This morning, Fred Wilson of Union Square Ventures discloses to the world his failure rate as a venture capitalist of 17 years (20 percent over 32 investments, which is enviable in VC circles). He’s also had 11 deals (40 percent) with 5X+ returns, so it more than balances out.
Wilson is more at ease talking to the world (through his blog) than most VCs. But all venture capitalists should have to disclose their personal failure rates. After all, measuring performance should go both ways between VCs and entrepreneurs, not to mention venture investors. Sometimes, you can learn a lot more from failure than from success. Wilson shares what he’s learned from his failures. Either a business turns out to be a dumb idea, he says, or, more likely:
It was a decent idea but directionally incorrect, it was hugely overfunded, the burn rate was taken to levels way beyond reason, and it became impossible to adapt the business in a financially viable manner.
. . . Of the 26 companies that I consider realized or effectively realized in my personal track record, 17 of them made complete transformations or partial transformations of their businesses between the time we invested and the time we sold. That means there a 2/3 chance you’ll have to significantly reinvent your business between the time you take a venture capital investment and when you exit your business.
So it’s pretty clear to me that most venture backed investments don’t fail because the business plan was flawed. In my experience at least 2/3 of all business plans we back are flawed.
Most venture backed investments fail because the venture capital is used to scale the business before the correct business plan is discovered. That scale/burn rate becomes the cancer that kills the business.
We’ve all heard variations of that be-nimble-or-die philosophy, but it bears repeating.
What have you learned from your business failures? Comments, as always, are open.
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Couldn’t agree more with this post and Fred Wilson’s conclusion. IMO, sometimes not having access to VC funds can be a blessing in disguise. It keeps the founders hungry and driven. Necessity is the mother of invention, so lack of funds could also envourage more innovation. Only once the business plan is ironed out and validated (Fred comments that this only happens well into the life of the startup) should serious VC funding be considering.
Shafqat
Admirable on Fred Wilson’s part. I’d bet the average failure of VC’s is MUCH MUCH higher. It also isn’t surprising that Fred Wilson points to the business plan challenges being the cancer. Most VCs are operationally challenged and struggle with business plans as such.
Interesting admission by Fred Wilson. Kudos to him!
“Most venture backed investments fail because the venture capital is used to scale the business before the correct business plan is discovered. That scale/burn rate becomes the cancer that kills the business.”
Agree. That and bad cash flow planning, which in a way, is the other side of the same coin.
well right now i’m at 100% VC Failure Rate … Guess they didn’t think my ideas were “All That”!
Darin
I’ll get back to you on that one in about 6 months
Great post though -adapt (if needed) or die.
Marc Andreessen believes that the size of your market is the biggest determining factory in your success, even beyond the specific idea or skill of the founders.
If Fred Wilson is right about business plans having to change drastically before they find success, then it does seem critical that you have a big enough market to allow that sort of midflow change.
I am currently in a bootstrapping phase of development. I realise that the current situation for our IP is not ready for investment. I figure that the right time and the right investment will happen when it is right for both parties.
However I am suprised that only 2/3 of business plans changed between investment and exit. I would hope that someone with experience of 32 start ups (and especially the failures) would help me change the direction of what would become “our” business. Who gets it right first time ( or nth time)?
I would never wrote that publicly like that, this is such a negative impact on him, I mean why would I hire some business man that just told story about his failures?
Anways good story TechCrunch! Thanks for sharing!.
By the way people most likely make mistake because they are just not for net business or don’t write a business plan at all.
I have blog for example that 4 months before I even start bloging on that blog, I layout what am I going to write about, how often will I post and such things. I asked my self most critical questions: What if I day? Who has password to my blog? What if my blog get’s hacked what is my backup plan? And those are some of the questions that people tend to ask them selfs in “business plan”
I’d like to recommend Rick Segal’s blog too. He’s a Toronto-based VC and covers the industry and his insights in an excellent way.
http://ricksegal.typepad.com/
John Carson.
#8: LOL! I can just see it: Right under your “executive summary” section would be the “password management” section and the “uh oh my 5 reader blog was haxored, time for plan B” section.
I second that Erick, that all VC’s should publish their stats. Its very cool of Fred Wilson to share his.
I’m about 50/50 in failure rates. The outsourcing thing didn’t work, but the last venture did.
So now I am going on the search engine venture.
Will I be 1/3 or 2/3????
I don’t see the purpose of disclosure for those that want to keep it a secret. Unlike me.
As long as they put up the money, it’s all good in the hood. It makes no difference.
finally, some good coverage from TC.
