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VCs are generally greedy and stupid at the same time. They follow the herd more than any other industry. The fact they invest in something means little as to ho

VCs are generally greedy and stupid at the same time. They follow the herd more than any other industry. The fact they invest in something means little as to how savvy they are or how successful the product will be. 90% of all startups fail, and there have been plenty of spectacular implosions in the past and there will be plenty of spectacular implosions in the future. Bird will be the WebVan of this business cycle.

MegaButts 7y ago
> 90% of all startups fail There's no way it's that low. Maybe 90% of VC-backed startups, and even then I think it depends on how you massage the definition of 'fail'
- jeron 7y ago
  https://www.failory.com/blog/startup-failure-rate https://www.failory.com/blog/startup-failure-rate 90% failure rate comes from research by Small Biz Trends
  - MegaButts 7y ago
    A cursory glance at that data tells me it makes no sense. They cite several industries with failure rates substantially below 90%, don't give a single instance of a failure rate greater than 90%, but tell us it averages out that way. Also real estate businesses only have a 42% failure? So I have a greater than 50% chance of becoming a real estate mogul? I just don't buy it, and I don't believe those other numbers either. And the only source they cite on the website, http://www.moyak.com/papers/business-startups-entrepreneurs.html http://www.moyak.com/papers/business-startups-entrepreneurs...., doesn't really lend any explanation to their numbers. I think their data is wildly skewed by sampling bias, as they claim to get their data from interviewing failed founders. Welp, they never interviewed me - how many other people have they never interviewed because they simply never knew the company existed? How many founders, after failing, go out of their way to talk about their failure? VCs have a strong incentive to create a story that starting a company has a greater chance of success than it does, because it's low-risk for them and they want a churn of potential investment prospects. I think 1% is a much more realistic number than 10%, unless we're limiting ourselves to Sequoia-backed post-Series A companies.
- tedmiston 7y ago
  It also depends on how you define "startup". The informal definition we think of day-to-day is fairly fuzzy. There's nuance in differentiating a small business operated by a few people from a startup. Being venture-backed is a simple differentiator but there are still legitimate startups this would exclude, e.g., serial founders who don't need to raise or products that make money early. With respect to "fail"... is an acquihire or an even-money, 1-3x exit etc a "failure". Probably, yes for the VC, but not necessarily for the founder. Accelerators are incentivized to count "successes" liberally as well. With a more broad definition of startup, it's easy to see the failure rate at 99%+.
mushufasa 7y ago
(edited to consolidate my comments) Here are the reasons I can think of 1) compelling if it all works out. Invest clear-eyed and hope the founding team figures out the roadblocks. Greedy but not stupid; most successful startups start by 'doing things that don't scale.' 2) Pattern-matching / top-down portfolios. Mobile apps. Sharing economy. Subscription businesses. Electric Vehicles. Internet of Things. A lot of investors decide on themes for portfolio before they look at investments. Scooter sharing ticks a lot of boxes. 3) Adverse selection. It's a simple idea - anyone can grasp scooters as subscription. So the simplest-minded investors chose this rather than more subtle ideas. 4) as another comment suggested, investors are playing a game of musical chairs between funding rounds. Chamath Palihapitiya claims this as the reason his firm is stepping back from VC -- so he's walking the talk here https://www.cnbc.com/2018/10/10/start-up-economy-is-a-ponzi-scheme-says-chamath-palihapitiya.html https://www.cnbc.com/2018/10/10/start-up-economy-is-a-ponzi-...
- hef19898 7y ago
  So, point two would mean that, in an environment that regards VC finding as success, any good idea, in the sense of getting VC funds, would optimize to tick the right boxes, wouldn't it?
  - mushufasa 7y ago
    If you think of VCs / founders as a marketplace, which it kindof is, then yes. You have a larger 'market' for selling your startup idea, and optimize the 'product' for 'fit'. If you think of VCs as totally independent, open-minded, critically thinking professionals, dutifully providing a financial service, then no. You pick the VC for the idea rather than the idea for the VC. The second case is the ideal, but assumes highly-competent VCs and founders with equalish leverage. I think the perverse incentives for VC partners (read Palihapitiya) and the lack-of-prestige factors for first-time founders break the model. But this seems to be more true for second-time founders with moderate success under their belt.
- tenpsafdl 7y ago
  I agree with Chamath Palihapitiya. VC money is like taking steriods. You get the muscles, but it will disappear once you stop taking them. I have come to the realization that VCs are really bad at distributing resource. For all these pedigrees to show for, they all seems to be playing musical chairs. Part of the problem I see is that most VCs don't have a founder background and most of them you meet are pretty arrogant.
tedmiston 7y ago
Given the high percentage of startups that fail, I wonder what percentage of VC funds fail, where perhaps we can define fail as "return less than the S&P 500 over the same timeframe". I imagine the true answer is a much more difficult number to come by. Easier to get late money in a successful company and claim "qualitative success".
- MegaButts 7y ago
  There's better data on this than there is for startups. Between 85 and 90 percent of VC funds (which is distinct from VC firms) lose money.

