The previous VC wisdom was “management, management, management.” What they mean is that good management builds businesses and bad one destroy it. To implement this thinking, many VCs replace entrepreneurs with professional CEOs. My analysis of billion-dollar and hundred-million-dollar entrepreneurs shows that entrepreneurs can be trained to build big businesses with reduced needs and without VC. This way they can keep control of their venture and of the wealth they create. The question is whether the entrepreneurs know the skills they need or are willing to learn. Examples include Michael Dell who got a mentor who helped him lead Dell, and Page and Brin who partnered with Schmidt to build Google.

I had the pleasure of interviewing Dileep Rao, a professor of high performance Entrepreneurship at Florida International University, Stanford, the University of Minnesota and INCAE. He has financed 450+ ventures and managed 5 turnaround companies, 4 of which were successful.

Thank you so much for joining us! What is your “backstory”?

I joined a small fund with about $500,000 in assets for a summer job. I became the V.P. of financing and business development in the fall. Over 23 years, I funded over 400 ventures, businesses, and real estate projects via venture capital, loans, and leases. I wrote books on venture financing for the NY Times and American Management Association. After retiring from financing, started teaching entrepreneurship, innovation and venture financing at the University of Minnesota and at Florida International University. Have also taught at Stanford and INCAE (Costa Rica) and in executive MBA programs around the world.

Can you share a story of your most successful Angel or VC investment? What was its lesson?

One was a meat company with annual sales of about $60 million that was losing money and at risk of closing down. We bought the company and turned the business around by adding financial management skills. We sold the business to a group of meat experts. The company was later sold to General Mills.

Also invested in a company that developed the first electronic burglar alarm. This company spun off a company that developed a wireless burglar alarm that changed the industry. The company grew to nearly $400 million in revenues. The original company failed due to product obsolescence.

Lesson 1: In emerging industries, technology always changes and companies need to keep up

Lesson 2: Don’t get out too early. We sold our stake at an earlier stage than we should have.

Another company was a cranberry marsh owned by a Native American tribe that had “gone to seed.” We invested $100,000 and turned the business around and earned many times the investment. Was a primary asset generator for the tribe until casinos came along.

Can you share a story of an Angel or VC funding failure of yours? What was its lesson?

See above story of company that failed. In a fast-changing emerging industry, need to stay at the bleeding edge, or develop an unassailable advantage.

Is there a company that you turned down, but now regret? Can you share the story? What lesson did you learn?

Did not turn it down, but did not accept the offer the entrepreneur offered. This means we wanted to invest in the company but not with the terms the entrepreneur wanted. The company became a huge company and the entrepreneur, who found financing elsewhere, is a multi-billionaire.

Lesson 1: Stick to your analysis because there were others where we were glad we did not budge

Lesson 2: Develop perfect 20–20 foresight to know when to violate your policies.

Which person or which company do you most admire and why?

Glen Taylor/ Taylor Corporation: Perhaps the most well-rounded entrepreneur I have met.

Bob Kierlin/ Fastenal: A great leader who built a giant company by developing the human assets of the company (gives meaning to the phrase: “Lions led by a sheep will lose to sheep led by a lion” — Bob is a lion).

Steve Jobs/ Apple: Perhaps the greatest entrepreneur of the last 50 years for bringing Apple back from the brink and building one of the world’s greatest companies.

Jeff Bezos: Perhaps the greatest strategist and entrepreneur working today

Bill Gates: For making the deal of a lifetime when he negotiated with IBM

Elon Musk: For building multiple billion-dollar ventures

How have you used your success to bring goodness to the world?

Have been an advisor to community development corporations serving low-income Hispanic-Americans, African-Americans, Native Americans, and European-Americans in low-income areas of the U.S. as a consultant to the Department of Health and Human Services. Was amazed to find out that there are parts of this rich country where there are houses without indoor plumbing. Thought that only happened in third-world countries.

Have also trained entrepreneurs in Haiti to develop finance-smart entrepreneurs and grow their businesses with limited capital in a desperately poor country.

Currently working on developing an online institute to train low-income entrepreneurs and others to grow without capital because there are always more dreams than capital. And skills to grow without capital can be taught.

What are your “5 things I need to see before making a VC investment” and why. Please share a story or example for each.