Posting failure rates? Brilliant! I think for the people who are hungry for money, $$$ may be their only consideration when seeking out VC’s. However, finding the right partner requires evaluation of other aspects as well. Do they have a good network, do they know key contacts, how much will they manage or micromanage the growth? Everything above can be a huge help in success or become a source of stress that ultimately brings down the business.
Right now, I’m working on my 4th real venture and on our blog we also post our successes and failures and use lessons learned from previous failures to steer other entrepreneurs from similar fate. After all, a mistake is only fatal if you choose not to learn and recover from it.
Couldn’t agree more. I’ve been part of start-ups that had VC funding and have not….both had to reinvent themselves, but the VC funded company burned a TON of money in the process which bothered all of the employees that are business savy. We all saw flaws in the initial plan, but our voiced concerns we swept under the rug with a “what do you know..” attitude. In the end the employees were right. I’ve worked for 3 startups…all still in business, but the funded ones CEOs seem to lose their mind and lose focus on the “goal” the business was based on. It’s important to be able to adjust to market needs, but remember the “idea” that got you the VC money in the first place.
For the non funded company it seemed to be more open to everyone’s input on where we were headed as a company…guess that’s possible without investor pressure.
Fred Wilson’s cool
Cut your burn rate by 2/3 and eliminate your litigation costs: move to Panama!
All I can add at this moment is - GREAT POST. It’s nice to see posts with substance vs. half baked reviews of irrelevant products. I’ve had my finger on the unsubscribe button for a while, but now I think I’ll still around. Nice work Erick.
“It was a decent idea but directionally incorrect, it was hugely overfunded, the burn rate was taken to levels way beyond reason, and it became impossible to adapt the business in a financially viable manner.”
orly?
He’s just now figuring that out? And how did he become a VC? Charm school grad?
Gawd.
Good question, but this also applies to All business owners - not just VCs
indeed, the failure rate is high - no questioning that, lol…
all these TC’ers who have created clones and what not can attest to that
Maybe his moderate failure rate can be attributed to identifying those ventures that are in big markets and are keeping their burn under control. If these two factors are in place, it would signal that the management understands the necessity of adjusting the business plan to find the sweet spot before scaling up.
I think people are too caught up with failure rates, especially the entrepreneurs. The people who should care about failure rates are the investors that supply the venture capitalists with their pool of money. But entrepreneurs shouldn’t be so concered with a VC’s failure rate, which can be highly deceiving. Frequently the best VC’s (like Sequoia) are the ones with the most failures. They’re willing to take risks that others aren’t, and see things differently enough to fund wildly successful companies. Their giant successes more than make up for the numerous failures and give better overall returns to the investors. They also provide entrepreneurs with an approach that’s a little different from the run-of-the-mill VC, who might be conservative and have a low failure rate but never fund a truly phenomenal company. Robert Yser posted a good response about this.
http://hightechweekly.com/vent.....e_11_30_07
I’ve seen stubbornness with regard to original business plan cause a venture to succeed against all odds. I’ve also seen stubbornness in that area cause a venture to fail, even though there were obvious successful alternate paths (and the acquirer of the assets took them and then succeeded).
So it can break both ways.
Great post Erick. I appreciated the links and the info. I’d love to see more educational posts like this for those interested in VC funding and startup information.
Why not create a website that keeps stats on VCs?
I bet it would get bought out by TC.
I know it’s exciting to get a VC on board but if you can build your model and even begin to generate business (revenue) you’ll be much further a head of the VC game. And if you at that time need to bring a VC in, you’ll be in a much better position both in retaining ownership and in getting the VCs to take a serious look at you.
From my personal experience I think there is also one thing that VC should get better in.
As you say, 2/3 of the businesses will completely change their business plan during their life. That’s mean that you actually need to invest in the people that can do this transformation and not just on the idea.
Now, All VC like to say in interviews that it’s all about the people and people first marketing talk.
We met with several VC before taking our A round. I got to say that probably just one actually asked us “Why do you do it?” “What drives you, personally, to do it?”.
Everyone else were so into just the idea and the business plan.
I think that VC should first understand the people they invest in. Try to see if the founders are the kind of people that can adopt to changes. If what drives them is something that will stil be when the times will get difficult (and they will).
Shahar Nechmad
CEO, NuConomy
blog: http://www.nechmads.com
I’m sure that Fred only meant to draw attention to the win / loss ratio as secondary to the total rate of return for the portfolio.
Fred Wilson, honesty should be commended. One thing that remains to be true is that a wise man learn from his failures, which in turns helps build character and makes us a little more cautious when choosing the right business venture, Affiliation or partnership.
interestings success/failure list from Lauder Partners:
http://www.lauderpartners.com/.....index.html
First, Isaac newton created calculus. He predict the world is going to end at 2060. As I was reading holy bible. I can foresee white sunlight or asteroid coming near earth. It’s about to hit southern Mexico or California.
