In this blog I look beyond the obvious and try to find out why people and companies do what they do - and what it means for the rest of us. 
In many ways, the world has changed. In many ways, it has stayed the same. Sometimes, there is a combination where, though the world is changing right in front of us, we try to keep on doing the same dumb things we’ve always done – hoping for a different outcome.
Over the last 10 years, there have been a handful of startups who, in one way or another, have been able to create (or follow) a funding frenzy that catches the eye of the industry in such as way that even the most logical and even-tempered venture capital firms find themselves caught up in. Firms step all over themselves to inject outrageous amounts of capital into mediocre (at best) plans to shoot for the moon – or keep up with the Jones’ (I don’t mean the trashy Jones’ from the Jersey shore, I mean the Yale Jones’ of proper Brahman descent, of course).
Most all of the companies funded to excess – those who instead of raising the obligatory $24 million in their startup lives raise $80-100 million+ – crash and burn on the force of their own weight, selling their “IP” for pennies later on. Many share a similar story line. There are interesting things that can be observed if we look back at over the last ten years.
Of the ridiculously funded psychotic startups, the grandaddy of them all has to be Storage Networks (SNI). A spectacular play grabbing the cash and attention of the world, making it all the way through an IPO that valued the company at $10B at one point – only to flounder into oblivion a year later. Why? Because the company never had a “business” – a small detail,I agree, but eventually no matter how much money you raise, someone is going to want to judge you by a metric or two based in business. SNI never had a real market that would pay for it to solve a real problem – the two basic characteristics every company should be founded on. In this case, the outrageous levels of investment were justified; hwever, as those who piled in the crazy cash were rewarded greatly – as long as they were smart enough to realize they were part of a pyramid scheme and sold when they could. Those who held on believing that acompany without customers or any real hope of getting them could somehow justify and grow their already lunatic valuation lost a pile of dough.
A lot of people made a lot of money with Enron, less ye forget.
In the SNI example, I don’t blame the founders, nor do I blame the VCs – they won. They didn’t build a real company, nor real sustainable value, but they were able to do what the rest of their kind did not: provide a home run return to those investors. The suckers who bought in after had what pennies were left of their investment returned to them shortly thereafter, along with the AMT tax burden adding insult to injury.
When something catches fire – whether it is based in logic derived from sound business practice or based on an idea gleaned from an acid trip, the VC world goes nutty and the lemmings line up to toss the cash. Remember Storability? They were second in line behind SNI and took a big pile of dough. Sold for diddly. There were dozens of other SSPs – storage service providers – that came and went. Though none had that level of silly VC investment, all had garage sales.
Here we are ten years later and SaaS (storage as a service – maybe that was the problem, they were missing a letter!) in the form of “Cloud” is all the rage. Different terms, different times, same principals apply. Is it a business that has been formed to address a legitimate problem, which I define as one which a market will pay to solve? Is the problem itself sustainable – or will it only be a short term issue? If you can’t answer these questions, you have no business putting money or time into anything.
There have been other monumentally huge investments into startups where the answers to these questions have been simply “no,” only no one bothered to ask them. Companies that might have had cool ideas or great technology where VCs simply never bothered to ask the hard questions, or answer them honestly. I’m no genius, but I could be taught to ask myself, “assuming this company does everything it says it is going to do, then:”
- Does it solve a real problem that people will give us money for?
- Is the problem going to get worse instead of better (organically)?
- Since I know that no one wants to deal with a new vendor, no matter how nifty this new company is, will the incumbent vendors have “good enough” answers to the problem – and if so, for how long?
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Tags: AMT, Cereva, Cloud, Incipient, SaaS, SNI, SSP, Storage Networks, VC, Z-Force
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I found while trying to raise startup capital or VC capital that VC’s didn’t want to fund small amounts. They make money on taking lower risk bets than we commonly think they do. When it’s easy to raise money they take riskier bets. Harder to raise money and they get more conservative.
A key problem is the lack of angel investors. Angels provide the high risk start up funding. They also assure that the business model is vetted earlier.
Lack of angels means good start ups never get off the ground and some people are able to catch a trend or get luck early even for a business that is not sustainable over the long haul.