  1. Potential to dominate a high-potential industry: VCs succeed when the venture dominates an emerging industry. Those who do not dominate usually fail. Example: Google beat other search engines including Ask Jeeves and Bing. Facebook beat MySpace. Nearly every major VC success has been in emerging industries or an emerging trend. It is very difficult to make a successful VC investment without one of these. Examples include Intel (semiconductor), Microsoft and Apple (PCs), Genentech (biotech), Cisco (telecom), Google and eBay (Internet 1.0), Facebook, Uber, etc. (Internet 2.0), and Chipotle and Whole Foods (organic food).
  2. Entrepreneur Aha: This is the most important Aha. The previous VC wisdom was “management, management, management.” What they mean is that good management builds businesses and bad one destroy it. To implement this thinking, many VCs replace entrepreneurs with professional CEOs. My analysis of billion-dollar and hundred-million-dollar entrepreneurs shows that entrepreneurs can be trained to build big businesses with reduced needs and without VC. This way they can keep control of their venture and of the wealth they create. The question is whether the entrepreneurs know the skills they need or are willing to learn. Examples include Michael Dell who got a mentor who helped him lead Dell, and Page and Brin who partnered with Schmidt to build Google.
  3. Strategy Aha: Most ventures with a “first-mover” product, i.e. product Aha, have been beaten by entrepreneurs with a better strategy that helps them control the emerging industry. Examples include Jobs, Gates, Zuckerberg, Dell, and Walmart (we financed Sam Walton’s expansion as he grew across the rural heartland). Kalanick improved on his own business model and pivoted from renting cars to building a cab business without cabs. If the venture is relying on the technology, they need a high-potential technology with strong intellectual property rights. Since these are rare, and since most products can be imitated and improved, and ventures with product Aha can be beaten by ventures with strategy Aha, VCs need to make sure that the strategy can dominate the key market segment.
  4. Emerging industry or emerging trend: Nearly every major VC success has been in emerging industries or an emerging trend. It is very difficult to make a successful VC investment without one of these. Examples include Intel (semiconductor), Microsoft and Apple (PCs), Genentech (biotech), Cisco (telecom), Google and eBay (Internet 1.0), and Facebook, Uber, etc. (Internet 2.0).
  5. Potential financial return: Can the investment get a good return? Are the projections reasonable based on proven assumptions? Is there a good way to exit, especially via strategic sales since few companies have attractive IPOs. A good example of this is Facebook, which was growing at such a rapid rate and so dominant in an attractive industry that an attractive return was inevitable. The investors did well.

Can you share your “5 Things I Wish I’d Known Before I Became a VC?”

The best deals are in emerging industries, emerging trends, and Silicon Valley.

Emerging industries and emerging trends create high-growth opportunities for entrepreneur. To succeed, VCs should (and successful ones do) focus on emerging industries and emerging trends.

Most of the successful VC deals have been done in Silicon Valley, in emerging industries and emerging trends. That’s where I would have focused. Silicon Valley has been able to create one of the greatest conglomerations of technology, talent, and resources the world has seen. That’s where the top 50 VCs are located, and it is difficult to throw a stone in Palo Alto and not hit a billion-dollar venture. But NO ONE has managed to recreate Silicon Valley’s VC magic even though some governments have wasted a lot of capital. Outside Silicon Valley, billion-dollar ventures were built by skilled entrepreneurs. Knowing this would have affected our strategy.

Most billion-dollar entrepreneurs have succeeded by delaying VC in Silicon Valley and by avoiding VC outside Silicon Valley. About 90 percent of billion-dollar entrepreneurs in Silicon Valley used VC but about 75 percent of them delayed it. About 90 percent of billion-dollar entrepreneurs outside Silicon Valley did not use VC. It is easier to be a successful angel or VC in Silicon Valley than anywhere else.

Don’t invest your own money in VC. And insist on finance-smart entrepreneurs if you do.

Since the top 4 percent of VCs earn about 66 percent of IPO profits, this means that only about 50 VC funds do well. The others are average or lose money. The reason why only about 50 VC funds do well is that there are only about 15–60 home runs per year, and VCs don’t do well unless they are early investors in a home run. For the top VCs who invest in these home runs, the VC model is great. They earn an attractive management fee if the fund does poorly, and earn a high upside if one of their investments becomes a home run. But most home runs are in Silicon Valley. Silicon Valley angels and VCs who invest in these home runs do well. The others do not. Knowing this would have helped our strategy.

