Friday, November 7, 2014 by John Sharp (Hatcher+) 5,177 Views
Non-performing startups are not always easy to spot. From a distance, some of the very worst can appear to be doing everything right - charming founders, great product, nice office, lots of press - and a business objective that promises massive returns to the shareholders.
So how can we spot the bad ones?
First of all, let's define what a bad startup is. This is easy enough: every startup has a published goal. A bad startup is a company that has promises to move closer to that goal according to certain timelines but never actually does so. Or does so in very small, meaningless amounts.
I have a trick I use to spot these bad startups. I look for evidence of two things: a) evidence that the startup is circling its business objective at roughly the same distance it was the last time I talked to the founders, and b) small requests for capital. As in, just enough capital to last a couple of months.
I call this the "planetary motion test". Because bad startups resemble planets in motion: by remaining at a fixed distance from the large, shiny object that is their business goal, and moving at the same speed relative to it (courtesy of a continual flow of small, unnoticeable amounts of capital), they can avoid the kind of solid diligence that inevitably accompanies large amounts of capital. Doing this allows them to continue to keep stakeholders entranced, money flowing, and the bills paid.
[Science buffs: yes, I know, elliptical orbits exist - but the truly bad startup founders (and Ponzi schemers) are experienced enough to be able to move in and out from their mission goal - and still pull in more small amounts of capital - so I say that the analogy still holds.]
What to do? Bernie Leong published a Buffet quote in his LinkedIn feed earlier today that basically amounts to: "if you find yourself in a chronically leaky boat, don't try and fix it, change boats."
My advice is similar: Investors, if you find yourself in a startup that is maintaining a fixed distance relative to its goal, and surviving on incremental payments from you or an ever-growing list of shareholders... get out, fast. That planet may not yet be Krypton, but it is almost certainly going to blow up.
John is a Partner at Hatcher Plus, the leading data-driven venture capital investment firm. John has extensive commercial experience at the senior management level, having been the Chief Executive Officer of Authentium, Inc. the Managing Director, Asia, of WorldSpace, and CEO of Hatcher, the precursor company to Hatcher+. A tenacious and driven executive with longstanding board-level and C-suite level management experience within high-growth companies, John also brings a strong history of capital raising from an extensive network of investors globally. As Chairman and CEO of cybersecurity pioneer Authentium (acquired by CYREN in 2010), John co-authored three US patents and developed and sold cybersecurity solutions to some the largest organizations in the world, including the US Department of Commerce, NASA, AOL, British Telecom, Comcast, Cox Communications, Google, McAfee, Microsoft, Symantec, and Telstra. As CTO at Hatcher+, DocDoc, Heardable, and ThoughtRiver, John has designed and developed several highly-innovative technology platforms using cutting-edge approaches to data processing, user interface design, and workflow optimization. John is a frequent blogger and an in-demand speaker at venture events globally, and has extensive experience implementing ESG solutions as Chairman and/or board member of numerous start-ups, including director roles at trade finance provider ASYX and payment aggregator Mozido, and roles as Chairman of MENA-based financial services pioneer Telr, and the leading Cambridge-based legal services technology company, ThoughtRiver.
The Best Investor Deck Ever|
The Most Unrewarding, Misunderstood, Underrated Job on the Planet|
The First 100 Are Funded!|
Venture Capital Simplified - The Rule of 5X|
The AI-Powered, Highly-Automated, Global-Diversified, Exchange-Tradable VC|
|John Sharp (237)|
|Wissam Otaky (11)|
|Dan Hoogterp (4)|
|Manav Narang (3)|
|Stephen Fisher (1)|
|Y Combinator is Pulling Back. They Should be Ramping Up.|
|Can a Robot Write a Business Plan?|
|What's Your TQ?|
|My Five Years in Space|
|Triple Your Bottom Line|
|An Activist Signals MPT is Coming to VC|
|The Hatcher+ H2i Impact Initiative|
|VC Impact Investing: A Primer|
|Looking for the Inflection Point – Tracking COVID-19|
|Keep Calm and Carry On Investing|
|Using AI to Match Investors and Entrepreneurs|
|50 Surprising Facts We Learned From Our First 100 Investments|
|The First 100 Are Funded!|
|The Power of Venture|
|US Immigrants Are Vital To VC Returns|
|Hatcher+ v2.0 Release|
|The Golden (Selection) Ratio|
|The Time-Traveling VC|
|We Created a Venture ETN - Here's Why|
|The Crane's Neck - Using Data To Improve Startup Portfolio Construction|