Posted on November 15, 2007
Filed Under VC Insanity |
Glenn Kelman, the CEO of Redfin and co-founder of Plumtree Software, wrote a great guest piece about entrepreneurship on TechCrunch. He focuses in on the serial entrepreneurs that Silicon Valley VCs have showered with money in this latest boom:
The second coming of the Internet bubble, Web 2.0, has in some ways been the love-child of Entrepreneur 2.0 — wealthy from his 1990’s success, restless from his time off. Venture capitalists have lined up with funding.
Kelman, a serial entrepreneur himself, makes some interesting observations. For instance, while some evidence indicates second-timers experience fewer failures, their startups don’t appear on the list of the biggest Silicon Valley successes. He notes that “every Silicon Valley colossus — Amazon, Apple, Dell, Ebay, Google, Microsoft, Oracle and Yahoo! — was started by a first-timer 30 or under.”
Kelman also correctly points out that there are a number of reasons why serial entrepreneurs would logically find it difficult to achieve the same level of success with their new startups. Some try too hard to achieve the same level of success, some don’t work with the same drive and urgency that propelled their first startup to the promised land and others prefer to take “exotic vacations that mere mortals could never afford” (after they raise their VC round, of course).
But the most important observation Kelman makes that probably explains why second-timers haven’t built any of the biggest Silicon Valley successes is that it’s far too easy for successful entrepreneurs to raise money. Once you’ve had a “hit,” VCs will shower you with money. A first-time entrepreneur may find himself struggling to answer what appear to be asinine questions as part of a VCs “due diligence” while a second-time entrepreneur essentially finds that the VC doesn’t seem to care too much about due diligence. This robs the latter of the opportunity to receive “one of the only real sanity checks a business plan is likely to get.” The result is funding for startups that make us go “huh?”
It makes sense for VCs to fund entrepreneurs that they believe in and when an entrepreneur has a track record of success, it certainly provides permission to believe. But as most investors should know, past performance does not guarantee future results. Experience counts for a lot but it’s not the only element of a successful business and investors should not overvalue an entrepreneur’s track record while undervaluing other elements (like a business plan that actually makes sense). Brilliant, successful people are just as capable of making mistakes, are equally adept at coming up with stupid ideas and because they have a level of comfort from their past successes, don’t necessarily bring to the table the same drive and focus that a person struggling to succeed for the first time does.
If anything, I believe that smart VCs should hold serial entrepreneurs to a higher standard. VCs don’t do these entrepreneurs any favors by handing them easy money. If nothing else, I’m surprised more VCs don’t turn around and say: “John, you made $35 million when you sold your first company. You’re looking for $2.5 million from me. You project that you’re going to have a $50 million/year business within 3 years. Why do you want my money? Wouldn’t you be better off taking a small risk and funding this yourself?” Some serial entrepreneurs, of course, do invest in their own ventures and that’s a good thing. More should be willing to do it and if they’re not, it doesn’t take a rocket scientist to figure out why: you probably have an “entrepreneur” who doesn’t want to risk losing his ability to go “golfing in outer space.”
Print This Post