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Why Startups Fail? Entrepreneurs Perspective – Keep the Founder Around May 23, 2008

Posted by John in Technology.
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Why do startups fail? There are many reasons. Here is a post from a VC in Silicon Valley called VCDave – David Feinleib is a partner at MDV – Mohr Davidow Ventures – He invests in Internet-enabled companies.

This is a great post from VCDave, but I would add that the faster the market moves the more the founder needs to be in charge. Finding a founder with vision, product skill, and deal making ability is ideal. Venture capitalists need to let the founder run the ship. If VCs run interference with the founder then the entire venture slows down. Building a startup from nothing is difficult and navigating the market landscape with imperfect information is key. Entrepreneurs are good at dealing with ambiguities.

Once a venture enters the market the venture plan has to be in a constant state of reinvention to ‘hit’ the tipping point for the preferred business model for the proverbial ‘big opportunity’. One thing often over looked is the important objective of getting the new venture in a position in the market to seize the growth opportunity contemplated by the entrepreneur and the investor.

Entrepreneurs and VCs need to deal with change as a positive not a negative. If the ventures position in a growing market is good then the change is a normal characteristic. To me it’s about letting the founder stay in control until the venture hits calmer waters. Founders know best in the early stages. Creative, product, sales, and deal making skills matters the most. VCs shouldn’t just replace founders because a few waves crash on the ship.

If investors want a return remember that the founders know best. Don’t replace the founder to early.

http://www.usatoday.com/money/companies/management/2007-08-21-founder-ceos_N.htm

Update: Donna who tracks the NYC startup scene at StartupAlpha has a post on this. Here is 37Signals Jason Fried’s take at Signal vs Noise on this topic.

Two important points Donna and Jason make: 1) build a good sustainable venture and 2) if the market is slowly developing then there is no market.

Here is a good section from end of Jason’s post “If the entrepreneur finds themselves in a situation they can’t control it’s almost certainly because they put themselves in that position — either by borrowing too much, spending too much, rushing too fast, creating a false sense of urgency, hiring the wrong people, attacking a market that doesn’t exist, or not focusing on generating revenue early enough. Natural disasters are out of our control, bad business decisions are in your control.”

My advice to entrepreneurs: try to maintain control for as long as you can (control > 50%) at all costs. Only go over 50% dilution if you need to scale and never run out of money.

Update 2: An post from last year from Denny Miu who I have met and respect. He writes a great post that has lessons and observations.

Comments»

1. Adam Bullied - May 23, 2008

I agree, John – founders can certainly have the necessary skills to take the company / product to the line and make it work. However, while VCs shouldn’t remove founders too early the converse is also true – they shouldn’t be afraid to remove a founder. Especially if they lack the skills necessary to make things really sing.

It’s tough to find someone that has real product skills (not just writing some code over the weekend), deal making ability, and can actually construct / communicate / execute a clear and focused vision. The Dells’, Jobs’, or Bezos’ are not the norm…I don’t think.

However, one of the great examples is Feedburner – the founders knew their roles, hired accordingly, obsessed over (and built) a strong product, and made the company a success.

Just my $0.02.

2. John Furrier - May 23, 2008

What cool about VCDave’s article is that he highlights some great scenarios. Like your example and in my opinion founders will do whatever it takes if their vision is being realized. Bringing in operational talent or equivalent is fine that supports the vision but not bringing people and changing the founders vision.

Great points. The USA Today article has statistical data that shows when a founder is in essence booted by investors the venture trends on the side of failure.

3. kosso - May 23, 2008

Hi John! Great post!

How do you feel about ‘angels’ as opposed to VCs?

4. John Furrier - May 23, 2008

Angels are very important because they take a big risk with the entrepreneur. There are two types of angels 1) passive and 2) active.

Angels tend not to reinvest. Most importantly finding an angel that has domain expertise if the plan is go the route of venture. If the key to success is building a product at low cost structures then angels are great no matter what their profile is. Money funds ventures.

I would add to my post that the best way not to fail for the entrepreneur is to not run out of money. If an angel financing gets the necessary cash then go angel. If it’s a big idea then venture is the way to go. If it’s a big idea and vision the founder needs to be active all the way to the point of ‘calm’ or scale.

5. kosso - May 23, 2008

Thanks for the response!🙂

Actually, I am seeking funds to get my new idea off the ground!

I will be looking for Angels.

