Pete Cashmore has been coming up with very clever titles (and as always great insights on social networking) over at Mashable. A good example is today’s “Web Startups and the Lying Liars That Lie About Them” where he basically makes the case that in general startups suck worse than one would think if one simply took what is written about them in blogs (including his) for granted.
This point hits home hard when you note, as Don Dodge recently did, that it appears startups absorb more money from venture capitalists than they return to the VCs that keep new web companies spinning out of the web, and often (more in the old days than now) keep them spinning out of control even after the startup’s business model has failed.
Interestingly, my own experience with our travel startup Online Highways was something of the opposite of the normal deal. We grew fast, did not get VC money, and started to make enough that we could open new offices in India and a second in Oregon. Initially by many measures we were not a great travel site but we were doing spectacularly well – by July of 2003 we had over 3 million monthly unique visitors. However, after pouring over a million of revenues into developments, maps, and other improvements we actually got nailed by Google for reasons that remain unclear, but as always make the internet a darn interesting place to hang out whether you are a startup that sucks or one that rocks.
Great article by Marc Andreessen about VC
Joe Duck 
Some startups are ‘burn rate’ focused.
All that programming is really just burning through the venture capital funding with no hope of providing a return to the investors because the idea is lousy or the funding is inadequate so they might as well burn through it.
Fools Gold I wonder how many startups are really just looking for funding rather than success? I was really surprised to see that VCs tend to lose money on average but that appears to be the case. However a lot of innovation does happen in the “not profitable” biz space and VCs have money to burn, so it’s not necessarily a bad system.
hmmmm….not sure how to respond to this. Although you both make a point, I don’t think you are on the mark.
First of all the vast majority of funding goes toward marketing and sales. Sometimes key executives are paid large sums but mostly the money is definitely used toward marketing. Until you try to take a product to market it is hard to fathom just how difficult it really is to get the word, get early adopters and eventually attain some level of profitable traction.
One thing that is key, is the management team – in fact it could be said that investment is in the people not the idea. Someone who has a great idea but cannot execute on it – will end up nowhere. Start-ups are all about execution.
Typically in a startup the founders are concerned with getting it “right”. That is to say getting the glitches worked out of their product, getting the message and vision to the rest of the world in a way that people can understand it and start to drink the kool-aid.
Once the vultures get involved (investors) you’re many times driven to deliver bottom line results – it is always important to achieve a solid and growing bottom however, depending on the stage of the technology or solution focusing on the bottom line could also ultimately be the kiss of death.
To be fair you can really get key and good investors in your ventures. They really can make a big difference but they also can be the biggest distraction of your vision. Then you have the board of directors to manage and work with – a lot of times you are trying to balance and juggle several different agendas.
Keep in mind that all investors are “big boys” and understand what they are investing in. Out of 10 major investments if 1 or 2 hit the investors are doing well. It is a numbers game and the majority of startups fail.
The majority of people just don’t understand how difficult it is to conceive, build and execute on an idea to something of substantial value.
Entrepreneurs have to be willing risk literally everything they have in their life to become successful. You’re talking on average 17 hours a day for many years with very few vacations, etc. Please understand when someone hits a homerun with their efforts has literally earned every single penny.
Another point that I can think…just when you think your company is going to fail is when you actually break-through and make it. This point definitely separates the “men from the boys”.
Glenn – what surprised me the most was to learn that on average VCs are losing money. Based on this the “startup” biz, on balance, is not creating successful companies, rather it’s just a way to move VC money to startups. That’s not necessarily bad but it’s very interesting.
Joe it is an interesting play. But the VC’s rarely lose money overall unless they really don’t know what they are doing.
The returns of a successful investment are incredible. One of my early startups we have an initial investment from a firm just under $3 million – well 11 years later the company went public and achieved a market cap of around $600 million and a couple of years later was bought back private for $1.4 billion. You can just imagine how much of a return that $3 million produced…and that doesn’t even include the preferred shares and warrants they always get and able to convert at time of certain financial events…i.e. simplistic example at the time of an IPO it is not uncommon to see warrants that convert into common at some multiple below the IPO price, etc…
You are talking 100 million + in ROI from the right early investment like that. So if I VC makes 30 investments of $3 million for a total of $90 million and have 3 major hits they still get close to 3X their money back overall.
It is also important to note that VC firms rarely invest just once (unless it fails) and they tend to have their sweet spot of investment range and usually plan up to 5X their initial investment during their life of investing with the company.
Thx Glenn – I’m digesting that really interesting comment! Now *that’s* some decent leveraging of a position.