Firstly, a response to “Venture Capitalist Sounds Alarm on Startup Investing” interview with Bill Gurley.
There are several great points; depending on the fund, they might not be mutually inclusive:
1) Founders spend too much and VCs are too relaxed
2) Most current founders don’t have a direct, visceral memory of the ‘99 burst
3) Investor ROI may be more difficult to capture without aggressive terms that can leave many waiting or hanging
4) We’re in need of a correction for. It will be healthy and natural, though painful.
1) While many thought leaders advocate VCs having little control over startups, if irresponsible burn is such an epidemic, why not call for more oversight and, if really needed, controls? That would help maintain sustainable growth in the industry while doing companies a service.
This might be the biggest core problem, and one more easily solved by relaxing on the stigmatic “anti MBA” culture in many startup camps. Having a grounding force that is a voice of practicality, foresight and balance — wherever it comes from — could do a world of good.
This would have to be balanced by the desirability of speed and innovation. “Fail fast” and “first to market” can justify spending a lot to iterate quickly, but these might be justified more often than is appropriate.
2) Founder long term memory. I started HS in 1998, so fall in this camp. Admittedly, studying the bust’s history and rationale has been a minimal part of my entrepreneurial education, and summed up as “business models weren’t as thoroughly vetted, and excitement over the internet’s fast growth led to overvaluation.”
Do VCs who “invest in people” (a philosophy I like and often hire by) skimp on due diligence? Is the growth of early stage funds, accelerators, incubators and the growth of startup ecosystems a helpful buffer to slowly vetting first time entrepreneurs? Is the current state of computing and the coming boom of global connectedness going to carry us forward in ways the original boom hoped, just smarter?
3) Gurley clearly analyzed the economics of the current situation, and I don’t disagree with him here. Any investment is a risk, and there are legions of stats on success and failure. If profit is the primary, ultimate motive, it might do many firms good to heed his warning. However, if profit is strongly desired, but there’s a high risk tolerance and a preference for grander vision (more in my last point, below) then this is just the cost of doing business. Is it too high? Maybe. So let’s work on the model (#1), talk best practices, and encourage VCs to take a good, honest look at why they make decisions — and if enough data has been gathered and analyzed before closing a deal.
That being said, I know this can be difficult given the time sensitive nature of this industry. Obstacles: momentum in startup rounds, along with alliances to other firms and the trend to trust (a good thing to save work, a bad thing if the core work hasn’t been done).
4) Natural ecosystems balance through natural selection and carrying capacity based on conditions, so we shouldn’t be surprised if the current startup ecosystem does the same.
Agreed. That’s a big prediction, and suggests big action if it’s true. I’m a fan of data: What does it say? What does it mean? Do we have enough?
If the answer to any of these is “I’m not sure,” it might be good rationale to pause and reflect.
A final point on the WSJ interviewer’s question on eyeballs, which Gurley addressed by saying there were many examples of good exits.
Beyond the scope of this article on realistic investor expectations, I’d like to see the dialogue include user data, which is a value that might not be fully appreciated yet, but when crunched intelligently (which is getting easier at scale) can provide huge insights into consumer behavior and sentiment. Control over a population and user ecosystem (Whatsapp, Instagram) that leads to a bigger goal (domination of virtual cultures) might have very powerful, but hard to trace ROI.
There’s also the analogous benefit of successful innovation. If Twitter isn’t profitable but provides a much appreciated social good, immediate news network, infrastructure for quick massive action (Arab Spring) and feedback tool (corporate transparency) — but we can’t immediately quantify those through revenue — does it have negative ROI? How about other companies that also provide similar intangible goods that spread innovative thinking (Minecraft) and education (MOOCs)?
Will unreasonable burn rates hurt the startup ecosystem? Maybe. If so, there are some things more valuable than money that we could lose. Whether or not Gurley is right, the consequences of a bust are bigger than money, and they’d affect more than the VC firms and their LPs who can frequently weather the losses.
I respect the firms that make clear, consistent and high returns. I also respect firms that support moonshots; often these are the same. In evaluating risk and returns, the final variable I’d love to see celebrated more is the powerful affect entrepreneurship has on people: It teaches practical creativity.
That’s a luxury employees crave, and whether or not someone succeeds as a founder, being able to explore an idea and build a company — if only for a short time — is an incredibly valuable and unique experience.
Should it be done at the right time, with the best education, excellent mentors, and a vetted plan? Sure. But I’d hate to imagine a world without inventors.
And for that reason, more than any other, I put one of my greatest passions on hold — art — and moved to the Valley to dedicate to a life devoted to entrepreneurship and venture capital, and focus in the area of human optimization.
Creativity is precious. Envisioning an idea — and fueling its growth — is my greatest joy. If anything can jeopardize that, I will fight. Not just for myself, but for my fellow founder brothers and sisters.
If we’re being irresponsible with burn, we should realize who gets hurt. It’s not just us. It’s not just our investors. It’s a bigger, broader community, and our future depends on it.
Let’s do this right.