Worst Analysis of Entrepreneurship and VCs EVER!
Wow. It isn’t often that I drop everything after I read an article and feel compelled to respond.
But I was dumbstruck when I read this piece in the Washington Post.
It was titled: Five myths about entrepreneurs. In around 1000 words, the author went on to trash the National Venture Capital Association, Peter Thiel, Jason Calacanis and Fred Wilson, using “scientific research” to try to prove them wrong.
This just goes to show why academics don’t “get” entrepreneurs, don’t understand job creation and don’t make good VCs. It also proves that academics looking to make headlines can do so by using bogus statistics and misleading phrases.
So how did he get this so-called research SO wrong and backwards? I mean, his conclusions are mind-boggling in their naiveté. In a nutshell, the author confuses average with great. He looks at quantity instead of quality. And in doing so he reaches irrelevant and misleading conclusions. I downloaded the study and read it. You too can do so here. Part of the problem is that the author surveyed “549 company founders across a dozen fast-growth industries.” But nowhere could I find a list of the companies or founders surveyed. I am betting that they include no $100B companies, no $10B companies, no $1B companies, and probably few $100M companies. But perhaps he could prove me wrong. Again, his research looked at quantity, but I can’t tell if it included “quality” companies.
Lets be clear. Most jobs over time are created by HIGH-PERFORMING startup companies. These are the companies that all VCs want to back. And these are the companies that the myths he tries to bust are based on.
The article basically claimed the following:
1. More old people (40-60) start companies than do young people (under 30). The writer and “researcher” tries to bust the myth that “America’s typical tech entrepreneurs are in their 20′s.” Hmmmmm. As a VC, I am not looking for a TYPICAL tech entrepreneur. I am looking for the entrepreneur with the vision, the passion, and the drive to change the world. I want the best entrepreneur. Not the typical one. So while the statement may be right, it is quite misleading. I wondered at what age the MOST SUCCESSFUL tech entrepreneurs are when they started their companies. So I looked up the list of the world’s most valuable public companies. On that list there were 6 tech companies started in the USA in the last 50 years. They are, in ranked market value order: Apple (2), Microsoft (4), Google (10), Oracle (20), Intel (32) and Amazon (44). And how old were the founders when they started these companies? Steve Jobs (21), Bill Gates (20), Sergey Brin (22), Larry Ellison (33), Gordon Moore (39), and Jeff Bezos (31) were all under 40. Average age? 28.
2. Entrepreneurs are “made” and not born as entrepreneurs. His claim is that entrepreneurs come from everywhere and every walk of life, and are not just the sons and daughters of entrepreneurs. I agree. No one that I know claims that entrepreneurs are born of entrepreneur-parents. Instead, the claim is that the best entrepreneurs have a drive, a will to win, a need to succeed, that is inbred – and one that cannot be taught in a classroom. The author does NOTHING to disprove this widely held belief. Just as hard work cannot be taught (but perhaps lazy can be learned), you can’t teach an entrepreneurial drive to a non-entrepreneur. I have found that the best entrepreneurs have something to prove, to themselves, a parent, a sibling or the world in general.
3. Well-educated entrepreneurs are the best entrepreneurs. No disagreement here. Personally, I am not a big fan of encouraging kids to stop out of college to start a business. A few will succeed. But most will miss out on a great social/academic experience with their peers.
4. There are few women entrepreneurs because VCs insult them (I kid you not.) This is THE MOST OFFENSIVE tripe I have ever read about VCs, and the author should be ashamed of himself for claiming this. Let me quote directly from the author:
“The problem is a broader one, as I learned through interviews with female entrepreneurs. Few girls get encouragement from their parents to study engineering; they encounter negative stereotypes in the workforce; when they approach venture capitalists, they are asked demeaning questions such as, “How are you going to manage your company when you have children?”
As a VC who has backed several VERY successful women entrepreneurs, I have never asked any question like this, nor would I even consider it. Might he have come across an anecdote and confused it with research? Perhaps. Or perhaps he just made it up. For me, I am offended.
5. The NVCA‘s claim that VC backed technology companies account for 20% of GDP is misleading and complete BS. In attempting to debunk the factual statement by the NVCA, the author claims (1) that only 5% of VC dollars go to early stage companies. DUHHH! Small companies need the least capital. Once they ramp up and need to grow, then they need more capital. Late stage VC will ALWAYS invest more money than early stage VC. Then (2) the author claims that hypothetically a VC could buy stock in a private company right before it goes public, and that this would count in the NVCA statistic. So what? Most companies that go public have late stage rounds. But his hypothetical argument lacks intellectual rigor or anaysis and is just tossed into the mix to debunk a valid statistic. Is there evidence that most large VC backed companies today only received their money days before going public? Of course not and the author knows this – or else he would have shown us the data.
