
Investors love underdogs, so why is capital chasing the rich?
One would assume that this has to do with education, exposure, and founder networks. However, reflecting on this notion, it actually boils down to one thing; rich boys can afford to fail.
To better understand such a socioeconomic dilemma, we first need to look into the commercial value chain and the risk profile, stage by stage, for each stage. We need to understand how investors think.
Working as an investor, I ultimately have one job; managing risks.
Your success rate goes higher as you move up in the value chain.
The success rate of the idea stage falls, at best, between 5% and 7%*1. Yes, you heard that right; statistically, for every 100 novel ideas out there, only five to seven will see the light. Most institutional investors don’t get involved at this stage given the high level of risk. Therefore, this stage is typically developmental and not commercially driven.
Statistically, 77%*2 of financing for entrepreneurs is sourced by savings and only .05%*2 of startups raise venture capital funds - the rest are mainly friends and family.
In other words, unless you have a hefty bank account or parents with deep pockets, you are unlikely to get the chance to finance and explore different entrepreneurial ideas because you can’t afford to fail.
Success ratio, however, goes up to between 10% and 30%*3 after a business venture hits the revenue stage, and your chances become much higher for onboarding institutional investors.
So, the one-million-dollar hack is to move to revenue stage as quickly and economically as possible. And, if you happen to solve a problem at scale, investors will run after you.
It’s interesting how we live in a world where failure is frowned upon in the venture space, despite the fact that we regularly experience failure as we go about our everyday lives - whether in jobs, projects, relationships, etc.
Many successful entrepreneurs I met have at least tried and failed once. One good friend jokes about how his parents covered the costs of his first three ventures to keep him busy, and he only made it big on his fourth.
Failing obviously makes us better; you won’t get to know all the answers, but you will learn what not to do (even fund managers favor second-time founders as part of their selection criteria).
Besides promoting failure, as ecosystem builders, we also need to improve the statistics so as to allow more investors to step in - the very low 5% to 7% at pre-seed success rate just doesn’t look too great.
So, what can we do?
42%*4 of startups fail due to lack of market need.
Unlike typical accelerators and incubators, which work with entrepreneurs to develop their business ideas and ventures, a venture builder is a group of wise humans who identify market gaps first, then onboard founders in order to build the product. They also help ventures reach the sales and revenue stages as soon as possible and prepare them for the next financing round.
Founders at venture studios are paid for their time.
Venture building is on the rise and, unlike most accelerators and incubators, venture builders can be commercially viable, and more private money is being poured into this investment vertical.
I’ll probably elaborate more about venture building and how ecosystem builders can accelerate this vertical in another article. But, for now, if you have a good idea and no wealthy parents; what can you do?
Fail as Quickly and Cheaply as Possible
1- Rule number one; understand the commercial value chain.
2- Articulate your idea on paper; your thoughts only matter when they are jotted down.
3- Understand that business is more than a product; there are plenty of materials online like Y Combinator*5 - which have a rich library (enclosed below) - so prepare, prepare, prepare.
4- Study your market well; investors only partner with founders who know their market better than them.
5- Sell before you make; build a Minimal Mockup Product and go to market as soon as possible. If you are in hardware, build a prototype; if you are in software, build a landing page. By mockup, you only create what allows you to approach customers and then pre-sell to customers to finance product building. If this approach is good enough for Elon Musk*6 - it’s good enough for you. The idea is to generate revenue and reduce commercial risk as soon as possible.
6- Fail as quickly and cheaply as possible; don’t spend more than a few hundred dollars to build your Minimum Mockup Product. If you are unable to pre-sell your product, then it probably has no market fit and is not solving a real problem. If that’s the case, drop and repeat.
7- If you are in Jordan, reach out to Oasis500*7 and Flat6labs*8 - both incubators cover the idea stage.
8- And last, but definitely not least, never give up!
Source 1: https://www.wipo.int/edocs/mdocs/innovation/en/wipo_ifia_kul_96/wipo_ifia_kul_96_1.doc
Source 2: https://www.fundera.com/resources/startup-funding-statistics
Source 3: https://www.entrepreneur.com/article/288769
Source 4: https://www.cbinsights.com/research/startup-failure-post-mortem/?utm_campaign=cbi-social&utm_content=173297792&utm_medium=social&utm_source=linkedin&hss_channel=lcp-1140722
Source 5: https://www.ycombinator.com/library?categories=Becoming%20a%20Founder
Source 6: https://www.forbes.com/sites/jlim/2016/05/25/sell-before-you-make-it/?sh=82fc08b52d82