Startup Lessons: December 2007 Archives
We have all heard about why VCs look for 10x return and how most of their investments fail or underperform (hence the need for the 10x home runs). Fred Wilson of Union Square Ventures has published two blog posts which contains an analysis of the startups he has invested in as a partner - 32 investments over 17 years.
First of all notice that it's not 320, it's 32. So we're talking 2 new investments a year. This is in line with most of other VCs I have heard from (about 2 deals per year per partner). They receive a lot of business plans but select only a few. Usually the partner involved takes a seat in the board of directors of the company, and these accumulate over the years - if the average life time of a company through exit is four years, the partner ends up on some eight boards.
In failure rates in early stage deals, he shares some numbers in terms of what he thinks (and promises to VC investors) in terms of success/failure rates, and what his performance shows (he has done great, by the way). He counts on 5x-10x in 1/3 of the companies he invests in, complete loss on another 1/3, and another 1/3 in between (doing ok, but no considerable ROI).
Personally I find the second post, why early stage investments fail, even more interesting. Notice that this is not "why early stage startups fail". In fact of the two reasons he gives, the second mostly applies to companies beyond their early stage.
He talks about two main reasons: 1) VC realizes it's not a good idea and kills the investment. 2) Idea is good but grows too soon, i.e., it gets overfunded and burn rate goes high before they realize how to scale the business.
He then goes into more details on the second reason, which is what I really liked about the post. I have seen this first hand. He sys most of the time the business plan is flawed in the beginning, and the companies have to transform themselves as they are executing to make sure they finally find the right business plan. In his words: "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."
Again he shares some data - of his investments, within the ones that did 5x or more, 7 transformed, 4 did not. Of the failed ones, 1 transformed, 4 did not. Interesting, eh?
First of all notice that it's not 320, it's 32. So we're talking 2 new investments a year. This is in line with most of other VCs I have heard from (about 2 deals per year per partner). They receive a lot of business plans but select only a few. Usually the partner involved takes a seat in the board of directors of the company, and these accumulate over the years - if the average life time of a company through exit is four years, the partner ends up on some eight boards.
In failure rates in early stage deals, he shares some numbers in terms of what he thinks (and promises to VC investors) in terms of success/failure rates, and what his performance shows (he has done great, by the way). He counts on 5x-10x in 1/3 of the companies he invests in, complete loss on another 1/3, and another 1/3 in between (doing ok, but no considerable ROI).
Personally I find the second post, why early stage investments fail, even more interesting. Notice that this is not "why early stage startups fail". In fact of the two reasons he gives, the second mostly applies to companies beyond their early stage.
He talks about two main reasons: 1) VC realizes it's not a good idea and kills the investment. 2) Idea is good but grows too soon, i.e., it gets overfunded and burn rate goes high before they realize how to scale the business.
He then goes into more details on the second reason, which is what I really liked about the post. I have seen this first hand. He sys most of the time the business plan is flawed in the beginning, and the companies have to transform themselves as they are executing to make sure they finally find the right business plan. In his words: "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."
Again he shares some data - of his investments, within the ones that did 5x or more, 7 transformed, 4 did not. Of the failed ones, 1 transformed, 4 did not. Interesting, eh?
