TCG Advisors' Under the Buzz pulls three suprise conclusions from a study on startups highlighted in a Darwin article by Graeme Thickins
1) Companies raising the most capital don’t have the strongest chance to succeed. The insight here was that over-funding actually allows companies to follow a flawed strategy for too long.The data pointed to the fact that the total capital invested in storage start-ups that reached successful exits was in a limited range, between $33M and $40M, a surprisingly small amount in today’s technology marketplace.2) A fully staffed executive team is not necessarily a requirement for success. This insight was based on the realization that the ideal pedigree for a successful founding team is a successful product development track record. Furthermore, the study found that building the team sequentially was much more capital-efficient than following the late-nineties example of starting only with a fully staffed seasoned team of executives who ‘have done it before.’
3) In 93 percent of the cases examined, the strategy that a company emerges with (at exit) is completely different from the strategy it set out to implement. Citing a Harvard Business School study that found that it takes four to five years for the right product and business model to emerge, the Crescent Ventures study concludes that “a funding strategy that deploys capital incrementally while the business model is sharpened and the market is better understood” is infinitely preferable to a strategy that releases the funds in more conventional large tranches.
The common thread I see is iteration. Good capital formation is milestone driven. Good teams iterate products as quickly as they can learn from their customers. Good businesses change their strategies. Such incremental iteration is contrary to the methodologies of some investors, who seek to hedge market risk by taking greater investment risk. This works for them because of diversification benefits, but the same option thinking can and should be supported within their investments. Embrace change.