The author, Vivek Wadhwa, has an impressive pedigree and is the director of research at the Center for Entrepreneurship and Research Commercialization at Duke University. Very impressive credentials. And the Kauffman Foundation, a group I like a lot, participated in the research.
But shame on Professor Wadhwa for trying to mix research with anecdotes in order to make headlines. And kudos to the Washington Post for letting us all have an open debate on this issue.
John Backus is a founder and managing partner with New Atlantic Ventures. He blogs here and tweets here. Opinions expressed by Backus are entirely his own.
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tim wilson said on August 2, 2011
He who protests the loudest….. you cant equally have an unbiased view as you have the most to lose here, no?
C. R. Kimball said on August 2, 2011
I share some of Backus’ skepticism. But he can’t accuse Wadhwa of being a propeller-head academic. My reading of Wadhwa’s background profile is that he is much more a busineesman than academic.
Laura Pearl said on August 2, 2011
I tend to agree with Backus. On the point about women entrepreneurs, I think an often over-looked issue is how often women start consumer businesses (think specialty foods, media, designer diapers–all of which I have seen recently from women entrepreneurs). These businesses tend to have less appeal to VCs than IT and healthcare related businesses, where proprietary technology is involved. I think if you looked at the success levels of women with engineering, computer science and biochemistry degrees, you would find their rates of success are higher.
Lisa Suennen said on August 3, 2011
I agree the article has its flaws (and no doubt the research too), but I am sad to say that I think some of the comments about how VCs treat women are legit. It is great that you are offended as the author and a male VC, but as a female VC (and one of few–less than 10% of all VCs), I hear from women entrepreneurs that they are frequently insulted by questions about marital status, childbearing and other ridiculousness which has absolutely no relationship to their ability to perform. I also am frequently involved in the hiring of CEOs for my portfolio companies and it almost universal that the female candidates are taken less seriously despite having equal qualifications. It is a pathetic state of affairs. While there are some much more enlightened investors, they have yet to overtake the majority. Here’s to hoping your offense at these concepts is contagious!
Rob Edwards said on August 3, 2011
I understand why you might be upset but your subjective point of view and how you might feel about certain outcomes from a piece of research is irrelevant. Wadhwa interviewed a statistically significant number and reported the outcomes of his research; however distasteful some outcomes might be they must nevertheless be accepted. I’m not sure that the outcomes betrays a lack of understanding of the nature of entrepreneurs, it might be just the opposite.
Richard Titus said on August 4, 2011
Well said John. I agree with almost all of your points, except the point on woman. As an angel investor I am appalled at the behaviour of our (yours and my) colleagues with regards to female entrepreneurs. The Anecdote Wadhwa quotes is a true story – about one of the founders (and a friend) of Last Minute Travel, and is not the ONLY such story I’ve heard. I, like you invest in the best talent, wherever they may be, regardless of race, religion, sex or creed – but my recent work with one entrepreneur has opened my eyes to just how much of a boys’ club/locker room large swathes of private equity and VC are. This is something that absolutely needs to be addressed – not ignored – as we work together to build the next generation of businesses. The ONLY way out of the mess we are in today.
Brent Lane said on August 5, 2011
John’s critique of Vivek’s research substitutes vehemence for evidence. I appreciate Vivek’s solid work to discern the reality of entrepreneurship usually obscured by Silicon Valley myth-making. John’s convictions about his definition of successful entrepreneurship and especially the importance of venture capital is undermined by 1) the less than stellar performance of the asset class and its practioners over the past two decades and 2) the near inevitability that the VCs will displace their portfolio companies’ founding entrepreneurs with their own hand-picked industry veterans. Or as a VC might say: the three most important criteria in their investment decisions are “Management, management….and the right to replace management”
Enrique said on August 6, 2011
High-growth firms are the main drivers of growth: http://www.kauffman.org/newsroom/high-growth-firms-account-for-disproportionate-share-of-job-creation-according-to-kauffman-foundation-study.aspx
Another article explaining how entrepreneurs start: http://www.scribd.com/doc/60209956/Nascent-Entrepreneurs
I do think VCs have a clear job: Fund the next generation of Fortune 500.
Ciao.
