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in Funding - 18 Sep, 2013
by Tech Journalist - no comments
The Silicon Valley network favoritism

Did you know that more than 90% of tech startups fail?

But i bet what you did not know is that 75% of VC-backed firms in the U.S. don’t return the investors’ capital – thus fail (research done by Shikhar Ghosh, a senior lecturer at Harvard Business School). So far we have been told by venture capitalists that only 25% to 30% of venture-backed businesses fail, whereas the reality is completely the opposite.

Venture capitalists “bury their dead very quietly,” Shikhar Ghosh says. “They emphasize the successes but they don’t talk about the failures at all.”

Shikhar Ghosh analyzed data from more than 2,000 companies that received  $1 million or more in venture funding, during 2004 to 2010. He found similar results when examining the data for the period 2000 – 2010.  He adds that while none-VC funded startups tend to fail more within the first 4 years of existence than venture-backed companies,Venture-backed companies tend to fail following their fourth years—after capital injection from investors stops.

 

There’s a Startup selection problem, not the right start-ups are getting the funds!

Reuters examined the 88 Silicon Valley companies that received “Series A” funding from one of the 5 top Silicon Valley VCs during the period 2011 to 2013, their analysis show that 70 companies (80%) were founded by people who had either held a senior position at a big tech firm, worked at a well-connected smaller one, started a successful company already, or attended one of 3 universities – Stanford, Harvard and MIT.

Venture investors are backing people as much as ideas, Horowitz -a partner in a top VC firm- said, and thus have no choice but to insist that the entrepreneur have a certain level of qualification or reputation.

Another VC recently wrote a blog post in which he said that of the 5,000 executive summaries he received he didn’t invest in a single one of these 5000 companies even-though he met with some of these entrepreneurs , so when he realized this bias, he started asking his fellow VCs if they had funded any companies that approached them un-introduced.  The answer he got was “no.”  No one he asked had funded a company without some sort of introduction. “The closer your relationship with the person making the introduction, the better.  And the closer that person’s relationship with the VC the better.” he added.

From the above information we can conclude that if you weren’t connected to the VC in some way (introduced) and you weren’t from what could be described as the traditional Silicon Valley cohort, you were unlikely to get any fund, whatever innovative idea or startup you had!

This favoritism would help VC’s avoid scam artists but at the same time it is reducing the success rate of VC-backed firms, and instead of  investing 100% based on the idea and the project, they find themselves investing in people! In simple terms great ideas and projects with good business models are ignored in favor of  projects created by people they can trust or at least they think we can!

What should be done?

  • From VC point of view, little can be done, because when there’s money, people will create schemes to scam and thus the VC would be taking a bigger risk than investing in more likely to fail companies!
  • From Startup point of view, work on your network, join clubs that help you network with other startup founders, here’s one i like: Startupz

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