usv beta - Latest Comments in Why Early Stage Venture Investments Fail

Re: Why Early Stage Venture Investments Fail

Jean-Claude Goldenstein — Thu, 18 Sep 2008 12:07:45 -0000

Thanks for the trip down memory lane yesterday Fred, I enjoyed your talk.

I agree with you that New York's tech community is "more connected to media and business." New York also is the capital of banking and real estate. I know you didn't have time to discuss yesterday but you and many others could on CREOPoint.com, a global community for professionals in that space.

I founded that company in April with former executives from E&Y, Citibank, Morgan Stanley, NAI, CNET and WPP as I believed that hundreds of thousands of people would need a place to reinvent themselves and the industry.

If you are intrigued by my story and plans, I'd love to get your views on how to best scale the business with a low burn rate.

Best, JC

Re: Why Early Stage Venture Investments Fail

Zoorroyathy — Sat, 02 Aug 2008 18:33:30 -0000

Tahnks for posting

Re: Why Early Stage Venture Investments Fail

Blake — Mon, 31 Mar 2008 11:36:01 -0000

All this time I have been a bootstrapper without knowing it?!

Starting without a traditional business plan is tough, but success can be had if you can stay afloat long enough (and pay attention to that which drives your market).

Re: Why Early Stage Venture Investments Fail

steven — Sat, 09 Feb 2008 17:34:12 -0000

having helped to start a number of successful VC backed companies, the concept of having a healthy skepticism regarding the market really resonates. Painfully, I have seen companies spend $50-70Mil on development based upon flimsy "customer interest" and a good set of PPT. Focusing on the marketing / sales element is something I believe too many founders just don't get.

For the next time around, I want a P.O. before any major investment!

Re: Why Early Stage Venture Investments Fail

Jeff Chavez — Mon, 17 Dec 2007 12:28:47 -0000

I really appreciated this post. I wanted my readers to see this also so I've provided a link to it from one of my recent posts:

http://northstarthinktank.typepad.com/northstar_thinktank/2007/06/the_founders_fu.html

Keep up the good work!

Jeff

Re: Why Early Stage Venture Investments Fail

Case interview practice — Sat, 15 Dec 2007 11:08:34 -0000

Excellent article. Great reminder to start up entrepreneurs to keep burn rate low and be flexible to changes in the business model!

Difficult when you have a model that requires critical mass to prove itself! Good luck trying to solve the chicken and the egg problem?

Re: Why Early Stage Venture Investments Fail

psychic readings — Tue, 11 Dec 2007 08:14:06 -0000

I dont have much experience in this field, but this was a great article to read.

Thanks :)

Re: Why Early Stage Venture Investments Fail

Rob McNealy — Sat, 08 Dec 2007 01:24:58 -0000

I cannot relate more to what you said about businesses so often having to "transform" or reinvent themselves. I also agree that investors need to be able to fail from time to in order for them to be real veterans.

Thanks for the great insight.

Re: Why Early Stage Venture Investments Fail

Chris Blake — Fri, 07 Dec 2007 10:29:40 -0000

We all like to believe that backing past winners is a successful strategy. Unfortunately the evidence points in the opposite direction. One study by Carhart looked at every managed fund from 1962 to 1993. They top decile performers were tracked for the following years - to see if yesterday's winners are tomorrows' winners. In the second year more of the past years' top performers were in the top quartile again than the 10% that chance would suggest (but also 20% of them were in the last decile the following year!) But after this mild one year winners' effect there was no correlation at all. There are differences between picking stocks in mutual funds and backing start-ups with VC money. And yet we all believe in winners. The interesting question is why do we believe it when it isn't true. For a neat explanation you need to read Shefrin's coins thought experiment (Beyond Fear and Greed) for the interplay between luck and skill. There is always a lucky winner and we always assume its down to skill. Competence does play a part but you can't tell if the winner is skilful or lucky!

