``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.''
If you don't have time to read the whole article, at least read the last three paragraphs.
Translation: Expenditures outpaced income. I don't get what this article has to do with early-stage investments in particular, except that early-stage usually means no income yet.
I guess investing only in proven businesses is a lot safer, but every business was "early-stage" at one point.
"Expenditures outpaced income" is an oversimplification. Every new business's expenditures outpace income. This essay describes a two-part problem. The high burn rate makes you die faster; that's one part. The other part is that scaling up to a larger business makes you less adaptable.
"Most venture backed investments fail because the venture capital is used to scale the business before the correct business plan is discovered."
Read: Scale up before they have the income level to justify it.
Being "nimble" or "adaptable" in this case is simply another way to say "didn't run out of money before they started making enough income".
Being large doesn't necessarily make you less adaptable. Think of how many directions Google can explore because it is large. They are far more adaptable than most small companies.
Companies that are composed of only two or three founders don't have the skillsets available to them that larger companies have; Google has a bagful of tricks because it has bought up so many of these one-trick ponies. A lot of them probably were in the category of not having monetized their startup even to the point of self-sufficiency yet -- let alone to the point of making a profit -- and being acquired by a large company was the way to stay alive.
Before ViaWeb was bought by Yahoo they almost ran out of money; they had to borrow a conference room at Yahoo in the middle of negotiations to get enough money from another investor to stay alive. Would you say they weren't nimble or adaptable if they hadn't gotten that last-minute financing? Are they nimble and adaptable just because they got that financing? Or is it that despite how quickly you can change directions, you eventually have to PICK some direction to keep going in if you want to get anything accomplished?
It doesn't matter how adaptable you are, you can only explore so many directions before you run out of money. Some people don't change their idea, but they are able to keep pushing and pushing until they finally make it. Some people get lucky and succeed on the first try.
Paul says, "When startups die, the official cause of death is always either running out of money or a critical founder bailing. Often the two occur simultaneously."
Thus, "If you can just avoid dying, you get rich."
Screw income, businesses can run on fairy dust, Tink!
> Read pmarca's blog posts on "product/market fit" to understand.
I read that when it was first posted, and it's nothing new, it's the same "make something people want". Which comes down to the same thing, income. "Product/market fit" is determined by exactly one thing, making money. It can be garbage, as long as you can get people to pay for it.
"Scaling up" translates to "increasing expenditures". And what is "traction", if not having an established customer base, i.e. people to make money off of?
Even if you're considering the case of startups which don't have a user base -- e.g. they are working on some cool technology in-house, as opposed to something with simple technology but a lot of users ala social news sites -- there's still a customer there: Google or Yahoo or whoever is doing the acquiring. Then you're finding one BIG customer instead of thousands of individual customers.
So it's still back to the same thing, money out vs. money in. I don't know why people like to mystify it with tales of startup lore.
Even PG's "If you can just avoid dying, you get rich" doesn't specify a timeframe; of course if you have an unlimited amount of time and resources, you can eventually "succeed" -- except if you already have such staggering financial resources available to you, you're already rich, so it's a wash.
In any realistic consideration, it's possible that you keep changing your approach into one of the many other directions that also won't work, instead of one of the few that will. E.g. after 6 tries, you don't hit on a PayPal, but on failure #7. Then you run out of money. Oops, you didn't successfully implement the "don't die" principle.
``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.''
If you don't have time to read the whole article, at least read the last three paragraphs.