My friend Dick Costolo, co-founder of FeedBurner, describes a startup as the process of going down lots of dark alleys only to find that they are dead ends. Dick describes the art of a successful deal as figuring out they are dead ends quickly and trying another and another until you find the one paved with gold.I like that analogy a lot. Of the 26 companies that I consider realized or effectively realized in my personal track record, 17 of them made complete transformations or partial transformations of their businesses between the time we invested and the time we sold. That means there a 2/3 chance you’ll have to significantly reinvent your business between the time you take a venture capital investment and when you exit your business.
Here’s an interesting breakdown of the “transformers” versus the “stick to our plan” investments in my personal track record.
Greater than 5x – 11 total investments – 7 transformed, 4 did not
1x to 5x – 10 total investments – 6 transformed, 4 did not
Failures – 5 total investments, 1 transformed, 4 did not
Unrealized Union Square investments – 6 total, 3 transformed, 3 have notYou might think that the home runs had their plan figured out right out of the box and the deals that were less successful were mostly transformers. That’s not the case with the investments I’ve been personally been involved in. It’s about the same ratio for both categories.
But where you really see the value of being nimble is in the failures. All but one failed to transform their business and all but one were unable to do that because of the large unsustainable burn rates they had built up. Even the one business that did transform itself, it went from a low cost business model to a high cost business model and they put themselves in a pickle when the transformation didn’t pan out.
To go back to Dick’s analogy, you can go down lots of blind alleys if the cost of doing so is low. But if you are spending a million dollars on each blind alley, you’ll be out of business in no time.
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.
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.
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I just discovered the above VC blog. I could always learn more about investing (in terms of how the business works, not me investing my own money), but the lesson above is actually something I learned firsthand from one of my previous workplaces. Nevertheless, now that I’m at another startup, it’s something to keep in mind- the winner is the one who doesn’t accept failure and keeps finding a way to stay alive (do what it takes, and screw the ego), not the one who had the greatest-plan-ever in a one-shot.
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