Should every startup get funded?

First off, let me be clear that the opinions expressed here are solely my own and not that of my employer, or anyone else. 

The other day, Ron Conway said at an event that “he hopes that any entrepreneur that has “the guts” to start a company gets funded.”  Fred Wilson seconded that opinion, citing that “We need more entrepreneurship, not less.”

I’m all for more entrepreneurship, but I think it’s a slippery slope to tie together funding an increased number of companies with a better innovation landscape or even a better economic.

First off all, not every company is right for equity financing—and many other companies would be better off starting without it.  I can’t tell you how many companies I’ve run into where the inability to get financing, or the lack of interest in it, led them to building better companies. 

Too many entrepreneurs start out their business endeavors with an investment pitch.  Step one: Ask for money.  They skip over “talk to customers” and God forbid, “teach myself to hack together a prototype to see if it works”.  It’s what I did as an entrepreneur (taking money first) and I can honestly say that we would have been better off vetting the product longer before asking for investor money.

That’s the thing—startups in the initial stages need advice, feedback, and guidence a lot more than they need money upfront.  So, just writing a bunch of checks doesn’t necessarily create more and bettter entrepreneurship.  If you can’t back it up with guidance and mentorship, we’re burning up a lot of cash, 500k at a time. 

That’s why participating in programs like TechStars make so much sense.  If you just looked at it just as an investment, you could undoubtedly find more money elsewhere, cheaper.  You’d also be incredibly shortsighted.  Getting key strategy advice early on, or getting introduced to a new market can make or break a company in ways that no amount of angel capital can help. 

So if we’re talking everyone getting funded without getting the benefit of an experienced set of mentors in a small, focused program like TechStars, or a lead investor who will spend a lot of time with you upfront, I’m not on board with that.

The problem is that misguided startups with too much money to spend also take up scarce resources—like engineering talent, media attention, designers, etc.—making all of those harder to get for everyone else.  Engineers don’t usually spend a ton of time predicting future business viability—they just want to work on interesting technology problems.  If you haven’t noticed, but there’s not 100% correllation between interesting technology problems and viabile businesses.

Is it true that, in many instances, you can’t tell the good startups from the ones destined for the deadpool early on?  Of course.  That’s what makes venture capital such a risky investment. 

However, there are *obvious* instances where an idea or product needs a lot more vetting and it clearly shouldn’t get supported to go further than where it can get on its own dime.  I won’t use the “dipshit” term that Arrington used, but even the entrepreneurs themselves who have pivoted away from early models recognize that investors were often justified to pass on earlier attempts.  Many times, that kicks them into gear to find a better stream of revenue or rethink the product.  This is a good thing. 

Realistically, while startups are often unpredictable—there are certain things that I do strongly believe increase your chances of success.  For example, do you know anything about how your industry works?  That doesn’t mean you have to be a 20 year veteran, but I’d like to back someone who has some kind of experience that led them to think this was a good idea from an insider’s perspective—or at least has done a ton of research.  I think you need to be discerning about what kinds of investors and ideas you back, and that’s better for the innovation community as a whole—that there’s at least some kind of bar to get outside backing. 

Otherwise, if anyone who wants to be an entrepreneur gets a check, there won’t be enough employees to go around.  We’ll be a society of one person, technical co-founderless startup ideas that haven’t been vetted, de-risked, proven, etc…  Powerpoint Nation if you will. 

Want to get these folks help?  Great.  I’m all for that—and that’s why I teach entrepreneurship at Fordham, run educational programs through nextNY and support the incubator programs that provide startups with hands on mentoring.  Help doesn’t necessarily mean an angel round sized check.