Beware the VC Fad Factor

 

By: Erik Sherman
Source: http://www.inc.com/erik-sherman/wsj-top-50-startup-ranking.html

An annual ranking of top start-ups suggests VC funding and success go hand in hand. That’s one huge mistake you don’t want to make.

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Trying to identify the next big entrepreneurial thing? The Wall Street Journal has some implicit suggestions in its ranking of the top 50 start-ups. According to theJournal‘s third annual account, these are the top venture capital-backed young companies. One of the big takeaways this year is that business-to-business concepts are ahead of online consumer companies.

If you’re focused on consumers, that means it’s time to shift strategies and look at how to sell to other businesses, right? Not quite–because there are some mighty big assumptions and contradictions in this start-up compilation, and you don’t want to send your horse to the corral on someone else’s say-so.

Venture capital partners are subject to whim and fad

It’s fine to talk about which companies are getting the most venture money. As in any other part of human existence, there are fads and fancies. Right now, venture firms are looking more at B2B. There are some good reasons they might. For a long time, B2B companies often found themselves passed over for the flashier Internet consumer offerings: Facebook, Twitter, Foursquare, and so on.

Companies that sell to businesses typically are using proven business models with a twist, so it is easier to predict outcomes. A larger portion of businesses than consumers are willing to pay for what they need and get, because the lack of the right service or tool can make the difference between profit and loss.

But remember that not too long ago–as recently as earlier this year, in fact–VCs were all over consumer Internet companies. They literally poured money into the space. According to start-up database Crunchbase, Facebook pulled in $2.24 billion in investment. Twitter has received $1.16 billion. Foursquare, which looks like it’s in the low-rent district, by comparison, has $71.4 million. Zynga had $860 million and LivingSocial got $808 million. And let’s not forget Groupon at $1.14 billion.

VC-backed doesn’t mean successful

Notice that a lot of these companies have either had stock trouble since their IPOs because of concerns over revenue (read that as business success) or have raised questions about their ability to increase income–or even makeincome. It’s a clear demonstration that the whims of VCs don’t necessarily map to ultimate business success. In fact, according to new Harvard Business School research reported by the Journal, three out of four venture-backed start-ups fail. Compare that to the 30% failure rate that most VCs say they see.

VCs don’t necessarily depend on operational success

Although some venture capitalists seem to truly believe in the companies they back–Fred Wilson at Union Square Ventures comes to mind (and even he holds to the 30% will fail, 30% will under-perform, and 30% will meet expectations model)–a good many look to build up a business only to eventually exit, which is the polite way of saying buy low, sell high.

They create demand for a product and then unload it to someone else. Too often the VCs depend on the greater fool market theory: that you buy something and wait for a bigger fool to come along and pay more for the same item.

It’s a fact of venture money that the Journal did not mention in its ranking. Of course, the ranking also takes into account valuations. But remember what Facebook’s valuation was right before its IPO in May 2012? Right–much higher than now.

Forget the rankings and the implications of what will work in the real world. If anyone had such a lock on the truth, that person would be able to print money. And yet, that’s not happening. So, consider your idea, think of the best market for it, look at data, think long and hard, and work longer and harder. It’s a much more certain formula to success than watching for trends in lists of well-funded companies.

Erik Sherman‘s work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He is a blogger for CBS MoneyWatch and InsideInvestorRelations.com. @ErikSherman

 

Top Ten Reasons Why Large Companies Fail To Keep Their Best Talent

by Eric Jackson

Whether it’s a high-profile tech company like Yahoo!, or a more established conglomerate like GE or Home Depot, large companies have a hard time keeping their best and brightest in house. Recently, GigaOM discussed the troubles at Yahoo! with a flat stock price, vested options for some of their best people, and the apparent free flow of VC dollars luring away some of their best people to do the start-up thing again.

Yet, Yahoo!, GE, Home Depot, and other large established companies have a tremendous advantage in retaining their top talent and don’t. I’ve seen the good and the bad things that large companies do in relation to talent management. Here’s my Top Ten list of what large companies do to lose their top talent :

1. Big Company Bureaucracy. This is probably the #1 reason we hear after the fact from disenchanted employees. However, it’s usually a reason that masks the real reason. No one likes rules that make no sense. But, when top talent is complaining along these lines, it’s usually a sign that they didn’t feel as if they had a say in these rules. They were simply told to follow along and get with the program. No voice in the process and really talented people say “check please.”

