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At the Union Square Ventures blog, Fred Wilson (A VC) is running a series of posts on venture capital investment and early-state companies. Today's post is full of insight that applies to any startup business (including a for-profit blog):
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.
Based on Wilson's experience:
there [is] 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.
What kills a company that raised enough money?
the venture capital is used to scale the business before the correct business plan is discovered
Who is largely responsible?
Entrepreneurs may not have the experience to know the folly of taking burn rates to levels which make "figuring it out" impossible. But we as investors know how high burn rates kill companies and we have a responsibility to fight them at every turn.
(My view: while many investors may know it, they don't seem to follow this advice. A key problem: the "hit driven" and "portfolio" nature of the VC business gives investors a different set of incentives than entrepreneurs.)
What about companies that don't raise money?
They will mostly fail because they have the wrong business plan and they don't have the wherewithal to survive for the period of time it takes to figure out the correct one.
Allow me to translate: if you quit your day job expecting that your great idea (or informative blog) will make money before your savings run out, make sure to have a backup plan. There's a very good chance you'll need it.
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