An article in the New York Times highlights the contrasting strategies of two of the most successful top venture capital (VC) funds – Benchmark Partners and Andreessen Horowitz. The article notes a divergence in the top category of VC funds, which are moving in two different strategic directions:

· Small and focused: Benchmark stays true to its roots and focuses on the traditional VC model of deploying capital with a smaller fund, allowing senior partners to provide more direct support to entrepreneurs.

· Bigger and more diverse: Andreessen Horowitz, on the other hand, is expanding significantly. The company has greater resources, a growing workforce and a larger number of funded ventures. It also offers additional services and aims to position itself as a comprehensive financial institution. Other top-tier VC funds are reportedly following Andreessen Horowitz’s lead.

Here are three implications for entrepreneurs from these contrasting VC strategies

#1. Effects on timing and amounts.

Many entrepreneurs assume that “experts” like VCs can accurately assess the potential of a real startup – a startup with no history and no revenue. Adding to the confusion, the business press, including the New York Times, often refers to all VC-backed companies as “startups,” regardless of their stage. As a result, true startups with $0 in revenue are lumped in with well-established companies – sometimes over 6 years old and with hundreds of customers. Here are two implications for entrepreneurs regarding when and how much funding they should apply for:

· Timing: To attract more capital from top-tier VCs, entrepreneurs must demonstrate billion-dollar potential. It’s all about demonstrating strategic dominance and leadership in a potential multibillion-dollar industry – only one percent of $85 billion entrepreneurs received VC after developing the idea (The Truth About VC at www.dileeprao. com). This will likely happen at a later date.

· Amounts: Larger funds like Andreessen Horowitz are more likely to look for ventures that require more capital, which will likely be at a later date. These VCs focus on companies that have already shown potential. For example, Airbnb was rejected in its first attempts and received larger funding only after it demonstrated its market viability and growth trajectory. Likewise, Steve Jobs was rejected by almost 10 VCs and Google by around 12.

To advance to later stages and demonstrate unicorn potential, entrepreneurs need unicorn skills. These skills include visionary leadership, exceptional market insight and the ability to scale quickly.

#2. Effects on dilution and control.

The growth of VC funds, from smaller boutique firms like Benchmark to giants like Andreessen Horowitz, is having a significant impact on entrepreneurs in terms of ownership and control:

· dilution: Entrepreneurs who raise larger amounts of VC or seek funding too early tend to be more diluted than entrepreneurs who delay VC or seek smaller amounts of VC.

· Control: Entrepreneurs who lack financial sophistication and rely on multiple rounds of VC risk losing control of their business. VCs often replace founders with professional CEOs – up to 85% of the time, limiting both ownership and control of founders. Entrepreneurs who delay VC and stay as CEO retain a higher percentage of the wealth created. Entrepreneurs who received early VC and were replaced retained about 7% of the wealth created. Those who delayed VC retained 16% of the wealth and those who avoided VC retained 52% (The Truth About VC at www.dileeprao.com).

#3. Implications for success

There are two key implications for entrepreneurs striving for success:

· Capital-intensive vs. financially intelligent entrepreneurs: Entrepreneurs must choose between two different paths: a capital-intensive strategy that leverages large amounts of VC funding from large VCs, or a funding-smart approach that minimizes external funding. Of the 85 billion-dollar entrepreneurs who have built billion-dollar companies from the ground up, 94% chose the latter.

· VC success: VC is a high-risk, high-reward game, as VCs only succeed on about 19% of their investments and only hit a home run on about 1%. Larger VC funds need more successful ventures to stay in the top tier, home runs that offer higher returns, and/or ventures where VCs grab more of the wealth created and further dilute the entrepreneur. This may not be good for entrepreneurs.

MY OPINION: If top VC funds fail to create more unicorns or sell more of their mediocre ventures to companies as strategic sales at inflated prices, their strategy is at risk of failing. As funds grow larger, the combination of young people seeking a track record and unqualified entrepreneurs seeking more venture capital at earlier stages could lead to significant failures. Additionally, larger VC funds have to invest more per company, leading to more dilution that negatively impacts entrepreneurs.

For entrepreneurs, avoiding or delaying VC while maintaining control of their ventures with unicorn capabilities seems to be a better solution. Building and maintaining a company is a deeply personal and time-consuming journey, and founders shouldn’t have to bet on their future based on the expertise of inexperienced VCs.

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