When Things Don't Work Out

I have said many times that early stage VC is a lot like baseball, if you get a hit one out of every three times, you are headed to the hall of fame. And if I look back over my career, and also over the track records of the firms and funds I have helped manage, that is pretty much the hit rate I have seen. By "hit" I mean an investment that returns 5x or better. But of course, many of these hits return 10x or even 100x every once in a while.

So what happens with the other two-thirds? Well that is the part of the startup world that we don't talk too much about. Sometimes an entrepreneur will take an early exit. They will have raised a small amount of outside money, will still control the company, and will get an offer they can't refuse, and take it. That's a win for the entrepreneur but not for the VC. But it is a happy outcome for everyone anyway. That's maybe 10% of the total outcomes. So at least 50% of the outcomes are not a win for the VC or the entrepreneur.

So what happens when things don't work out? There are generally two scenarios.

The first is the "slog it out" scenario. This one is in many ways the most painful. It means that there is a business that can be built, but it won't be one that makes the VCs much money and because it takes so much time and money to "slog it out", it doesn't make the entrepreneur much money either. And in many cases, the entrepreneur chooses to leave and the company has to recruit outside management to operate the business.

In the "slog it out" sceanrio, the VCs are often left holding the bag. They have a lot invested in the business and have a responsibility to figure out how to get it out. In some cases, the entrepreneur sticks around and slogs it out along with the VCs. I have great admiration for the entrepreneurs I have worked with who have slogged it out. There is very little upside for them in this scenario. Mostly they do it out of a sense of responsibility. These "slog it out" businesses can go on for a long time. I am involved with some that are well into their second decade and I am afraid that they may be headed into a third decade. I have heard these kinds of companies called "zombie companies and "the living dead". That's a bit unfair because there is no way a company can operate for two or three decades without being able to sustain itself. VCs do not keep pouring money into these businesses, maybe they do that for the first five years, but not after that. These "slog it out" companies turn into real companies eventually but just not companies that have the growth trajectories or strategic profiles that make them great acquisitions.

The second scenario is "hit the wall". In this scenario, the company runs out of cash and there is no more coming from the investors. The company cannot sustain itself and one of two things happens. There is a fire sale or an acqui-hire, or there is a shut down. The fire sale is the preferred outcome and VCs and entrepreneurs have gotten pretty good at finding homes for the teams in recent years. There is such a vacuum of talent out there that a fire sale can often be arranged just for the talent that a company has assembled. But often the fire sale cannot be arranged and the company has to be shut down. Again, the responsibility for an orderly shut down often falls onto the VCs to manage. In a shut down, the employees must be notified and paid through the date of the shut down. All required tax payments must be made. Liabilities such as leases and bank borrowings must be managed. In particularly messy situations, a bankruptcy filing is required.

There are two interesting things here that I always think about. The first is that even the very best investors in the VC business only get a hit about 1/3 of the time. That means that they have their share of "slog it outs" and "hit the walls" too. I am certainly in that camp. The second is that we end up spending an incredible amount of time and energy (hopefully not money) on the 2/3 of our investments that don't work out. When everything goes well, you really don't need that much from a VC. Of course, I have added value in all of my winners. But its the ones that don't work that I have left my blood, sweat, and tears on. And that's the paradox of being a VC that cares. Which is the only kind of VC you want to work with.

#VC & Technology

Comments (Archived):

  1. Mroberhozer

    How soon after the initial investment are you able to tell which of these camps the company will fall into?

    1. pointsnfigures

      On execution, it’s tough-with regards to what the team is like if you do your homework correctly, before you write the check.

    2. fredwilson

      usually within a couple years. but you can be surprised on the upside. which is why you have to be careful. look at Rovio (mentioned elsewhere in this thread). Harmonix also comes to mind.

  2. Kirsten Lambertsen

    So, when a company is at series G, is it reasonable to assume they’re in the “slogging it out” category? Have any of your investments ever punched their way out of slogging it out for many years and into a hit?

    1. JimHirshfield

      I don’t think the number of rounds is necessarily a bad sign. Investors seem to keep throwing money at Twitter…seems to me they may have had a G round by now. 😉

      1. Kirsten Lambertsen

        Very good point!

    2. fredwilson

      nope. twitter probably has done that many rounds. in fact the slog it outs have to stop raising money at three or four rounds. they can’t keep raising money. the hits can.

  3. Semil Shah

    I hope you write more about this topic in particular because (1) it de-romanticizes aspects of venture capital and (2) reorients founders to think about their own exit paths in the case of “hit the wall” or non-growth businesses.

    1. LE

      “de-romanticizes aspects of venture capital”How do you feel that it does that? Explain.

      1. PhilipSugar

        I liked that comment. It talks about the hard realities.

      2. Rohan

        I think he means it takes away the mental image that VC’s are filthy rich folk who sit around in plush offices speaking to entrepreneurs like Jack Dorsey all the time. 🙂

        1. FlavioGomes

          I think he means that getting VC is viewed as a fairytale carriage ride to the top. It at times actually complicates things even more.

        2. ObjectMethodology.com

          But that mental image is the *real world*. VCs just sit around drinking and smoking cigars all day. They throw a dart at a list of startups and invest in the one they hit. Kinda’ like stock market traders.Oh wait, that’s what I do all day, my bad.