Re: Why Early Stage Venture Investments Fail

Michael Rivers — Fri, 07 Dec 2007 10:01:41 -0000

For early-stage companies gaining market traction is often difficult, resulting in slower growth that disappoints.

Why does this happen? Not because the product or service is not ready or has no value....

From experience of working in, with and for technology-based businesses, one main reason is because the company's response (product, service) is a mismatch with one or several of: the nature of the need, the size of the pain, the value of the solution and the timing of its offering. But that is all relatively motherhood...

The second principal and often unadressed reason for failure is the lack of a sound approach to marketing (and no, I don't mean wasting money on PR and advertising...).

This starts with inaccurate understanding of the size, value and life of the market opportunity continues through indistinct positioning, undercooked market strategy and the lack of actionable plans to underappreciation of the strength of the competition, failure to understand why rates of adoption are slow and persuasion harder and, of course, unprofitable pricing.

So why does this happen? Well, in early stage companies there are those that build and those that sell - anyone else is generally considered an irrelevant and unacceptable overhead, right

(imho) Including an experienced strategic marketer (and the "VP of Sales and Marketing" is not this person) in the early-stage team will help the business to side-step some of these common mistakes. (Selling too early is a mistake - see scale/burn discussion).

Re: Why Early Stage Venture Investments Fail

Michael Rivers — Fri, 07 Dec 2007 09:31:42 -0000

"So it’s pretty clear to me that most venture backed investments don’t fail because the business plan was flawed. In my experience at least 2/3 of all business plans we back are flawed."

Further to Shafqat's post I imagine that this may be the reason why microfinancers such as Y Combinator and Charles Rivers (and Y Europe and Seedcamp over here) have set up - to thrash the dust out of the business model, plan and product in a short, intensive period, with the benefit of hands-on experienced support. If done well, should reduce the risk of the above ...

Re: Why Early Stage Venture Investments Fail

Allan Isfan — Mon, 03 Dec 2007 19:34:05 -0000

I've been thinking a lot about this since the post came out. Being the CEO and co-founder of a young startup looking to raise money, this question is so crucial.

We've already gone down some dead-end alleys and am glad we were not funded at the time ... would have pulled the trigger in the wrong direction and would have been pressured to deliver the wrong thing. In my last start-up, we also re-vectored, and it paid off hugely.I totally get this ...

But something has been bothering me with the comments around failing fast. Things like "I look for reasons to give up" are really disturbing to me. Anything really disruptive and major requires people with balls that are willing to go against the grain and persevere. It isn't about the romantic aspects ... it just takes perseverance to do something hard. That's how I was brought up in the eastern block ... fight for what you believe in. Would google have ever existed? The list is long of companies that went against the grain and did something incredible.

I think the point of your blog was not give up or fail fast ... it is that it is important to run lean and hungry and keep looking until you get it right then go like stink. The trick is to really figure out when you have it right.

Re: Why Early Stage Venture Investments Fail

Allan Isfan — Sun, 02 Dec 2007 15:11:31 -0000

Fred,

What another great post! Cuts through the typical bull and over analyzed scenarios ... the value of knowing what actually matters. Reminds me of the "thin-slicing" concept discussed by Malcom Gladwell in Blink. It would be great if you could elaborate on this with some more specifics and examples. Of course, your loyal readers read this your blog to get some real advice but many of us are also trying to figure out how you think so that we can one day get funded by you. No surprise I'm sure.

The company I co-founded is presently bootstrapping in the media personalization space and launching an app in FB imminently. We have many features and tech development in the pipeline and they are popping slowly due to minimal resources. At the same time, we have the opportunity to white label our service (ASP) to a couple of media companies .... pretty darn proud of that for such a young company. White labeling brings its own development requirements. I know I could sign on more white label partners but am holding off because we won't be able to support more customers without growing beyond our boots. I struggle with this all the time. I've dreamed of signing on customers and now have to hold back. This is probably a good thing but somehow it doesn't feel that way.

