How to Kill a Great Idea
Jonathan Abrams created the first online social network and enlisted Silicon Valley’s best and brightest to run it. Yet Friendster flamed out spectacularly. What went wrong?
This article from Inc.com analyses the answer in detail. It contains some salutary advice for entrepreneurs with great innovative ideas. Abrams believes he failed because because he embraced a system that is designed to create far more failures than successes. Friendster, he believes, was not simply a singular failure, but a systematic one. And he’s determined that things be different with his new Web venture, Socializr. “In the old days, entrepreneurs would bootstrap and figure things out over the first few years,” he says. “The VCs come in too early these days.”
Abrams is not the only one who feels this way. “The basic venture capital system is structured so that there are built-in conflicts of interest between the VC and the entrepreneur,” says Joel Spolsky, founder of Fog Creek, a New York City software company, and writer of the popular blog Joel on Software. It’s a point that even some investors are willing to concede. “Most VC firms have adopted a model where they make 20 investments and have two hits,” says Peter Rip, a partner with San Francisco-based Crosslink Capital, which has backed such companies as Good Technology and TiVo (NASDAQ:TIVO). The traditional VC model works fine for investors, since the returns from one Google (NASDAQ:GOOG) far outweigh the losses from nine Friendsters. It’s fine for the VCs themselves, who reap healthy management fees regardless of the outcome. And it’s fine for the network of professional managers who bounce from start-up to start-up, earning well wherever they go.
But it isn’t much good for an entrepreneur who has a promising idea–and who would prefer odds that are better than 20 to 2. Spolsky believes that working with a VC imposes a level of risk that someone prepared to invest his life–not to mention his life savings–in a single enterprise simply should not tolerate. “An entrepreneur would rather have a 100 percent chance of owning an $80 million company than a 10 percent chance of having a $800 million one,” he says.