Giving up the ghost early

There is four times as much seed capital in the venture market this year as there was 1 year ago. Because of this, it’s easier to attract seed funding than it has been in the past.

I’ve noticed a disturbing new trend and I think it’s related. Startups are “quitting” when the first year doesn’t go as planned. The founders shut the business down, and either take a job or go out and start a new company with more of that plentiful seed funding. In some cases, they just exit with an acquihire and get themselves a nice compensation package without any material return of capital to their investors.

Startups are hard. Rarely does the first year or two go exactly as planned. The hockey stick doesn’t emerge quite like you thought it would. It takes persistence and determination in almost every case, if you hope to be successful.

The thing I worry about is that the Facebook movie and tons of seed funding have made it almost too attractive to get into entrepreneurship. Founders can live for a year or two on seed capital, have some fun, and punch their lottery ticket. If things don’t take off immediately, they can simply move on to something else.

I’m not saying this is the norm or even typical. Most founders are well intentioned and in it for the long haul, of course. This is just another of the myriad problems in figuring out what’s real given the oversupply of seed capital in the market today.

If you’re thinking of starting a business, think about it as a minimum of 5 years and likely 10+ years. That’s what it’s going to take to be successful. And that’s the commitment you should make before taking money from outside investors.

 

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About David Cohen

Geek. Hacker. Investor. Founder and Managing Partner at Techstars.

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  • jamesoliverjr

    Wow. What a great post today, David. I’m feeling encouraged seeing these words from you. Sharing on twitter now.

    • David Cohen

      thanks!

  • http://getuvize.com/ Bo Bergstrom

    I’m surprised more founders don’t take the harder road of dialing down the company and continuing to work on it nights, weekends, etc. Could be 1 founder getting a job to pay the bills, another doing contract work to pay the other’s salary or both going full time and continuing to push sales when they have time, but it seems like this rarely happens. After you’ve put all that time and effort into the product why not continue the fight in whatever way possible rather than start over? David, is this as rare as I think or do you see it sometimes?

    • David Cohen

      it happens. but the scenario i’m talking about is more about a founder deciding it’s not going perfectly and they can start over anew with other peoples money.

  • Rosalind Tan

    Thank you for sharing your thoughts. We encounter such founders too. Although not significantly high, it is enough to put me on an alert. Just curious if they all share similar characteristics that could be flagged out earlier before we decided to make an investment. Seed money on average is about S$250K, ranging from S$50K to S $500K, insufficient for a comfortable pay cheque but at the right amount for some to treat it as a 6 months to a year project.

    • David Cohen

      i don’t have enough data points to draw a conclusion like that yet, but soon perhaps if this continues.

    • Hari Jeevakumar

      Hi Rosalind,

      Have you read the book MINDSET by Carol Dweck? I think you may find some answers to your question about “similar characteristics.”

  • angilly

    <3 this. Can confirm: startups hard 🙂

    • David Cohen

      genius insight, i know.

      • angilly

        I’ve often found that advice which to some may seem so self-evident as to not merit disseminating can be eye-opening to others. Even those which may believe a thing can benefit greatly from having their beliefs externally reinforced.

        This was written very well!

  • http://mikelewis.me/ MikePLewis

    David – really happy you posted this. As you know i’ve co-founded two companies (Qloud and Kapost). The first was successful in that we were a music service that grew to have over 20 million monthly users. The second has achieved product-market fit and is growing fast. In both cases the first year sucked. We had almost no revenue and at 10-12 months time we had to completely throw away everything we had done. But we had learned a lot. Learned things you can’t learn from watching from on the sidelines.

    Only when you immerse yourself in your product and market and customers will you find the best opportunity and that takes time. It’s hard.

    I’m glad you reminded people of that.

    • David Cohen

      thanks mike. you are the picture of stick-tuititve-ness!

  • http://turf.ly/ Ty Martin

    Maybe you’re seeing good founders with bad ideas doing this. I know a few mediocre founders (no previous exits) with good ideas who are struggling to raise seed, even in this environment (SF and Boston based).

    Bias check?

    • JamesHRH

      A good idea is about 4 good ideas short of being a good startup.

      • http://turf.ly/ Ty Martin

        Clearly. It works both ways though.

        • JamesHRH

          If by both ways you me that you have to know when to hold ’em and know when to fold ’em, then … yes.

          But, would it surprise me to hear that the recent environment has spawned more uncommitted founders than in any era other than the late ’90’s? Well … no.

          • http://turf.ly/ Ty Martin

            The other way would be that funded startups are often 4 ideas short of being good! But you make a good point. In the frothiness I’m sure a ton of founders are working on bad ideas and just looking to “get theirs.”

