The Top 5 Myths About Building Billion-Dollar Startups

Kevin Mwanza
Written by Kevin Mwanza
racial wealth gap billion-dollar startups
By looking at billion-dollar tech companies of the past decade, this new study has determined five myths about billion-dollar startups. Image: Christina Morillo at Pexels

Nnamdi Okike and Aaron Holiday are founders of 645 Ventures, a 7-year-old seed-stage New York City-based venture firm that applies a data-intensive approach to investing in top software and internet companies.

Okike and Holiday are some of the authors of “The Top Five Myths About Building Billion-Dollar Startups“.

Holiday, whose father was a substance abuse counselor, and mother worked at the collection department at Sears, is a computer scientist who grew up in New Orleans’ sixth ward and went to Morehouse College.

He worked previously at Goldman Sachs where he developed algorithms for high-frequency trading. He was, however, not content with just developing algorithms; he wanted a more active role in managing the money.

Okike’s parents immigrated from Nigeria and Germany to the U.S. where he has been involved in angel investing since 2002 when he joined Insight Partners as an analyst.

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Given the many preconceived notions on what it takes to build billion-dollar technology companies, 645 Ventures studied the billion-dollar tech companies of the past decade in order to understand what their earliest days looked like, and structured their findings into the five biggest myths about billion-dollar startups.

Here is what they came up with.

Myth: They all raised large early-stage funding

It is widely assumed that billion-dollar startups raised a large sum during their early days. This is to suggest that all startups that grow into unicorns are almost always supported by deep-pocketed investors.

Truth: Data shows that this is not the case. Only about half of these companies raised any kind of seed funding and even when they did, the funding was relatively small. Two-thirds either raised no funding or less than $1 million.

Myth: Top venture capital firms don’t miss billion-dollar startups at an early stage

The prevailing understanding of venture capital is that only the best firms get access to the best deals and these firms go on to become unicorns.

Truth: Only about a third of VCs raised capital for startups that went on to become billion-dollar startups.

Myth: Building billion-dollar startups requires taking a risk in creating a new business model, catalyzing new user behavior, or driving deep technical innovation

This assumes that companies that take greater risk in user behavior by investing in non-existent behavior made a better exit for VCs.

Truth: While there were fewer companies that took on the behavioral risk, those who assumed this risk appear to have generated larger exits.

Myth: Billion-dollar tech companies are rarely built outside Silicon Valley

Truth: The study revealed that the Bay Area does not have a monopoly on the formation of billion-dollar tech companies given that several billion-dollar companies were created in regions not known to be technology hubs.

Myth: There is a predictable career path for billion-dollar company founders

Some founders and investors believe that in order to build a billion-dollar company, their entrepreneurial experience is paramount.

Truth: The 645 Ventures research showed that 40 percent of the founders used in the research were first-time founders, while 17 percent had previous startups that had failed. This means that close to 60 percent of billion-dollar founders did not have a successful entrepreneurial past.