Here’s some comments from a discussion about YPlan’s recent demise:

“Well i would imagine the founders didn’t put in much of the 1.5m, had fun squandering other people’s money for years while paying themselves and their friends salary”

“Terrible for everyone, the Founders would have seen a sliver of this money, the investors would have been looking for significantg returns on a $40million raise.”

“Another sign that SV way of doing business is soon to implode. I expect this to happen with Uber, Twitter, Groupon, Tesla, probably LinkedIn etc. You can’t build a company just by spending investors money. You need to have a product to sell it.”

“Because a few years ago, it raised some cash, which was enough to earn it a press write-up.”

“Wow, I’m totally flabbergasted at how little this was liquified at, they must have had significant debt, I would laugh if I was crying a little inside.”

“they wasted a huge amount of money in what was basically a R&D exercise”

“Remember the likes of Google, Apple, Microsoft, Facebook didn’t start with huge capital and scale. It’s only a recent thing in the US, built off the top of highly successful companies”

There’s four big misunderstandings about venture being banded around and have persisted throughout the vast majority of comment I’ve seen so far, which I’d love to try address.

They are:

• Venture capital is a startup ‘borrowing money’ and if it isn’t ‘paid back’, you’ve cheated someone (it isn’t).
• YPlan ‘failing’ despite raising so much money is a huge calamity to be ashamed of (it isn’t).
• It is incredible that they didn’t manage to build a ‘viable business’ despite the fact they money raised (it isn’t).
• YPlan only got so much press attention because they raised so much money (it probably isn’t why).

Here’s why:

What venture capital is for

A startup raises venture capital to fund some sort of venture — to try something, to solve a problem. That might be to fund a business until it reaches a certain level of scale and can leverage the economics of such (e.g. Uber, Amazon, Walmart), it might be to try develop and prove a new technology (e.g. Tesla, SpaceX, a new drug), or to bring some new insight to an established market.

Or, as seems to be the case with YPlan and their shot at entering the US market, it might be to compete for amarket which often needs big marketing and customer acquisition spend to get traction.

There seems to be a misconception that ‘oh, you’ve raised lots money. Your business should be viable by now. Surely.’

A startup by definition is a venture in search of a repeatable and scalable business model. Venture capital is capital in search of a venture deemed to have the potential for high growth.

YPlan and their attempt at the venture fit the bill. The seemingly high valuation was large (because the size of the opportunity was significant) and hence the amount of money raised was large (because the opportunity needed a lot of resources to execute).

Most ventures fail to return money — this is part of the model

Generally speaking (and I hope I am not simplifying this too much), institutional venture capital builds into the model the fact that 6–8 out of 10 investments ventures will fail. The money will — literally — be burnt through. Then, one or two might return their capital or a bit more. Then, one investment will return enormously back to the fund. In other words, 60–80% of invested and investable startups will fail.

Therefore, while it is noteworthy to see YPlan try their venture and while there will be a lot of useful takeaways for other startups from YPlan’s attempt, it is not noteworthy that YPlan ended up failing in their venture in spite of its funding.

Most institutional investors are not stupid

I think we can trust multiple institutional investors that they thought something about YPlan deemed it to have the potential for high growth in a big market. Maybe it was early user traction. Maybe it was simply belief in the founders. Maybe it was the even bigger opportunity they tried to tackle by expanding in the US. We don’t know.

However, a reasonable assumption we can make is that there was probably something there that professional and seasoned investors thought it was worth backing and primed to capture the market, knowing full well that they had a mere 20-30% or so prospect of having their capital returned on a great day.

If it is worth funding, it is probably worth writing about

If we accept the above, then we should accept that investment in a venture is a strong signal that there’s something interesting there — and therefore something worth writing about.

As a founder of a bootstrapped startup, I enjoy a good moan about how much harder it is for us to get the attention of the media without the venture funding signal.

However, I also accept that big opportunities are exciting and huge potential is exciting. And that’s what attracts funding. Exciting things are interesting and make good stories. And that’s what attracts media attention.

Just because the media reporting on YPlan was often anchored around its fundraising events (which would naturally coincide with when YPlan chose to deploy its PR efforts) does not mean the media attention was only because it raised funding.

YPlan got media attention for the same reason it attracted funding: big opportunity, potential and an exciting venture.

Don’t be ignorant, don’t be spiteful — be thankful

Almost everything that happened to YPlan is normal and part of a healthy startup and venture ecosystem. YPlan or its founders or its investors should not be vilified.

If anything, we should raise a glass to the founders for having tried something, for having contributed to the community in London, and for choosing to try their startup venture out of London at all.

London and our startup community is better — not worse — off for another venture being tried, even if it failed.