            Three founders I’m thinking of have all been at it for 18+ months (but they’re all over 35y/o!). I know an ex-googler was at it for 18 mo before being able to raise series A. Tons of stories of hard-working, persevering first-time founders out there getting lost in the craziness too.

            No doubt there’s all kinds of cowboy-ism going on, but there’s a lot of nuance and great founders being missed in the rush to fund the “killer traction” and visionary storytellers. The hustlers are hustling…

    • David Cohen

      i’ll concede that since we’re selecting only about 1% of companies for Techstars, what i’m seeing is more likely to be in the good founders category.

  • Chris Osborne

    Great advice, although I think this applies to bootstrapped startups more than funded startups (not giving up too early).

    • David Cohen

      both!

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  • JamesHRH

    Someone gave me the interview question, early in our Friends & Family round funding cycle: ‘ How do you see this going?’ Answer – I see me building our team and business into a global brand over the next decade.

    Otherwise, you are kidding yourself.

    • David Cohen

      word.

  • http://osakabentures.com/english-2/saulfleischman/ Saul Fleischman

    What I look forward to are stories of those who took funding, then went unresponsive with investors when they ran into trouble, ran out of runway, shuttered their baby – and are appropriately blacklisted by angels and VC when they try again to burn others’ money.

    • David Cohen

      i’m sure people are keeping lists. 🙂

  • http://www.cosential.com Dan Cornish

    The only way to do a start up is what I call the Cortes Strategy. Start your business, go ashore and then burn the ships so you only have one direction to go. Forward. If you have no choice but to make it work, then you will figure out how to make it work.

    • David Cohen

      love it.

    • http://linkedin.com/in/chrisbrenchley Chris Brenchley

      It is truly the only way, Dan. Like making yourself an offer you can’t refuse.

    • Gregory Layer

      Agree 100%!!!! As the co-founder and CTO of devTango I have come to appreciate those things in life that actually remove options, like quiting. After living with Parkinson’s for 25 years now, i have come to appreciate the feeling of having my back against the wall!

  • Paul Agostinelli

    I really appreciated this post, David. As a serial entrepreneur in the second year of my latest venture, I can see how the culture around seed stage companies has created conditions that could encourage opportunism and lack of patience, two qualities that have been the downfall of many a venture throughout history! I believe the age of the founders can tell you something about their susceptibility to these forces. My co-founders and I are all above 50, and have learned that there are no shortcuts to building a truly innovative “whole product.” The urgency of youth is great, and ideally it is combined with the resoluteness of age and the willingness (like Mike Lewis said below) to immerse yourself in your space, however long that takes. Thank you for your insights.

    • David Cohen

      thanks paul. one thing i’ve learned about startups in general is there are certainly rules of thumb but no hard and fast ones!

  • Chris Brenchley

    Great post, David. As the hare learned the hard way, “slow and steady wins the race.” (Although that pace is maddening when bootstrapping.)

    • David Cohen

      thanks chris. fast and steady can win too, but it’s more rare.

      • http://linkedin.com/in/chrisbrenchley Chris Brenchley

        Truth. The difference between fast and slow is funding.

  • brandonmwest

    There’s a pretty big gap between “do more faster” and success, and a lot of times “do a little bit every day with consistency and perseverance” can be more valuable. I believe that these days hustle is overvalued and patience not valued enough. Not sure that the younger startup folks are getting that message.

    • David Cohen

      hopefully they read this!

  • http://babich.me/ Michael Babich

    Great post. May be it’s time to look more outside the US as startups that get a chance to get in the US and get US VC money understand that it is the ONLY chance. So, they are persistent.

    Also, here are also couple great quotes on the topic:

    “Most of my success was not from being smart, It was from not quitting and not hiding.”
    —Ben Horowitz

    “The problem with the Internet startup craze isn’t that too many people are starting companies; it’s that too many people aren’t sticking with it.”
    —Steve Jobs

    • David Cohen

      yep, that’s one of the reasons we’ve started growing internationally.

  • Ben Yudysky

    What’s a key question you can ask of founders you’re considering to back (or their references) that will shed some light on their collective ability to demonstrate perseverance or grit beyond that 1-2 year “filter period?”

    • David Cohen

      tell me about you last failure. tell me about a situation that you dealt with that was really difficult. (i look for multi year durations vs short give ups).