Re: Why Early Stage Venture Investments Fail

Mike — Sun, 02 Dec 2007 12:46:54 -0000

Let me comment on your quote

"I should also say that for businesses that don’t have the benefit of venture capital backing, the reverse is probably true. Almost certainly non-venture backed businesses will not have the ability to get too big too fast. They will mostly fail because they have the wrong business plan and they don’t have the wherewithal to survive for the period of time it takes to figure out the correct one."

I think this statement is a bit ignorant (and I mean it respectfully) of the process of bootstrapping. I've been bootstrapping for two years now and when you're a bootstrapper, you rarely have a business plan (as business plans are for getting money).

Generally, I think most bootstrappers start out with a fuzzy idea of where they want their product or service to go but end up taking it towards market segments where there is real, yet unexpected demand.

Re: Why Early Stage Venture Investments Fail

Mike — Sun, 02 Dec 2007 12:41:02 -0000

Let me comment on your quote

Re: Why Early Stage Venture Investments Fail

Bryce — Sat, 01 Dec 2007 21:10:15 -0000

Fred,

Thank you very much for the thoughts. I am left with the question, if business practices that extol the virtues of capital allocation, efficiency and a focus on the realities of the business model are hallmarks of success what value do pure financiers, without operational backgrounds, bring to an early stage entity other than capital?

Bryce

Re: Why Early Stage Venture Investments Fail

wallbang — Sat, 01 Dec 2007 14:29:12 -0000

re: " ... having a long engineering queue due to limited engineering capacity in a bootstrapped company can actually save you"

I'd like to highlight Victor's post above - the funded web 2.0 community should take heed of that paragraph.

Re: Why Early Stage Venture Investments Fail

Victor — Sat, 01 Dec 2007 13:36:00 -0000

In most cases, having too much money in any business, startup or not, will lead to bloat.

If you are bootstrapped you will ultra-prioritize your goals. One thing I have noticed time after time is that having a long engineering queue due to limited engineering capacity in a bootstrapped company can actually save you. When the 3-6 months roll by and you look back at the jobs in the queue, half of them don't make any sense anymore, yet if you had the capacity, you likely would've pushed them all out- much of it garbage.

Secondly - And I think it was Lucille Ball who once said never ask anyone who is not busy to do a job for you. Well, guess what. More cash, means everyone has assistants, longer lunch hours, and shorter working days. Most company's could probably lop off 1/3 of their staff and get more done if they could only bite that bullet and take the leap of faith. People often work better under tighter conditions, they collaborate better, they don't have to go through 3 layers of management, and generally feel they can personally move the needle, which is rewarding to most.

Stay lean, be a boot-strapper. Once you build up a value, then go sell equity at a premium.

Re: Why Early Stage Venture Investments Fail

Mark — Sat, 01 Dec 2007 09:32:44 -0000

Great post Fred, thanks for sharing. The idea of numerous dark alleys points to the other key to success and that is in any venture investment you are betting on the quality and ability of management. They must be able to not only have the vision to conceptualize the intial product but execute the plan to realize it and if necessary - all those dark alleys - shift that plan into a new vision. The bet is as much on management as on product.

Re: Why Early Stage Venture Investments Fail

wallbang — Sat, 01 Dec 2007 00:00:49 -0000

Fred, thanks for sharing your perspective! The 2 hour bike ride(s) help a crunch, er, bunch.

Re: "...going down lots of dark alleys..."

In 1987 (eighty seven!), I visited San Francisco promoting a software app I developed. So many smiles with completely blank stares. The worldwide market I passionately spoke of wasn't born until 1997-99. Ten years...

I remember visiting with one known VC in his home. He watched me demo my product. His eyes lit up and he stopped me. He excitedly asked me if the feature he was looking at was done? He wanted to know if I could strip it out as a stand alone product? I foggily remember him saying he'd fund me immediately if I answered yes.

I answered no. No doubt I could do what he wanted, but it didn't make sense to me based on my business plan, the plan never funded. The VC continued on to develop his app. I continued on making a business succeed in a tiny ski town, selling my app to a niche national market, cashing out in 1996. This app was re-acquired a few times, continuing on to this day selling to a larger niche market.

