

Why Early Stage Venture Investments Fail - drm237
http://www.unionsquareventures.com/2007/11/why_early_stage.html

======
brlewis
Key quote:

``Most venture backed investments fail because the venture capital is used to
scale the business before the correct business plan is discovered. That
scale/burn rate becomes the cancer that kills the business.''

If you don't have time to read the whole article, at least read the last three
paragraphs.

~~~
downer
Translation: Expenditures outpaced income. I don't get what this article has
to do with early-stage investments in particular, except that early-stage
usually means _no income yet_.

I guess investing only in proven businesses is a lot safer, but every business
was "early-stage" at one point.

~~~
brlewis
"Expenditures outpaced income" is an oversimplification. Every new business's
expenditures outpace income. This essay describes a two-part problem. The high
burn rate makes you die faster; that's one part. The other part is that
scaling up to a larger business makes you less adaptable.

~~~
downer
_"Most venture backed investments fail because the venture capital is used to
scale the business before the correct business plan is discovered."_

Read: Scale up before they have the income level to justify it.

Being "nimble" or "adaptable" in this case is simply another way to say
"didn't run out of money before they started making enough income".

Being large doesn't necessarily make you less adaptable. Think of how many
directions Google can explore _because_ it is large. They are far more
adaptable than most small companies.

Companies that are composed of only two or three founders don't have the
skillsets available to them that larger companies have; Google has a bagful of
tricks _because_ it has bought up _so many_ of these one-trick ponies. A lot
of them probably were in the category of not having monetized their startup
even to the point of self-sufficiency yet -- let alone to the point of making
a profit -- and being acquired by a large company was the way to stay alive.

Before ViaWeb was bought by Yahoo they almost ran out of money; they had to
borrow a conference room at Yahoo _in the middle of negotiations_ to get
enough money from another investor to stay alive. Would you say they weren't
nimble or adaptable if they hadn't gotten that last-minute financing? Are they
nimble and adaptable _just because_ they got that financing? Or is it that
_despite_ how quickly you can change directions, you eventually have to PICK
_some_ direction to keep going in if you want to get anything accomplished?

It doesn't matter how adaptable you are, you can only explore so many
directions before you run out of money. Some people _don't_ change their idea,
but they are able to keep pushing and pushing until they finally make it. Some
people get lucky and succeed on the first try.

Paul says, "When startups die, the official cause of death is always either
running out of money or a critical founder bailing. Often the two occur
simultaneously."

Thus, "If you can just avoid dying, you get rich."

<http://www.paulgraham.com/die.html>

~~~
paul
Income is not the important factor. The problem is scaling up before they have
traction.

Read pmarca's blog posts on "product/market fit" to understand.

~~~
downer
> _Income is not the important factor._

Screw income, businesses can run on fairy dust, Tink!

> _Read pmarca's blog posts on "product/market fit" to understand._

I read that when it was first posted, and it's nothing new, it's the same
"make something people want". Which comes down to the same thing, income.
"Product/market fit" is determined by exactly one thing, making money. It can
be garbage, as long as you can get people to pay for it.

"Scaling up" translates to "increasing expenditures". And what is "traction",
if not having an established customer base, i.e. people to make money off of?

Even if you're considering the case of startups which _don't_ have a user base
-- e.g. they are working on some cool technology in-house, as opposed to
something with simple technology but a lot of users ala social news sites --
there's still a customer there: Google or Yahoo or whoever is doing the
acquiring. Then you're finding one BIG customer instead of thousands of
individual customers.

So it's still back to the same thing, money out vs. money in. I don't know why
people like to mystify it with tales of startup lore.

Even PG's "If you can just avoid dying, you get rich" doesn't specify a
timeframe; of course if you have an _unlimited_ amount of time and resources,
you can eventually "succeed" -- except if you already have such staggering
financial resources available to you, you're already rich, so it's a wash.

In any realistic consideration, it's possible that you keep changing your
approach into one of the _many_ other directions that _also_ won't work,
instead of one of the few that will. E.g. after 6 tries, you don't hit on a
PayPal, but on failure #7. Then you run out of money. Oops, you didn't
successfully implement the "don't die" principle.