  • https://www.linkedin.com/profile/view?id=400056356&trk=hp-identity-name Sarthak Haribhakti

    I really liked this article. Its all about consistency and persistence. I don’t think that most entrepreneurs are not strong-willed enough to wait it out. I think angel investors and VC firms have created such an environment that most founders try to move on to the next venture as soon as they think the path ahead is rockier than expected in the hopes of getting the big bucks. I think it is safe to say that it is easier to find a VC investment or angel fund than it is to find actual coders in the Bay area.

    • David Cohen

      ha! maybe!

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  • Joah Spearman

    I’m a little late, but also loved this post. My cofounder and I simply refused to quit even though our first two years were pretty painful, learning some hard lessons and struggling to raise funds and find growth. But we pushed through and now Localeur is more than likely the fastest growing startup in travel (1,200% so far this year) and we’re on the verge of our A round to continue the growth we’re experiencing.

    • David Cohen

      and you shall have other bumps that you will get through! congrats!

  • benbuie

    What do you think is driving the increased seed money? Is it the movie?

    • David Cohen

      no, not the movie. the company behind the movie. and many other companies. it’s created great wealth, and that wealth is being reinvested. private capital markets have great sums of available cash. tech has been hot, and that attracts money. that combined with the cool factor of investing in early stage. it’s fun, and one of the reasons i love it. i’m sure it’s true for others.

      • benbuie

        That makes a lot of sense. I guess the increase in wealth due to recent IPO’s combined with the fact that it’s fun could be driving it. I still wonder if there is something else behind it because a 4X increase in one year is huge!

  • http://www.gothamgal.com Gotham Gal

    Great post. It would be really interesting to look at the data on men vs women who close shop so soon.

    • David Cohen

      i’m keeping a list! too early too tell, from my data. unless there’s a global list i’m not familiar with… 🙂

      • http://www.gothamgal.com Gotham Gal

        ha. just a gut that more women stay with it than their male counterparts

      • Todd Vernon

        I think i heard some data that came of Merge Lane that suggests women are more successful because they are less likely to start the company in the first place unless they have vetted the idea longer.

  • max

    I wonder if you had any thoughts on the UK in this regard. According to what I could observe so far, SEIS makes it relatively easy to get started but artificially limits the first rounds to 150-200K GBP. The follow on round then seems to be pretty hard to pull off: there is seed money available but I don’t think one can speak of abundance.

    • David Cohen

      obviously i’m not as familiar with the UK market. i’ll ask some of my friends there to come reply here.

    • jon bradford

      SEIS has been an amazing way to drive more funding into super early businesses in the UK and is now being looked at my many different countries across Europe. As with any government incentive it can impact the market at and around the break points – it is generally accepted as being a positive influence in the market and there are also many seed investment rounds being raised in excess of the SEIS limits.

      However, by its nature, there is always going to be attrition from one investment round to another and not all startups are going to cross that gap. Founders need to ensure that they have the intellectual honesty to ensure that when they raise an early round that they have sufficient runway to achieve the necessary proof points to raise their next round. It is however widely recognised that it has never been a better time to be a startup raising funding particularly in the UK as is highlighted by the recent article in tech.eu. tech.eu/features/5500/analysis-european-tech-startups-venture-capital-funding-q2-2015/

    • David Cohen

      in any case, there is much more seed money (angels thinks this is cool right now) than there is series A money.

  • Karin O’Connor

    But aren’t overly eager seed investors part of the problem? Everyone wants to fund something shiny and new–much harder to find capital for something that is a year old, still promising but showing some scars and warts. And still too early for Series A. . . . ??????

    • David Cohen

      yes, as i pointed out there is a great deal of seed money in the market. investors should be game to stick it out too when it’s not working. some are one and done. rarely does a company take off that quickly.

  • AngelSpan

    One due diligence item that can raise the batting average of investors focusing on those startups with the backbone to weather the tough times is the degree they embrace transparency and engage their outside audience of stakeholders and investors. There will come a time when investors will REQUIRE evidence of this transparency PRIOR to investing. Don’t get caught up in the shiny bauble of the idea, what evidence is there that they will execute well, and get the help they will eventually need before it is time to shut the doors.

    Investors need to raise their skills and instincts as entrepreneurism continues to expand. Just as the entrepreneurs do.

    • David Cohen

      totally agree.

  • Terena Bell

    “The thing I worry about is that the Facebook movie and tons of seed funding have made it almost too attractive to get into entrepreneurship.” I think this is a really important statement. Yes, there is a genuine issue with A money shifting to seed, and–as other posters have mentioned–we also have the problem of less professional seed investors throwing money at stuff that just isn’t going to work (we’ve all looked CrunchBase’s daily email & thought, “HUH?!!?”). But to me, this sentence is key. There are a *lot* of tech entrepreneurs doing this because it’s cool.

