Why Startups Fail? Entrepreneurs Perspective – Keep the Founder Around

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.

VC Credibility and Founder Credibility – It’s a Marriage

Getting financed by a VC is a marriage.  When it doesn’t work out it’s a divorce.

Josh Kopelman writes a great post on entrepreneurs pitching him.  He talks about Founder Credibility.  It works the other way as well – VC Credibility.  Both parties (the founder and VC) are looking for partnership – founder: money/business partner and VC: investment partner so chemistry is key.

If the VC doesn’t understand or believe in the founders vision then it will never work out.  For VCs they do this all the time- they take hundreds of meeting until they find that chemistry.

Here is Josh’s post.

This past week I had two distinctly different meetings with entrepreneurs.  They both were successful serial entrepreneurs.  Both were exceptionally smart.  Both had good ideas.

The first entrepreneur, however, thought that they were expected to know the answer to every question.  There wasn’t a question I asked that he didn’t have a definitive answer to.  He knew what their pricing model would be.  He knew why Google would never compete with them.  He knew what their consumer churn would be three years out (despite the fact that they hadn’t launched yet).  Whenever I tried to discuss the different risks in the business, he told me why they didn’t exist.

The second entrepreneur, had a different approach.  He definitively stated answers when he had them, but when he didn’t know he said so.  When asked about his pricing model, he said “well, we’re considering a few different options depending on the outcome of some tests we’re running…”  When asked about cost of customer acquisition, he said “well we don’t know what our numbers will be…but here’s our model based on other comparable companies.”  When asked about risks, he identified several — and then we discussed how to reduce/eliminate them.

I’ve come to believe that a key investment criteria is founder credibility.  And, I think the second entrepreneur was far more credible.  No one expects a pre-launch company to have all the answers.  (In fact, we get scared if you think you have them).  As I’ve previously discussed, rather than have an entrepreneur sell me on why they are 100% correct, I’d much rather understand how they are attacking the different risks facing the business.

And, by the way, the same applies for venture capitalists.  I often feel that during company pitches — and board of directors meetings — we’re expected to have an immediate opinion.  Should we double our marketing budget?  Should I hire this person?  Will this strategy work?  While it’s OK to offer opinions and thoughts, I think it is also appropriate to acknowledge uncertainty.    

One point in his post that is worth highlighting is how the second enterpreneur views the market. He looks at the market as a fluid dynamic – “running tests” with “base assumptions”. Many entrepreneurs have been scorned for this view (myself included) in being “not focused”. I hate that word. All early stage entrepreneurs are ‘very focused’ on the fluid market how to enter and plans based upon certain market conditions or scenarios. Key is the focus on the possible scenarios – for that there is no one answer.

Josh’s last point is important: VC Credibility – When VCs sit on 9 boards and shows up once a qtr for board meetings with ‘the answers’ then their credibility is on the line.

Early stage is about entering the market with a narrow value proposition that has the opportunity to take advantage of a massive growth trend when in market. For this the entry strategy should be very clear and the answers to the so called ‘billion dollar’ revenue plan should be scenario based.

Are Web 2.0 Entrepreneur’s Love Affair with Venture Capital Over

Cnet has a story headline “Is venture capital’s love affair with Web 2.0 over?”– Ironic??

According to this massive trend 2007 deals are down an amazing amount – total deal numbers down an amazing 5.   “Web 2.0 deals in the Bay Area actually dropped from 74 deals in 2006 to 69 last year” -Wow.

Entrepreneurs are starting companies that require less capital and no venture capital at all.  Maybe entrepreneur’s love affair with venture capital is over.  It’s clear to me that entrepreneurs that I talk to are bootstrapping longer and financing ventures themselves.

I hardly think that a reduction of 5 deals validates a venture capitalist trend.  Most VCs are not that savvy on Web 2.0 and are generally skeptical on web deals.  The ones that do get it are doing many deals.  Jeff Clavier has already pounded out 16+ deals in his new fund.

Entrepreneurs Beware. Yahoo Buyout Could Kill Technology Startups? Advice: Be an Arms Dealer.

Entrepreneurs beware Microsoft buying Yahoo could shut down the tech startup scene.  It could send the startup climate back to 2001 levels – nuclear winter shut down.  I lived through 2001-2004.  It was ugly.  

Brad Burnham has hit on a narrow topic about the downside of the Yahoo buyout for Silicon Valley.  Brad’s story is very relevant with ‘macro’ implications to the tech world not just Silicon Valley.   This deal could cripple startup activity.

Efficiency for Microsoft means leverage with suppliers.  Translation:  Startups are suppliers and Microsoft just became Walmart.  This could have a chilling effect on the VC and tech investment community.  This new industry structure puts even more of an emphasis on ‘hits’ or category specific deals.   If the Venture Capitalists are confused today can you imaging what they will do going forward.   This could get ugly. 

Advice for Technology Startups and VCs:  Understand where your company is in the pecking order in this war.  If you’re not an arms dealer then you might want to rethink your strategy. 

Update:   others are thinking the same….  A VC -Fred Wilson; Opportunity for another big player to bid:   News Corp. 

Venture Capital Resource AsktheVC – Entrepreneurship Lessons

Brad Feld who was a Mobius has formed a new VC firm called Foundry.  Brad’s a good investor and I’ve learned from Facebook that he has the same birthday as me (Dec 1).  He and his team have a great site called AsktheVC.  It’s a great resource for entrepreneurs who want to prepare to build a great venture.  They don’t post everyday (like sites chasing news) but their post are very strong in value.  Very credible.

Brad Feld and Jason Mendelson are the co-authors of AsktheVC. Brad and Jason have been working together since 2000 when Jason joined Mobius Venture Capital, a venture capital firm that Brad co-founded. They started writing together on Brad’s Feld Thoughts blog in 2005 with their Term Sheet series. After several other series about issues facing venture capital backed companies, Jason and Brad decided to start AsktheVC. Brad and Jason, along with three other partners have recently founded a new venture firm, the Foundry Group located in Boulder, Colorado.

Some topics that were post this past month. 

Sales is a Science, not an Art, What Happens If Convertible Notes Are Called By Angel Investors?, Should Venture-backed Companies Require Non-Competes?, Ad Revenue Models, The Wizard on Early Stage Board of Directors, Should Startups Invest In Patents?, What Are Typical Employment Contract Terms and Severance Benefits for a Startup?, more at the site.