In contrast to the last few years, 2023 will feature more failures. What do they mean for the startup ecosystem?
Pain is Progress
Firstly, startup failure is a healthy ecosystem feature. Failure is a chance for talent to be routed within the ecosystem from failing companies to scaling ones or to prompt the formation of their own startup.
As with athletes, the brightest technical talent has a period of peak performance, and the world moves forward when they join teams that are succeeding, not when they are trapped in companies whose time hasn't come.
Counterintuitively, in boom times like the last few years, the lack of failure often stifles creativity and progress.
Failure in Seed Stage Investments
We strive to ensure that most failures happen at the beginning when we have invested a small amount of capital. There are usually no fireworks in this kind of failure, just ideas that run into a wall of customer apathy or founders who find themselves unable to work together.
Usually, there are glimmers of hope and new market paths to explore with any seed-stage company, so Blackbird is likely to make a couple of investments over two years or so over this phase. Unless there is something major we missed, we still wouldn't consider these a mistake if we had invested $3M or less.
Over the past decade of Blackbird’s existence, there have been times when we have invested more than once into companies that never made it to market. Some were wound up before product launch, or failed to match an imaginative product idea with the economic realities of the supply chain.
Failure in Customer Acquisition
"It's not much of a life you're living
Round and around and around and around we go"
- Stay, Rihanna
Failure may come not through a bad product but through the brutal nature of acquiring customers. The tyranny of many businesses is to hand their gross margin to Google or Facebook, reminiscent of a constant run on the treadmill. They get stuck having to spend too much for the sales they generate to create an economic business.
Or an enterprise software business where the payback on the cost of marketing and the sales team always seems stuck at 36 months, despite the optimistic carousel of new sales leaders who pass through.
Hopefully, Blackbird will show the discipline not to invest further in companies like the above, and that decision will not surprise the founders. The golden rule of investment relationships, like in management, is that the decision shouldn't be a surprise.
Our investments should enable the pursuit of clear units of progress, and the decision not to invest should be described in those terms, setting expectations a year or more ahead of time.
Although we loved Jodie and Michael Fox’s vision for Shoes of Prey and invested in multiple early rounds for the company, we did not invest in the Series B when the ugly reality of acquiring mass-market customers had been revealed.
There is a famous saying in venture capital that money is made in successful investments and your reputation in failed ones. So we need to fail well with our investments. What does this mean?
Primarily, it is a recognition of the relationship between the pig and the chicken in a meal of bacon and eggs. Founders put their whole life into a company and, in many cases, entangle their entire self-worth and identity with their startup.
Our role as investors is to remove stress from a failed company. We help the team find new jobs quickly. We offer assistance to help the founders wind down the startup correctly and help them get back on their feet.
We remind the founder of our pride to be involved in their pursuit of something ambitious and in the best cases, like the case of Shoes of Prey co-founder Michael Fox with Fable, invest in their next startup.
Venture capital is a business where more companies fail than succeed. Even within the group of successful investments, most are merely modest, rarely returning much more than the invested capital.
Most of our energy and time will go into startups that fail or succeed only modestly, but little of our financial success will be tied to these companies.
This is the paradox of venture capital; which is solely defined by the power law companies and the degree of their success.
2023 has already brought plenty of rough and tumble. If Blackbird is to be successful in our ambition, our responsibility is to remain unwavering in our investment approach through this time - and to be a steady hand through the ups and downs of the startup lifecycle.
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