I tried to get money from VC to built first space defense spider clawer. They won’t invest it. So I give up just like that.
I will be 80 years staring sunlight ball at sky. You guys will.
Dear Fred,
I take back the couple of rough comments I’ve given you on your blog directly before. Though your posts were a bit in left field and you portrayed yourself as a “victim” (i.e. remember when you said you received to many emails and would not respond…). Hello, that’s your job, guy!!!!
That said, I believe this is spot on. Your transparency is really appreciated and also brings additional credibility in a time when many entrepreneurs are looking to shy away from traditional VC investments. My company that is VC backed is failing for this exact reason. The VC’s continue to throw money at a model that needed a new direction. The technology was/is really good but the lack of vision and market knowledge by the Board of Directors is just gross. The founders handed the direction that the company should head three years ago to the CEO. In turn the CEO I think was working on a better compensation package for himself and his lieutenants as well as probably could not articulate the story to the “moronic” board.
Lesson #1 for entreprenuers - NEVER give up some type of operating control and NEVER EVER give up your right to sit on the Board of Directors of your company. Most of these guys that sit on the Board are just polished “politicians” who could not use Google maps - if there personal assistants didn’t print out the direction for them.
I think there needs to be a yearly awards in the valley.
1) Dumbest VC investment of the year.
2) Most idiotic VC advice received all year.
3) Worst outside CEO hire for a VC backed company.
4) Best VC investment of the year.
5) Best VC advice received (this will be one of three firms year in and year out)
6) Best outside CEO hire for a VC backed company
Just like fund managers are measured every year so should VC’s.
Good article. Thanks for posting.
Given that VCs have so much influence on the companies they invest in, their failure rate is also an indication if they have a golden touch or not.
So yes, for all involved, VCs should give out their failure rates and lists of all the companies that failed and did not fail.
But that is not going to happen.
This was a good article, TC has the potential to become no. 1 insight of what happens in the VC side of internet startups if you guys would want to.
this is the not the right metric to look at.
Only success and the size of these sucess matter.
Failure is part of VC business and do not really count. They can only lose their money once.
The idea is only to go for big wins that make up th emany loses.
Wonder how many business failed due to bad VC interference?
I have heard of situations gotten worse due to VCs. Is it allways the business plan?
Ha, does that mean that VC’s with higher failure rates are more likely to invest in any cockamamy business plan you put together? I’m in!
- Jc
Majority of the investments fail because of VCs. If you want to succeed avoid raising money from mediocre VCs (majority of them), or just say NO to VC money.
VCs don’t build companies, entrepreneurs do.
VCs should blame themselves before pointing fingers.
VC failure rate? 92.875%!
If only entrepreneurs/founders knew these numbers going into the game. Here’s a rough swag-of-a-scenario on the potential return to founders:
Average Software Deal Size $90,000,000
Revenue Sale Multiple 5
Revenue required for value 18,000,000
Capital required to capture revenue 16,200,000
Plus Accrued Dividends @8% 6,480,000
Est Equity Stake at time of sale 2.00%
Investor Ownership 70%
Net Value to Common $67,320,000
Value of equity at sale 1,346,400
Success Rate 80%
Probability of common making money 60%
Idiot CEO Index
Probability Adjusted Return $646,272
I forgot to add the 2/3rds re-start probability. The net new adjusted return is $430K–and probably after 6 years.
I woud recommend adding a lil curry to the dogfood!
2/3 fail becuase instead of backing innovation most VCs are busy backing me too models, which are doomed because the only growth they have for themselves is money and not intelligence. The failure rate can be reduced if VC start specializing and are able to better recognize passion and innovation.
I enjoyed reading all of these comments. It’s clear from some of them that they did not read the two posts that Erick is citing data from. If you are interested in this topic, I suggest reading both of these
http://www.unionsquareventures.....tes_i.html
and
http://www.unionsquareventures.....stage.html
and Erick, thanks for using my twivitar! very nice
Fred
@ #25 Chris R.
TheFunded.com is a ratings & review site for VC’s.
Hello,
Interesting article. Failure is the key of success, I heard a lot. I guess it is true. The most important is to learn from mistakes. But most of all dont repeat the same ones.
I am building an Entrepreneurs Investors community. We would like to hear such experiences. Our idea is to bring to entrepreneurs advice that will help t hem in the growth process (without crawling and begging for help). They can post their needs. Most entrepreneurs are too isolated and just don’t know what to do. They also do not have all the financial resources to ask for advice. We will be honored if you can participate to our community.
Thanks and good work!
Hi Wilson,
Your experience is honorable. I do agree with your thoughts on Entrepreneurs and VC’s
Good Luck.