Sometimes They Don’t Work

Startups start with a basic idea.  Founders believe strongly in that idea and work on it.  Eventually, they might sell it to investors who invest in the founder and the idea.  The truth is, 50% of everything you write a check for will fail.  That’s typical over time as I have talked to all kinds of investors.

My own track record has about a 34% failure rate.  Maybe I needed to write more checks.  There is a ton of variability when it comes to startups.  That leaves a lot of room for excuses.  I hate excuses.  I love accountability and responsibility.  But, most people don’t like it because it can be a yoke around their neck rather than an opportunity to change and do better.

I was told by coaches to look in the mirror.  When I traded, I had no one to blame but myself.  Investing in startups is similar.

At the point where capital is exchanged for equity, there is accountability.  Investors expect a return on their investment and founders expect a return on their time.  No one is in the game for free.  Investors expect the return to be much larger than the stock market given the risk and illiquidity.

The startup continues to build.  What seems like a good idea at seed might not develop into anything.  In a lot of cases, that’s due to the founder not executing on the vision.  They take the wrong path.  They make an incorrect strategic decision.

In other cases, it’s just an idea whose time will never come.

Often times, at least I do this, you put the founder in front of people or customers that can propel their business forward.  Either they make it happen, or they don’t.  If they continuously cannot, either you are bringing the wrong people forward or they can’t sell.  There is no other excuse.

One of the other things I look for is tailwinds.  Trends.  Covid has altered a lot of trends and it also has given a lot of fuel to others that were either nascent or not there.  If there is a big macrotrend happening and the startup you invested in is supposed to benefit from that tailwind but it isn’t, then that is a good indicator that you won’t see a return.  At that point, you look to see if the founder has made the right decisions.  Are they being strategic or are they doing something else?  Are they spending time behind the computer rejiggering the engineering or are they in front of the customers?

Or, is the idea just not that big of an idea?  Is it too hard to execute on?

Or, did you make a fundamental mistake in analyzing the business?  Did you make a mistake looking at the market?  Did you make mistake in figuring out the character of the founder and their ability to execute?  Did something happen that was unexpected?  Maybe you or the founder screwed up on the cap table and that’s crushing your return?  In the future, what will you do to change your behavior and analysis so that it doesn’t happen again?

This is where I like to refer to my friend Richard Duchossois’s phrase, “Always inspect what you don’t expect.”  He learned the hard way to do that in WW2 and it stuck with him ever since.  It’s a part of his company’s core culture and it’s a good one.

In my seed-stage investments, I have seen all these things.  When it’s just not that big of an idea you understand.  When it’s other things, it grinds on you.  This is the time of year when you start to really look at a lot of things and try to account for them.

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