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Should You Flip Or Build?
Venture flipping is venture launch-to-sell. It is the venture equivalent of drag-car racing. The goal is to quickly sell the venture to a strategic buyer who often pays a high premium for a company that fits their corporate strategy. Instagram is a paramount example. It was sold for double the valuation about a week after the VC investment. Mostly the flipping takes longer than a week, as in the case of YouTube (purchased by Google), WhatsApp (acquired by Facebook), and Paypal (bought by eBay). Flipping to corporations usually offers an attractive exit for both the VC and the entrepreneur, but acquisitions have not done very well for corporate buyers. Approximately 70% – 90% of corporate acquisitions are estimated to fail.
Venture building is building a venture without considering it a short-term vehicle for a fast sale. It is the venture equivalent of the Dakar Rally. It rewards smarts, skills, and endurance. The goal is to build a real business for the long term. The 99.9% of ventures that do not receive VC are in this category. And perhaps the 80% of VC-funded failures should have been in this category – and may have selected this strategy if there was a do-over in venture development.
And then there are the unicorns, the rare ventures that become a home run. They are the crowning glory of venture building. Billion-dollar entrepreneurs, i.e., entrepreneurs who build a venture from idea to more than $1 billion in sales and valuation, are venture builders.
The Steps: Flipping vs. Building
Venture flipping’s steps include:
· Identifying an opportunity, including a Minimum Viable Product
· Finding a strategy that works with angel capital
· Launching the venture with venture capital
· Seeking an exit mainly via strategic sale or an IPO (if the venture is a success).
Venture building’s steps include:
· Identifying a potential growth opportunity
· Proving the strategy for growth potential
· Financing with Reverse-VC to grow with control
· Taking off without VC
· Scaling up after take-off – often with VC in Silicon Valley and without VC outside it.
Which is Better for Entrepreneurs?
Venture flipping works well:
· For the 19% of VC-funded ventures that are successful but not unicorns. The VCs who funded these ventures after Aha want to exit at a high valuation. So they flip the ventures to strategic buyers who pay a high price.
· In Silicon Valley where VCs fund a lot of promising ventures, venture flipping is often for ventures that cannot or do not want to go public but have value for a corporation
· In ventures with limited upside potential, which belong as divisions of corporations
· When the venture addresses a niche market, mainly in a hot emerging industry and the dominant unicorn wants to buyout potential competitors and avoid future competition. That is one reason why Facebook bought WhatsApp.
· For entrepreneurs who are looking for a fast return for developing a technology and advancing it to the point where a corporate buyer will pay an attractive premium.
The problems with venture flipping are the odds, which are that:
· The venture will not get VC (~99,900/100,000)
· The venture will fail with VC (~80/100)
· The entrepreneurs will suffer from dilution (100/100)
· The entrepreneurs will be ousted (best estimates are ~30/100)
Venture building focuses on strengthening the venture for long-term growth and domination. The goal is to build a real venture that can survive, succeed and dominate as an independent corporation. If strategic buyers offer a king’s ransom, the entrepreneur accepts it. If not, they keep growing. WhatsApp was a great example. Jan Koum and his partner were building a great venture. When Facebook paid billions, they took it.
Venture building works well:
· For all ventures before Aha because VCs do not fund before Aha – they need evidence of potential
· For the 99.98% of ventures who do not get VC or who fail with VC
· For entrepreneurs who do not want VC or do not need VC – and do not want or need a monitor looking over their shoulder.
MY TAKE: Venture flipping is to focus on the exit. Venture building is to focus on growth. Venture building is better for 100% of ventures before Aha, and for 99.981% of ventures after Aha. Coming up with a minimum viable product and seeking venture capital to scale up works for very few. Entrepreneurs need skills to develop a capital-smart strategy for growth potential till take-off and leadership skills to dominate after take-off.