Real Assets Junkie said on August 7, 2011
Wow, John really couldn’t be more wrong about his fellow VCs behavior towards women entrepreneurs. I’ve seen it in action far too often; VC pitches go a good deal more smoothly when a guy is the lead, even when they’re pitching their female CEO’s work and expertise. Forecasts and team experience, in particular, are questioned less. There is not one female CEO in the current crop of top 10 VC-backed cleantech entrepreneurs (http://wp.me/p1tfX8-7O), and most women entrepreneurs have learned to either look for private funding (there are plenty of smart family offices backing women, for instance) or re-badge themselves as CFOs.
tim said on August 8, 2011
I suspect that the primary problem originates from the 500 companies that were selected for the analysis. If that list failed to include many of the venture funded companies that are large cap today then you will get a completely different picture. A separate question is – should the success of these large companies be attributed to venture capital even after they have gone public. What’s at issue is how much the venture community contributes to the national economy and to employment generation. The answer, as is often the case for issues, is somewhere in the middle.
Mark Birch said on August 9, 2011
Interesting to read the two perspectives. In the end however, I would tend to believe Vivek Wadhwa’s sample of 549 entrepreneurs over John Backus’s sample of 1 VC. While John may look for exceptional, young entrepreneurs and while he may not insult female founders with irrelevant questions, many VC’s do. Many belittle the accomplishments of women and many toss out founders for seasoned executives that are not in their 20′s and 30′s.
Furthermore, Vivek is an academic now, but he has a solid business and entrepreneurial background. This gets lost on people given the fact that Vivek has accomplished so much on top of his career in the technology industry, but insulting him as a mere “academic” is a straw man argument. In fact, Vivek was a VP of IT at Credit Suisse, an executive at Seer Technologies, and started Relativity Technologies.
As much as I am skeptical of Vivek’s research and sample size, John simply does not provide any compelling evidence to refute the data Vivek presents. Rather, his arguments rest solely on his own antidotes and personal experiences. In the end, it is all bark, no bite.
Greg Battle said on August 9, 2011
VC’s ignore women and underrepresented minoritiy entrepreneurs at their own peril. A casual analysis of the past few PEW reports reveals the women, African Americans and Hispanics consistently over-index (outsized influence/usage) in terms of social technology adoption as consumers and generators – that includes Twitter, Tumblr, Facebook, LinkedIn, YouTube, texting, casual gaming and mobile browsing, videos & pictures. Granted, social tech is but one slice of the VC spectrum, but it’s the most visible and, in terms of recent acquisitions and IPO filings, viable sectors.
Rob Evans said on August 10, 2011
So much complexity, so little time!
As for the “ethics”, my heroine of past VCs was the black woman who gathered food and gave her mate the leisure space to play with chipping flints. I don’t have evidence for her existence, or her name, but I defer all knowledge to her and her tribe.
But we exist in 2011, and we are all her grandchildren; our new tools are Law, and Information: she invented these, and have improved them. We can improve these tools. One among them is money.
I don’t think academics help us in this, especially in “social sciences”; their samples tend to be unrepresentative of the populations claimed, unsystematically stratified, and poorly reported (eg reported perceptions of facts are normally reported as if they were facts)
I have spent a miserable period of my early life as a researcher at a major business school, and know the pressure to publish, and the way poor research can drive a remunerative consulting career. The system is obvious, but stupid, and seems to have infected science in a big way.
I do think though, that “academic researchers” are worthless without revealing the structure and design of their datasets.
I understand this is not the case here.
Tom H said on August 12, 2011
Did he really “trash” the individual and organizational as you purport? Your analysis of the article, which I read and didn’t find nearly as offensive, is bizarre, do you have a bone to pick?
Re: number 4 which you find so wildly offensive – have you ever been to India? It’s a damn big problem. Have you ever been to regions of MENA where entrepreneurship is stifled and women completely excluded form the picture. Did you ever think for a minute that there is a world beyond Reston, Cambridge, and Palo Alto? Probably not, that’s not what you are paid to do.
Don’t tell me that low capex, uber-lean, high tech businesses are job creators for anyone except top-flight engineers from great schools. They do nothing to sop up the millions of unemployed who put their faith in the career leader.
Sorry, but you are wildly off the mark and your take shows just how removed you are from the world in which you profess to understand.
Gene Rall said on August 15, 2011
Excellent analysis! Find the following link relevant to similar memetic corrections http://generall.org/archives/tag/failure
Jon Kessler said on August 16, 2011
Growth businesses are, almost by definition, the job creators. But that doesn’t mean all or even most growth business are backed by professional investors. For every biotech or .com there are hundreds of unremarkable firms that will be around creating jobs for decades to come.
Mark Wendman said on September 7, 2011
Vivek’s prior rebuttal to Andy Grove’s Business Week editorial was similarly laughable. He seems to have opinions formed from some other world’s experience.