Tuesday, May 13, 2014

"Epic Fails of the Startup World"

I'm reminded of a quote:

"Fundamentally VCs are risk adverse – they want no risk in the deal, if we could handle risk we'd be entrepreneurs."
– Victor Westerlind, General Partner at Cleantech VC firm Rockport Capital
From the New Yorker:
We live in the age of the startup. It’s never been easier to build a product and start a company. And, thanks to the boom in angel investing and crowdfunding, it’s never been easier for startups to raise money. The analytics firm CB Insights logged more than seventeen hundred seed-investment deals in the U.S. tech industry in 2012, more than three times the number from three years earlier. But there’s a catch: starting a company may be easier, but making it a success isn’t. Competition is fierce, profits are scarce, and venture capitalists aren’t generous when it comes to later stages of funding. As Gideon Lewis-Kraus shows in “No Exit,” a new Kindle Single about startup culture, the life of a new company is often brutish and short. Though we may be seeing a “Cambrian explosion” of new companies, as The Economist recently put it, there’s a mass extinction going on, too.

The fact that most new businesses fail is hardly a secret. So why are so many people gambling on ventures that are likely to end badly? A traditional answer is that entrepreneurs are just more comfortable taking risks than the rest of us. The eighteenth-century Irish-French economist Richard Cantillon, who coined the term “entrepreneur,” defined it as a “bearer of risk.” And in 1921 the economist Frank Knight argued that the function of entrepreneurs was to “specialize in risk-taking.” Yet studies of entrepreneurs find that, in general, they’re as risk-averse as everyone else. Only when it comes to starting a business are they daring. And that’s because the fundamental characteristic of entrepreneurs isn’t risk-seeking; it’s self-confidence. A 1997 study in the Journal of Business Venturing found that entrepreneurs are overconfident about their ability to prevent bad outcomes. They’re also overconfident about the prospects of their business. A 1988 study in the same journal of some three thousand entrepreneurs found that eighty-one per cent thought their businesses had at least a seventy-per-cent chance of success, and a third thought there was no chance they would fail—numbers that bear no relation to reality. A recent paper called “Living Forever” notes that entrepreneurs are more likely than other people to overestimate their life spans.....MORE