I have always been bullish about the spread of entrepreneurship as a global phenomenon. My organization has worked diligently towards propagating the lessons learned from successful entrepreneurs to those coming after, on a global scale. It has been thrilling to watch the world adopt entrepreneurship as a key tool for economic development.
One of my worries have always been that the Silicon Valley disease of equating entrepreneurship with venture capital financing will also spread, corrupting and misleading inexperienced entrepreneurs around the world.
Well, I am very sorry to report that the disease has, indeed, spread.
In fact, it is now an epidemic.
Last week, Nick Bilton wrote a comprehensive analysis of the Unicorn bubble in Silicon Valley in Vanity Fair. These companies, valued at over $1 billion, rarely with commensurate revenues or profits, up-to-the-neck in liquidation preferences, have now become commonplace. Over a hundred at recent count, growing every week, flooded with venture capital, these Unicorns make a grand mockery of the fundamentals: Entrepreneurship = (Customers + Revenues + Profits); Financing and Exit are optional. Most will not exit at these valuations, because the public market is NOT in a bubble, and most large tech companies are neither stupid enough, nor desperate enough to pay those valuations. (May be, Marissa Meyer will. The rest – I am not so sure.)
At 1M/1M, we have always worked with local organizations in various parts of the world to help with their entrepreneurship development efforts. Outside the United States, India has been our biggest geography. Indian entrepreneurs are hungry. It has been very rewarding to help a large number of them tackle the very steep learning curve over the last 10 years, first through my blog, and subsequently through our 1M/1M global virtual accelerator.
I wrote a book called Seed India: How To Navigate The Seed Capital Gap in India in 2003. In it, I had expressed the hope that Indian entrepreneurship would be less speculative, less venture capital oriented, more focused on building real companies, with real customers, real revenues, and real profits.
Well, I am sorry to report that in two years, the market has come to just as sorry a state of speculative bubble as Silicon Valley is in, currently. Valuations have no rhyme or reason, and no anchoring in fundamentals. Investors are showering capital on a few companies like Flipkart, Ola, and Snapdeal at a scale that makes no sense.
E-Commerce in India is still a rather small market, and these valuations also make no sense. And their losses haven’t swayed the investors away. Flipkart has raised $3 billion in funding so far from investors including Tiger Global Management, DST Global, Qatar Investment Authority, T. Rowe Price, Steadview Capital, Greenoaks Capital Management, Baillie Gifford, Sofina, Singapore GIC, Morgan Stanley, Accel Partners, Naspers, Iconiq Capital, Dragoneer Investment Group, and Vulcan Capital. Their last round of funding was held in May this year when they raised $550 million at a valuation of $15.5 billion, increasing significantly over the $1.6 billion that they were valued at back in 2013. Market rumors suggest that now Flipkart is eyeing a Wall Street IPO by next year. They are expected to raise $5 billion through the round, making them India’s biggest IPO.
And the media fuels stories of fund-raising constantly. In fact, that’s the only kind of startup news that gets any coverage, and the more outrageous the raise, the most crazy the valuation, the more absurd the amount, the better. Sensationalizing fund raising is the entrepreneurship media’s favorite game.
Recently, we have closed a partnership with the Delaware State Government’s Economic Development arm, DEDO. Ken Anderson, Director of the program, asked me during the evaluation, a simple question: “What happens if our companies move to Silicon Valley?” My answer to him was that the only reason it would make sense for a Delaware-origin company to move to Silicon Valley is if they seek funding from Silicon Valley investors, and the investors require that they move. The truth is, most of the companies won’t be venture fundable, and they would most likely be building fundamentally solid businesses with customers, revenues, and profits right in Delaware without any need to move. The beauty of 1M/1M is that we do not require them to raise financing and move to Silicon Valley. We don’t deem funding as our success metric. So we’re happy to support these fledgling ventures in becoming sustainable long-term businesses, creating value, creating jobs, all over the world.
Nonetheless, the local media in Delaware, reading all the Unicorn hype and the venture capital buzz, focuses on the financing issue as the key one, missing the overarching point of what entrepreneurship is truly all about.
I had a very similar experience recently with a delegation from the Tamil Nadu government visiting Silicon Valley from India. They came to see me to explore how 1M/1M can help them enhance the entrepreneurship eco-system in their state. And their first question was about funding. As I explained our observation that over 99% of the businesses who go out to seek venture financing are not fundable, they were stunned. I hope the visit was helpful in thinking their strategies through, because people thinking about economic development through entrepreneurship should not be thinking of venture capital as their core strategy. It is an optional piece of the equation. Customers, revenues, and profits are the fundamentals of entrepreneurship.
Unfortunately, as the venture capital obsession spreads like wild fire, and the Unicorn hype escalates, inexperienced members of the eco-system are getting utterly and completely confused. It seems, this unproductive bubble will last for years still, before the market rationalizes, and we get back to the basics.