I just got TechCrunched!
http://uk.techcrunch.com/2008/05/23/phreadz-a-seesmic-clone-or-a-lot-more/

6. Adam Bullied - May 23, 2008

On the vision comment, that’s interesting. I guess the VCs make a bet on the original founder’s vision – but what happens if that is proven to not be an attainable / valuable market opportunity mid-stream of the investment?

Inexperienced founders may say, “do whatever it takes to make the vision work,” which may include creating a myriad of products to try and execute on it. This type of strategy may be appropriate, but it’s always dangerous as it could deviate focus so much it ends-up hurting, but had the best intentions.

Should the VC then say, “founder, adjust your vision – this isn’t working” or find fresh blood to re-construct the vision around what core technology / identified market opps may be, or pinpoint it as a “cut your losses” type thing?

7. John Furrier - May 23, 2008

Adam: in my experience the vision doesn’t change but the paths do. VCs are institutional investors and they make bets all the time so losses are tolerated. Often VCs don’t want to waste more money on investments that don’t look like they are panning out. To bring in a new team requires more money and experience and to VCDave’s point requires recruitment..etc..

In my opinion if a venture looks like it won’t make it the VC stops investing and should let the entrepreneur sink with the ship not replace them. Entrepreneurs are skilled at vectoring on opportunity with limited resources so it’s not that much of a risk to keep them in. I would add like the USA Today article that the risk is significant with new mgt that takes the role of the founder out.

Experience founders will do the deals or be resourceful to get path to the attainable vision secured.

8. Adam Bullied - May 23, 2008

Great points, John – well said. Thanks for the great post / discussion!

9. Red Links 26/05/08 : Alexia Golez - May 25, 2008

[…] John has some interesting thoughts on startups fail. […]

10. Problem with VCs - Their Back Teeth are Floating - Portfolio Backlog and Gridlock - An Opportunity for VCs « Furrier.org - Business & Technology Blog - July 1, 2008

[…] Enterpreneurs need to be in charge for long term success. I wrote this on my blog about keeping the founder around. […]

11. Maddy Johnson - July 20, 2008

John,
Creativity is important. Building and shaping a startup is very difficult. Hiring the wrong people often creates the wrong dynamics in startups. DNA of a startup must be established first. I know you already know this.

12. “Apples and Googles” More Like “Apples and Pears” - Bad News for Enterpreneurs? Where’s the Halfway House - « Furrier.org - Business & Technology Blog - July 20, 2008

[…] course I’m biased but founders and entrepreneurs need to be in charge. Never fire the founder in a changing […]

13. BroadDev - Unified Communications, Virtualization, Security, and Web 2.0 » Venture Capital in Trouble? Is Another Apple Out There? Bad News for Enterpreneurs? - July 21, 2008

[…] course I’m biased but founders and entrepreneurs need to be in charge. Never fire the founder in a changing […]

14. Henry Gregor - July 31, 2008

Most startups fail because they don’t start properly – there is information in the literature about ‘initial-founding-conditions’. VC backed businesses usually never set any initial-founding-conditions because of VC demands for growth and exit. Businesses usually get their burn rate up too high because of their haste to get a product out and generate revenue. Usually in the process things change (the market, the economy, etc) and the business has built in so much rigidity it can’t respond to the changes, it then runs harder burning more cash until it flames-out.

15. dr frank morgan - September 20, 2008

I am a private investor based in the United Kingdom. I focus on seed capital, early-stage, start-up, ventures, LLC and all round completion and expansion of investment projects that need funding. I am interested to invest in your company on a long-term business relationship. If this is alright with you kindly get back to me with more details about your company. Dr. Frank Morgan.(Individual/Angel investor)morganfmf1@yahoo.com

16. Yang Is Forced Out At Yahoo - No Question About It « Furrier.org - Business & Technology Blog - November 18, 2008

[…] Yang Is Forced Out At Yahoo – No Question About It November 18, 2008 Posted by John Furrier in Technology. Tags: jerry yang, Kara Swisher, Mike Arrington, yahoo trackback Mike Arrington has the post up with a release from Yahoo. I think that founder should stay and be supported. […]

17. Al Johnson - July 26, 2009

Right on, and the latest travesty is my beloved luggage producer Zuca. I called a few days ago and asked to speak personally with the CEO/Founder whom I met a few years ago at a conference at Stanford for innovative products. I got a nebulas run around comment indicating that the founders (plural) have moved on. I dialed again and started pushing extension buttons and again got more or less the same story but by the tone of voice, both people were very uncomfortable with the explanation. My guess? Fired by the VC! Madness. I will watch for the smoke coming from the Zuca meltdown.
AJ


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