MegaButts 7y ago

> 90% of all startups fail There's no way it's that low. Maybe 90% of VC-backed startups, and even then I think it depends on how you massage the definition of 'fail'

jeron 7y ago
https://www.failory.com/blog/startup-failure-rate https://www.failory.com/blog/startup-failure-rate 90% failure rate comes from research by Small Biz Trends
- MegaButts 7y ago
  A cursory glance at that data tells me it makes no sense. They cite several industries with failure rates substantially below 90%, don't give a single instance of a failure rate greater than 90%, but tell us it averages out that way. Also real estate businesses only have a 42% failure? So I have a greater than 50% chance of becoming a real estate mogul? I just don't buy it, and I don't believe those other numbers either. And the only source they cite on the website, http://www.moyak.com/papers/business-startups-entrepreneurs.html http://www.moyak.com/papers/business-startups-entrepreneurs...., doesn't really lend any explanation to their numbers. I think their data is wildly skewed by sampling bias, as they claim to get their data from interviewing failed founders. Welp, they never interviewed me - how many other people have they never interviewed because they simply never knew the company existed? How many founders, after failing, go out of their way to talk about their failure? VCs have a strong incentive to create a story that starting a company has a greater chance of success than it does, because it's low-risk for them and they want a churn of potential investment prospects. I think 1% is a much more realistic number than 10%, unless we're limiting ourselves to Sequoia-backed post-Series A companies.
tedmiston 7y ago
It also depends on how you define "startup". The informal definition we think of day-to-day is fairly fuzzy. There's nuance in differentiating a small business operated by a few people from a startup. Being venture-backed is a simple differentiator but there are still legitimate startups this would exclude, e.g., serial founders who don't need to raise or products that make money early. With respect to "fail"... is an acquihire or an even-money, 1-3x exit etc a "failure". Probably, yes for the VC, but not necessarily for the founder. Accelerators are incentivized to count "successes" liberally as well. With a more broad definition of startup, it's easy to see the failure rate at 99%+.

mushufasa 7y ago

(edited to consolidate my comments) Here are the reasons I can think of 1) compelling if it all works out. Invest clear-eyed and hope the founding team figures out the roadblocks. Greedy but not stupid; most successful startups start by 'doing things that don't scale.' 2) Pattern-matching / top-down portfolios. Mobile apps. Sharing economy. Subscription businesses. Electric Vehicles. Internet of Things. A lot of investors decide on themes for portfolio before they look at investments. Scooter sharing ticks a lot of boxes. 3) Adverse selection. It's a simple idea - anyone can grasp scooters as subscription. So the simplest-minded investors chose this rather than more subtle ideas. 4) as another comment suggested, investors are playing a game of musical chairs between funding rounds. Chamath Palihapitiya claims this as the reason his firm is stepping back from VC -- so he's walking the talk here https://www.cnbc.com/2018/10/10/start-up-economy-is-a-ponzi-scheme-says-chamath-palihapitiya.html https://www.cnbc.com/2018/10/10/start-up-economy-is-a-ponzi-...

hef19898 7y ago
So, point two would mean that, in an environment that regards VC finding as success, any good idea, in the sense of getting VC funds, would optimize to tick the right boxes, wouldn't it?
- mushufasa 7y ago
  If you think of VCs / founders as a marketplace, which it kindof is, then yes. You have a larger 'market' for selling your startup idea, and optimize the 'product' for 'fit'. If you think of VCs as totally independent, open-minded, critically thinking professionals, dutifully providing a financial service, then no. You pick the VC for the idea rather than the idea for the VC. The second case is the ideal, but assumes highly-competent VCs and founders with equalish leverage. I think the perverse incentives for VC partners (read Palihapitiya) and the lack-of-prestige factors for first-time founders break the model. But this seems to be more true for second-time founders with moderate success under their belt.
tenpsafdl 7y ago
I agree with Chamath Palihapitiya. VC money is like taking steriods. You get the muscles, but it will disappear once you stop taking them. I have come to the realization that VCs are really bad at distributing resource. For all these pedigrees to show for, they all seems to be playing musical chairs. Part of the problem I see is that most VCs don't have a founder background and most of them you meet are pretty arrogant.

tedmiston 7y ago

Given the high percentage of startups that fail, I wonder what percentage of VC funds fail, where perhaps we can define fail as "return less than the S&P 500 over the same timeframe". I imagine the true answer is a much more difficult number to come by. Easier to get late money in a successful company and claim "qualitative success".

MegaButts 7y ago
There's better data on this than there is for startups. Between 85 and 90 percent of VC funds (which is distinct from VC firms) lose money.