Funding as a Predictor of Failure
Tim Bray has been doing a series of late on technology success predictors, the latest of which is a list of factors which may be important, including investor support.
Asks Bray: "Is a heavy flow of investment dollars an important predictive success factor?"
Having spent a lot of years in and around the venture community and watching startups, I know that there are two things which can kill a nascent technology: not enough money, and too much money. Not enough money is obvious. Too much money seems counterintuitive, but is just as deadly.
Several years ago, right around the peak of the bubble, and as WebVan was beginning its collapse, I had a hunch, and asked one of my associates to do a little research. The findings: he could not find any company which raised over $100 million in VC money and had ever turned a profit for the last stage of investors (where "turned a profit" means either acquired at a price above the last VC valuation, or went public and the stock price remained above the last VC valuation for more than six months, which is when the VCs are typically allowed to sell). Now, there might be examples which my associate missed, but the trend was clear. They all crashed and burned.
(As an aside: a few months after this discovery, I was at a breakfast for some partners and interested parties in a big tech company, and I happened to mention this interesting finding. The guy next to me turned bright red. "My company just closed a $100 million round," he said. At which point, I turned bright red, too. On the other hand, that guy's company has pretty much disappeared.)
This is true of industries, too, though the $100 million rule isn't the right rule of thumb anymore when you're talking about a whole industry. Too much investment kills industries.
Why does this happen?
My theory is that there are two dynamics: Overbuilding and Overconfidence.
Overbuilding happens when an industry builds massive infrastructure before customers are ready for it, leading to massive losses if demand takes longer to materialize (as it always does). This is very tempting when there's lots of money sloshing around, because everyone wants to be the biggest, baddest, and best, and the VCs only encourage it. But, when there's five times the capacity available as needed, it is almost impossible to turn a profit, since customers can always get it (whatever "it" is) cheaper from the other guy who also has five times the capacity he needs. Just ask all the companies which laid massive amounts of fiber optics in the 90's, or build large railroad networks in the 1800's.
Overconfidence happens when a startup stops thinking of itself as a startup, but as a successful company before it is really successful. There are two distinct phases any company has to go through: Startup, when you keep trying new stuff to find a successful combination, and Successful, when you keep doing what's already working. Well, if you keep doing what you're doing before you really found something that's working, then you're doomed. There's lots of other dynamics which go on here, too, like building a bureaucracy before you need one, and committing yourself to a particular plan when the plan is only half-bakes, and even employees feeling like they don't need to scrimp and work their tails off to make it fly.
But in any event, the end result is the same: too much money will kill a technology just as surely as too little.