Today, in my ninth year of developing a new app, I learned quickly to describe it as organic - one mistake layering another upon another - watching the growing humus with humor. I don't have a business plan. I don't have an income model. I don't have a single customer. I don't know when I'll cash out. I live simply and ride my bike a lot. The market I need has arrived, and this time society is passionately speaking up, demanding, hmmm, change. Perhaps I'll know the model in 2009 - ten years again...

Michael ;)

ps: The VC's app? A networked contact /calendar. He cashed out but the app failed. Enter web 2.0, and we still have the idea cashing out, but failing. wuwt?

Re: Why Early Stage Venture Investments Fail

Aruni Gunasegaram — Fri, 30 Nov 2007 23:20:03 -0000

Really great post and great comments! It is so true about having to go down several dark alleys, figuring out the dead-ends, and moving on fast. It's much harder to do when bootstrapping.

I liked Alan's points about 'the reasons to give up' and give up quickly. It is hard to do because as entrepreneurs we become really enamored of our company and its products. However, having observed the success of several companies many do not sell now (or have the same strategies) as when they first started. It's important also, to get out there with something and start testing the waters to see what works and doesn't...bootstrappers just don't have the financial wherewithal to keep doing that for long!

To Anthony's point...having been a founding CEO back in the late 90's I saw a push by VCs to burn money. They didn't want you to be conservative even if you felt you should be. Several discussions arose among my founding peers that this was a tactic by some VCs to push through the money fast that the Company would have to go ask them for more thereby giving up more of the company. It's kind of a jaded view but isn't it funny how different people view the same situation?

Re: Why Early Stage Venture Investments Fail

francine hardaway — Fri, 30 Nov 2007 21:26:10 -0000

Thank you, Fred. In Arizona, where I work, there is very little capital and we (Stealthmode Partners) help our companies bootstrap. They hate it. They beg to go for funding. I flat out tell them they can't get it most of the time, because they can't.

However,every once in a while, I send a guy who needs $1m to a VC in Silicon Valley. Always in the meeting, the guy comes out thinking he needs $5m because the vision has grown/changed when the VC inserts his own idea o where the market is.

The blame goes equally: entrepreneurs who think money makes success, and VCs who want to give them too much money too soon.

Re: Why Early Stage Venture Investments Fail

Shanti Braford — Fri, 30 Nov 2007 20:42:45 -0000

This is a great post, Fred.

What I'm curious about are cases like Friendster or some of the other VC horror stories where the venture capitalists were pushing the founders to spend the money at such a high rate.

Does this happen often?

i.e. I'm a founder; you just gave me $3million. But I tell you, I want to keep a slow burn rate until we have gone down a few of those dark alleys and finally found a sensible model. Maybe make a few key hires, but not the kind where VPs of X are just sitting around twiddling their thumbs & building powerpoints, because the product/service isn't ready or fully flushed out yet. (seen this first hand several times)

And if you don't do this (pressure to burn), have you seen it among other VCs much? =)

Re: Why Early Stage Venture Investments Fail

Anthony Kuhn — Fri, 30 Nov 2007 17:57:58 -0000

Fred:

I think it's great you started a dialogue regarding who's to blame for the failure of a startup venture. Share, and share alike, seems to be a reasonable place to .

Thanks for your insights on how best to view VC funding investments in light of failure, and success.

Happy Friday,

Anthony Kuhn

Re: Why Early Stage Venture Investments Fail

Gregg Smith — Fri, 30 Nov 2007 16:28:55 -0000

We had a great product, great customers (Big 4 accounting, national consulting firms, millions in revenue) a great core group of developers and a great board. We took the first $25 million, hit the gas and burned a lot of it on worthless ventures that weren't related to the core business (EMEA and a West Coast acquisition). The second $25 million was to survive. We sold it too early and too cheaply because we, in a couple of our investors cases, were their only opportunity near-term liquidity event.