Why So Many Companies Never Seem to Die
The Myth of Failing Fast
It’s taking too long for entrepreneurs to fail fast.
Increasingly, everyone seems to want to work in tech. Even NYC is coming around to the idea. There is a palpable trendiness now associated with “founding” a startup and, with Facebook sitting with a market cap of $120B, Twitter on the verge of being valued at $10-15B upon their IPO, Uber recently raising money at a $3.5B valuation, and Instagram being acquired for $1B, building a company can’t be that hard, right?
Unfortunately, the great majority of us won’t ever come close to achieving this level of success .
There’s a 0.00006% chance of building a company that will grow to be worth more than a billion dollars.
-David Friedberg, Founder of The Climate Corporation
Not shocking to most, I know, but what I find troubling is the length of time it takes for many founders/leaders to come to this realization.
Why is this? The answer, to me, revolves around three rather simple, but powerful forces: the continued decline in the cost of starting a company, the increased ubiquity of accelerator programs, and the ease with which unsophisticated investors can now join funding rounds.
Low Cost
Today, there is really no downside in trying to start a company. While I’m all for increased innovation and tinkering — I actually believe everyone should be able to try to step into the game — there is an element that scares me about this ease of access.
Put up a splash page, get an AWS account, grab a seat at the nearest coffee shop, and you are off to the races. Having virtually no barrier to entry has helped fuel the ability of many “wantraprenuers” to hide for longer in “stealth mode,” and survive seemingly forever on shoestring budgets — all while not having a clue how to actually execute, or being as passionate about their idea as they should/need to be.
This reality only serves to delay honest conversations around whether or not a product/service is truly of value, and elongates the time it takes to explicitly separate quality entrepreneurs from the rest of the pack.
Accelerator Blindness
The accelerator boom plays an interesting role in this dilemma as well. While I can’t say enough about how amazing my experience at TechStars was, and have incredible respect for organizations like YC and 500 Startups, I am worried that the proliferation of these types of programs are helping give a false sense of entitlement, and premature validation to many of the companies selected to participate.
In effect, the accelerator craze has enabled some startups to essentially skip key steps in their maturation process and appear perfectly packaged and far more fully baked than they really are.
While this doesn’t fool sophisticated investors — Mark Suster has talked extensively about why he doesn’t attend Demo Days — flashy presentations, slick demos and the perceived de-risking that comes with participation in a top accelerator program(have you seen the advertised success rates???) are often quite tempting to the untrained investor.
Unfortunately, many accelerators are increasingly feeding the drive/opportunity for inexperienced founders to optimize for all the wrong things — price and terms, over quality and fit of investor- and ultimately give legs to companies that probably shouldn’t stick around as long as they do.
Investors Everywhere
As we continue to move from a time where there was, relatively, little money available for entrepreneurs — and far fewer opportunities for capital allocation- to an environment today where seemingly everyone is working on an idea, and money is flowing freely, it is easy to see why some entrepreneurs might have a false sense of security. If it’s so easy to raise money, then why not do it and why not raise a lot?
Some entrepreneurs do realize quickly that they are in over their heads, or simply figure out that they aren’t passionate enough about a specific idea to warrant the venture funding received (the mark of a fantastic entrepreneur), but most do not. Instead, they are blinded by the easy money and the short-lived bragging rights that come along with an article in TechCrunch.
No longer does it seem like it’s okay to raise a small amount of money, and sell your company for $10mm-$20mm — even if you own a majority stake. This is crazy to me, but unsophisticated investors and party rounds have enabled novice founders to raise far more money than they often deserve, at valuations that just don’t make sense and, in effect, have given these entrepreneurs “permission” to fight a loosing battle for far longer than they should actually be able to.
So, while in theory, the ideas of constant iteration and lean methodologies are great — and do work tremendously well for top-notch founders — its my view that many of today’s market dynamics actually dissuade founders from failing fast and unfortunately enable a growing number “entrepreneurs” to abuse these frameworks, masquerade as quality founders, and help shield them from the unfortunate realization that actually building a successful company is far harder than the ease with which we all can *start* one.