This also suggests that angels and VCs outside Silicon Valley should not follow the VC model. The fact that most billion-dollar entrepreneurs outside Silicon Valley did not use venture capital should suggest that it is possible to build giant companies with skills and not VC. VCs outside Silicon Valley should promote skills-based venture development from idea till Aha, and invest after Aha.

Skilled entrepreneurs with excellent execution build more billion-dollar ventures than “first-mover” ideas.

Everyone has a billion-dollar idea. It’s the business that stinks. Many believe that a “first mover” idea is key to success. The study of billion-dollar entrepreneurs shows that great entrepreneurs imitate and improve on the product or service, develop a very competitive business strategy, and out-execute with excellence. They are not usually first movers. It is not the innovation that prevails. It is the entrepreneur’s skills that succeeds.

These skills cannot be read in their eyes or their business plans. It is only evident in their performance. The best at this was Steve Jobs (see the iPhone, iPod, and the iPad). It is interesting to note that about 12 VCs rejected Steve Jobs and the founders of Google, and over 200 rejected Howard Schultz when he sought financing to buy Starbucks. You only know a successful venture in hindsight. Marc Andreessen invested in Instagram but did not think the prospects looked good. So he invested in a competitor in a following round and avoided investing in Instagram. Instagram succeeded.

The reality is that VCs fail to reach their goals on about 80 percent of their investments and get a home-run only about one percent of the time. Skilled entrepreneurs have a better chance of success than great ideas, pitches, and plans. VCs, especially those outside Silicon Valley, should help develop finance-smart entrepreneurs to reduce their risk of failure.

VCs can build a better portfolio by seeding 1,000 entrepreneurs with skills than one opportunity with capital — especially outside Silicon Valley.

Rather than investing in one opportunity at a very early stage when the risks are high and most ventures fail, VCs can do better by teaching finance-smart skills to 1,000 entrepreneurs to grow without venture capital. Some of them will grow, and VCs can fund them when the venture’s potential is evident if the venture needs VC. While some entrepreneurs may not need VC because they used a capital-efficient and could continue growing without VC, the likelihood is high that 1,000 trained entrepreneurs will create more proven opportunities that need VC, which creates more successful ventures for the VC portfolio.

What comes first — the chicken or the egg? Don’t know. What comes first — skills or capital? We know.

In the VC age (since 1946), the accepted wisdom is that entrepreneurs and areas need VC to build big businesses. Many areas have tried VC as an economic development strategy. They have failed.

The reason is that areas need skilled entrepreneurs to launch an idea and bridge the gap from idea to Aha, when potential is evident and VC makes sense. And entrepreneurs need skills to bridge the gap from idea to Aha when they can get VC, if they need it, and control their venture.

Silicon Valley has the entrepreneurs and the angels to bridge the gap. But now there is evidence that another area has been able to build a slew of successful billion-dollar ventures — without VC. Naturally, VCs have followed.

Entrepreneurs first develop billion-dollar ventures with skills. VCs follow.

Professional managers brought in as CEOs should be recruited when the venture is on the growth path, when no more strategic changes are needed, and when the entrepreneur cannot or will not grow with the venture to learn the skills for the next stage.

Pierre Omidyar (eBay) is one of the few billion-dollar entrepreneurs who succeeded by handing over the reins to a professional CEO. Earl Bakken (Medtronic) was another such entrepreneur. But there are few such entrepreneurs. Most entrepreneurs who got VC early lost control of their venture and of the wealth created.

Steve Jobs was forced to hand over control to a professional, and four professional CEOs nearly brought Apple to its knees. Apple is dominant today only because Jobs returned to Apple.

Some of the biggest names in Business, VC funding, Sports, and Entertainment read this column. Is there a person in the world, or in the US whom you would love to have a private breakfast or lunch with, and why? He or she might see this. 🙂

Melinda Gates. I admire what she and Bill Gates have done with the Gates Foundation.

Why: Because even though she and Bill have accomplished a lot, they can do more to solve societal problems by teaching low-income beneficiaries how to fish rather than giving them fish. The Gates Foundation can help teach low-income people and entrepreneurs the skills to grow without capital because, as noted above, there are always more dreams than capital, and most billion-dollar entrepreneurs grew using the right skills rather than venture capital.