    My first company worked out of a DC incubator for a while. We were one of only 3 or so companies that arrived to work before 9 am (out of maybe 40?). And we were one of only 4 or so still working after 5 pm. This was a well known incubator with government funding and a selective application process. So what were all these cream-of-the-crop founders doing? Shooting dart guns at each other. Blowing up air mattresses. Making peanut butter & jelly sandwiches while they raided the refrigerator for free beer. This sh*t is WORK, people. It can be fun, and it should be fun, but at some point you have to sit down at your f*cking desk and MAKE IT HAPPEN.

    Again, I think the issues raised in this blog are solid and true. But when we look at failure rates and money-wasting rates and all these other things, we can’t dismiss the reality factor–that some of these kids get into this, hit reality and think, crap, I have to work for money?

    Solid point, David, and thanks for your thoughts.

    • David Cohen

      wow. just wow.

      • Terena Bell

        Tell me about it. Again, great blog, and thanks.

  • gonzaloc

    Great post David, I fully agree with your view. This is also true in Latin America as well; in the last few years being an entrepreneur not only became more accesible than ever before, but also very “trendy”, attracting some founders not so committed with the long run.
    In a very few cases, we have even seen a sort of “entrepreneurial tourism”, with founders from the US and Europe leveraging on easily accesible capital (sometimes even “equity-free”, i.e. Startup Chile and other government programs), with a mixed focus on both punching the lottery ticket AND having a good time in South America.
    Our challenge as early-stage investors is to “read” the founding teams and support those focused on executing for the long run.

    • David Cohen

      agreed on startup chile, for example. startup tourism but not all of them are really committed beyond having a good time.

  • http://www.etiennefiset.com Etienne Fiset

    Great post David, I think it supports very well the fact that finding a strong “reason why”, a mission that goes beyond money, is well worth it for a startup.

    Ours is helping a small subset of our overall market (children under palliative care). It definitely helps keep the fire burning and keeps us pushing through even in extremely difficult time.

    • David Cohen

      yes. why matters.

  • http://www.pointsandfigures.com/ pointsnfigures

    Was comparing notes with another investor yesterday. They said, “I am seeing more and more deals where the person just wants to get financing to finance their lifestyle. They don’t really want to build a business. They don’t have the actual fire, it’s fake fire. They want me to write a check, just so they can find a job in a year and do something else.” Interesting post.

    • David Cohen

      that’s an extreme case, but it no doubt happens. i’m seeing much more of the “might as well try this” crowd.

  • Julie Lerner

    David, I haven’t had the chance to read through all the comments. Nonetheless, I respectfully suggest that the Facebook movie and an increase of seed capital is not the problem. I think it’s a byproduct of these lucrative startup communities, Denver/Boulder, NYC, Austin… it doesn’t matter. It’s so incredibly cool to be an entrepreneur now and I suppose many feel it’s just a cool to fund one. It baffles me to hear people say they want to be an entreprenuer yet they have no passion for something they’ve invented or a problem that they want to solve. On the other side, social media has allowed people to self-promote themselves as gurus and mentors and other types of rock stars that startups can’t live without. They pump up entrepreneurs and convince them to go for it then profit from consulting/advisory work because they know that finding seed capital isn’t tough today. Perhaps we as a community (both sides of the start up table) need to shift focus to more substantive thinking. Of course, I am NOT talking about TechStars. I’m talking about those that are drafting off its success. I trust this is going to make me very unpopular in Denver, but so be it.

    • David Cohen

      might not be the facebook movie (that was intended as an example of making it cool) but it definitely feels to me (having been through a couple of cycles) that when the money flows, this dynamic happens more and more.

      • Julie Lerner

        I can see how that happens. And it’s good for the economy, so I guess everybody wins if the seed capital breaks even on the quick exits.

  • Chris Markl

    “the scenario i’m talking about is more about a founder deciding it’s not going perfectly and they can start over anew with other peoples money.” An entrepreneur should be taking a significant pay cut to work on an early stage venture – and should be focused on increasing the value of his/her equity. This value is obviously destroyed through jumping to a new venture and because the new venture is early stage, the pay cut should remain. Because income gap less for younger founders, do you think they are more prone to quitting early to jump to another venture?

    • David Cohen

      if the founder is focused on maximizing pay, to your point, they should really not be a founder.

  • http://www.nanotechgalaxy.com/ Alexandros Louizos

    I think that the mentality should be “I am committed to do this company for life”. If it does not feel like that then better off not start it at all based on the skewed odds of the success probability.