2. Failing to Find a Project for the Talent that Ignites Their Passion. Big companies have many moving parts — by definition. Therefore, they usually don’t have people going around to their best and brightest asking them if they’re enjoying their current projects or if they want to work on something new that they’re really interested in which would help the company. HR people are usually too busy keeping up with other things to get into this. The bosses are also usually tapped out on time and this becomes a “nice to have” rather than “must have” conversation. However, unless you see it as a “must have,” say adios to some of your best people. Top talent isn’t driven by money and power, but by the opportunity to be a part of something huge, that will change the world, and for which they are really passionate. Big companies usually never spend the time to figure this out with those people.

3. Poor Annual Performance Reviews. You would be amazed at how many companies do not do a very effective job at annual performance reviews. Or, if they have them, they are rushed through, with a form quickly filled out and sent off to HR, and back to real work. The impression this leaves with the employee is that my boss — and, therefore, the company — isn’t really interested in my long-term future here. If you’re talented enough, why stay? This one leads into #4….

4. No Discussion around Career Development. Here’s a secret for most bosses: most employees don’t know what they’ll be doing in 5 years. In our experience, about less than 5% of people could tell you if you asked. However, everyone wants to have a discussion with you about their future. Most bosses never engage with their employees about where they want to go in their careers — even the top talent. This represents a huge opportunity for you and your organization if you do bring it up. Our best clients have separate annual discussions with their employees — apart from their annual or bi-annual performance review meetings — to discuss succession planning or career development. If your best people know that you think there’s a path for them going forward, they’ll be more likely to hang around.

5. Shifting Whims/Strategic Priorities. I applaud companies trying to build an incubator or “brickhouse” around their talent, by giving them new exciting projects to work on. The challenge for most organizations is not setting up a strategic priority, like establishing an incubator, but sticking with it a year or two from now. Top talent hates to be “jerked around.” If you commit to a project that they will be heading up, you’ve got to give them enough opportunity to deliver what they’ve promised.

6. Lack of Accountability and/or telling them how to do their Jobs. Although you can’t “jerk around” top talent, it’s a mistake to treat top talent leading a project as “untouchable.” We’re not saying that you need to get into anyone’s business or telling them what to do. However, top talent demands accountability from others and doesn’t mind being held accountable for their projects. Therefore, have regular touch points with your best people as they work through their projects. They’ll appreciate your insights/observations/suggestions — as long as they don’t spillover into preaching.

7. Top Talent likes other Top Talent. What are the rest of the people around your top talent like? Many organizations keep some people on the payroll that rationally shouldn’t be there. You’ll get a litany of rationales explaining why when you ask. “It’s too hard to find a replacement for him/her….” “Now’s not the time….” However, doing exit interviews with the best people leaving big companies you often hear how they were turned off by some of their former “team mates.” If you want to keep your best people, make sure they’re surrounded by other great people.

8. The Missing Vision Thing. This might sound obvious, but is the future of your organization exciting? What strategy are you executing? What is the vision you want this talented person to fulfill? Did they have a say/input into this vision? If the answer is no, there’s work to do — and fast.

9. Lack of Open-Mindedness. The best people want to share their ideas and have them listened to. However, a lot of companies have a vision/strategy which they are trying to execute against — and, often find opposing voices to this strategy as an annoyance and a sign that someone’s not a “team player.” If all the best people are leaving and disagreeing with the strategy, you’re left with a bunch of “yes” people saying the same things to each other. You’ve got to be able to listen to others’ points of view — always incorporating the best parts of these new suggestions.

10. Who’s the Boss? If a few people have recently quit at your company who report to the same boss, it’s likely not a coincidence. We’ll often get asked to come in and “fix” someone who’s a great sales person, engineer, or is a founder, but who is driving everyone around them “nuts.” We can try, but unfortunately, executive coaching usually only works 33% of the time in these cases. You’re better off trying to find another spot for them in the organization — or, at the very least, not overseeing your high-potential talent that you want to keep.

It’s never a one-way street. Top talent has to assume some responsibility as much as the organization. However, with the scarcity of talent — which will only increase in the next 5 years — Smart Organizations are ones who get out in front of these ten things, rather than wait for their people to come to them, asking to implement this list.

[At the time of writing, Jackson was long YHOO]

Source: http://www.forbes.com/sites/ericjackson/2011/12/14/top-ten-reasons-why-large-companies-fail-to-keep-their-best-talent/