Silicon Valley *Is* a Meritocracy

3/20/12Follow @sramana

Of late, there has been talk that Silicon Valley is not a meritocracy, and that it is biased against women, black, and older entrepreneurs. I don’t believe this is true.

I have lived and worked as a serial entrepreneur in the Valley for more than 15 years. Over the past couple of years, as I have been running the One Million by One Million virtual incubator, the mission of which is to help a million entrepreneurs reach $1 million in revenue, I have worked with hundreds of entrepreneurs on a daily basis. I have raised angel and venture capital multiple times for my four startups (as CEO). I have also been rejected by investors at various points for various reasons, many of which were perfectly legitimate. And by the way, I am a woman of Indian origin, so I am definitely in the minority.

Let me start this piece with an anecdote from 2010. I had just put the concept of 1M/1M on paper. We had no product and, obviously, no customers. We had some free users for our various free offerings, including the online roundtables that have now become widely known.

I went to my VC network to get feedback on the idea from seasoned pros. I had access to very experienced, sophisticated VCs, and I wanted to either raise capital from some of them or understand why I shouldn’t raise capital. I had also made a personal choice that I would either raise enough money to get to serious revenue, or I would continue to bootstrap the business.

As I went through the discussions, one thing was clear: At the stage I was at with 1M/1M during the summer of 2010, we could raise a $2 million round comfortably, but not a $6 million round, which is what I assessed would take us to get to revenue momentum. I was very sure that I did not want to bootstrap with VC money, and I thus discontinued the $2 million financing discussions.

In this process of decision-making, one conversation was particularly important. It was held at the offices of Benchmark Capital with Bruce Dunlevie, one of the classiest VCs in the business. Bruce asked, what if the revenue ramps up slowly? What if it takes several years to get to momentum? The concept is new and innovative, and the market may take time to adopt the solution.

I came away from that meeting with the distinct realization that I needed to do the experimentation with my product, business model, pricing model, distribution strategy, and conversion ratios outside of the venture capital timeline. And in the summer of 2010, none of those experiments had yet been done. I had no validation of my business model, pricing model, or customer acquisition strategy.

If I committed myself to a VC timeline without those gaps filled and the business ramped slower than the VCs would like, I would either get diluted to the hilt or go out of business for lack of follow-on financing.

Instead, I kept 1M/1M as a slower-growing bootstrapped operation and continued to fill the gaps. Today we have success stories, and our product, business model, and pricing model are all validated. What’s more, we have been adding value to the journeys of numerous entrepreneurs.

Why do I tell you this story?

Because I want to caution you against using the excuses like “Silicon Valley is biased against women” or “Silicon Valley is biased against black entrepreneurs” and so forth, and turn your attention to the real issue: figuring out what are the gaps in your business, and what you can do about them. What strategy makes sense to address those gaps?

If you follow my writings, you know that I have said repeatedly that over 99 percent of entrepreneurs who apply for funding are rejected. The reasons are many.

Some seek financing too early, as I did. The only reason I did that, by the way, was that 1M/1M is my fourth venture, and I have relationships with people in the industry who would at least consider funding me even if the business was not fully validated. In the end, though, raising money with that many unvalidated issues did not feel right even to me, let alone to investors. For first-time entrepreneurs, it is not even an option.

Others are rejected because their total addressable market (TAM) is too small. Or their technology is not defensible. Or the team is not compelling. All these are legitimate reasons and, yes, there is plenty of subjectivity in the decision process. But by and large, the vast majority of rejections are for good reason.

Further, it is a well-known fact in the Valley (and elsewhere) that the bar for investment is rising ever higher. Even angel investors do not fund businesses without traction these days, meaning what could easily have been funded in 1999 is unfundable in 2012. Unfundable, period. Not because you are black, or a woman, or an older entrepreneur. It is because in this meritocracy, the “merit” that warrants financing is a “momentum business.”

So, what is an entrepreneur to do?

If you ask me, I would always say, plug your gaps. Bootstrap through the various stages of validation. Build momentum. Get to a point where the negotiating position tips in your favor. Once you get there, trust me, VCs will run after you.

One final point: can all businesses get there? No. Some businesses simply do not fit the venture model, and they will never be fundable. But you can build those businesses as self-financed businesses and become very successful outside of the venture capital ecosystem. There is nothing wrong with that success or the wealth you create as an outcome based on that success.

Also, some ventures in cleantech and biotech are just not conducive to bootstrapping. The capital requirements are high. But entrepreneurs in those segments face challenges irrespective of demographics.

So, please, entrepreneurs, do not get hung up on the excuses that certain pundits are coming up with based on age, gender, or ethnicity.

The game we play is largely a numbers game. If enough women, black, or older entrepreneurs were coming up with big ideas like those generated by Facebook, Google, or Apple and doing the groundwork to get these ideas validated, well, by hook or by crook, Silicon Valley would not reject them.

Whatever Silicon Valley is, it is not stupid.

Sramana Mitra is the founder of One Million by One Million (1M/1M), a global virtual incubator that aims to help one million entrepreneurs globally to reach $1 million in revenue and beyond. She is a Silicon Valley entrepreneur and strategy consultant, she writes the blog Sramana Mitra On Strategy, and is author of the Entrepreneur Journeys book series and Vision India 2020. From 2008 to 2010, Mitra was a columnist for Forbes. As an entrepreneur CEO, she ran three companies: DAIS, Intarka, and Uuma. Sramana has a master’s degree in electrical engineering and computer science from the Massachusetts Institute of Technology. Follow @sramana

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  • Darrell Glasco

    Sramana,

    I have been following your writings for a few years and respect them tremendously. I applaud your effort for focusing on an effort that can uplift everyone economically.

    However, after having worked directly with a number of technology companies in Silicon Valley as well as in other parts of the country, I can tell you that the system is not a total meritocracy. As you noted yourself in an interview with Xconomy:

    It (sic Silicon Valley) is very much a tribal, knowledge-based environment where nothing has been institutionalized and everything is inside people’s heads. The network is a very elitist, closed network.
    It is very much a tribal, knowledge-based environment where nothing has been institutionalized and everything is inside people’s heads. The network is a very elitist, closed network.

    Networks are very important to succeeding as an entrepreneur in all business sectors. Unfortunately, this is a network that some minorities, especially African Americans especially have been unable to break into for a number of reasons which are not all due to discrimination.

    There is a saying “where you sit determines your point of view.” I think before any of us discount issues we should become better informed about the “other point of view.”

  • http://1m1m.sramanamitra.com Sramana Mitra

    Hi Darrell,

    There is no question that the Silicon Valley network is highly elitist, and very difficult to penetrate. If you have been following my writings, you must also have read that I have commented on that, as well as the tribal knowledge issue multiple times. In fact, both of those are cornerstone ideas that have prompted the founding of the 1M/1M program: (a) To help outsiders (with merit) break into the elitist network (b) institutionalize the tribal knowledge of Silicon Valley.

    Your comments are on the mark.

    Sramana

  • http://nopersoncommittee.org YouTube’s Actual Inventor

    Merits for the rich kids!