      3. Semil Shah

        my belief is that, from the outside, venture looks like a plush gig and rosy. in some cases, it can be. but, many VC partners also have to struggle in their own way. i met a VC today who, only after 7 years at a firm as a partner, finally received a small check from an exit a few funds back. again, it was a nice event, but the impression many people have is that an investor makes money all the time — around here, many funds, in fact, are reducing in size. that is the reality.

    2. Donna Brewington White

      The other “founders’ stories” — the stories are out there, some publicized, but I don’t know if in a compiled body of information. We hear about the more dramatic ones, but what about the undramatic. Might be a valuable resource… I wonder? And not all the endings are “bad”…eventually.

      1. Semil Shah

        hey donna. it’s hard to blog a post-mortem. i’m starting to see more on twitter and hope that it’s a trend. but yeah, having gone through it myself and helped friends, not fun. but cathartic and helpful, too.

    3. MFishbein

      Do you think it de-romanticizes entrepreneurship even more than it does VC? At least VCs have a portfolio…entrepreneurs can’t diversify their risk that way.

      1. btrautsc

        good point mike… we’ve discussed creating an index concept before… First Round Capital tried to experiment as well but ran into regulatory issues (i *think*)

        1. MFishbein

          Interesting. Would love to learn more about what they tried.There is of course the studio/product model to starting companies…the most well known of which being Obvious Corp.

      2. Semil Shah

        hey mike. good question. i think it de-romanticizes both, for different reasons. entrepreneurship is certainly hard and an “all-in” endeavor. yes, VCs can diversify, but separate of this distinction, i think many people view venture with rose-colored glasses, so a post like this helps see the other side. i guess that was my overall point.

    4. fredwilson

      i will try to do that Semil. the issue is that its hard to be too specific without hurting feelings or reputations.

      1. David Petersen

        no one can complain about the truth 🙂

        1. ShanaC

          you can, in fact

          1. Techman

            How? You can talk all day and go around in circles but at the end of the day the truth is still the truth.

          2. JamesHRH

            Certain personality types would rather not lose than face the truth. That causes bad relations, when you share the truth ( and an amazing amount of wasted time – the other side will attack your ‘truth’, argue facts, etc.) Not worh it.

          3. ObjectMethodology.com


      2. ObjectMethodology.com

        Well that post is much better than denial. lolWhy not take it a step further and do some real good by working on changing the 1 out of 3? I’ve been repeating the numbers 80% failure rate of startups for years. But, I don’t find may people talking about fixing that.Most startups fail because of insufficient funding. That’s says a lot because many times the actual reason is something else. But, more funding could have fixed that reason.So, it appears the VC approach sucks! Why not change it? Is there some reason VCs wouldn’t want 2+ out of 3 to be a hit? It seems to me in software and any walk of life that the foundation is what helps most to make or break an endeavor.Why aren’t VCs more active in the earliest stages of companies? Seed funding, proof of concept, etc. Those stages are the cheapest.

        1. PhilipSugar

          Doing this for 20 years, disagree. Most fail from overfunding.

          1. Blake

            I would also assume improper planning on multiple levels

          2. Christopher Bond

            Absolutely Agree. I’ve seen more issues with Poor business models, operating management, sales, strategy, execution than anything else.

          3. ObjectMethodology.com

            Right and not having the funds to get help from professionals can be the culprit.

          4. ObjectMethodology.com

            Right, so you have a startup without the cash to pay for some proper planning help creating an unrealistic or down right stupid plan. Again, not being properly funded is the problem. I’m not coming up with this, there are others that do the research.

          5. Capitalistic

            Good point. Bootstrapping > early capital

          6. ObjectMethodology.com

            That may be good to help investors get better investments (I’m likin’ it).Can you explain how bootstrapping is better for a startup than being properly funded?

          7. Capitalistic

            I’m not against funding “concepts”. But I’d rather invest in a company that can demonstrate that they’ve bet the house on their idea. Have you ever seen an entrepreneur who bet the house on his/her idea? Have you seen the famine-like hunger in their eyes? I’d rather cut that entrepreneur a check.Some actual traction. Traction doesn’t necessarily mean revenue or sales orders. It could be compelling promises to buy/use/lease/rent the company’s product/service.Just my opinion.

          8. ObjectMethodology.com

            I like that you want to see “hunger in their eyes”. But, I don’t see it as good that the hunger *needed* to be forced. I think a truely good entrepreneur could have a few hundred million cash in the bank and still be hungry. In fact I personally think clearer when I have more cash on hand. It doesn’t pressure me into making “hurried” judgements.I think that similar to sports it’s the person who can remain calm and focused in all situations that wins. That being said the only thing that underfunding does is cause lessor entrepreneurs to move faster. But, that’s not calm and clear thinking.

          9. Capitalistic

            Agreed, but I think we’re referring to two different things. What I wanted to convey is that the hunger could stem from market acceptance versus desperation. The hunger could mean, “Oh my; demand for my product/service has exceeded my capacity. I need to ramp up asap.” Similar to time sensitive deadlines, not having enough can force a CEO to become more disciplined.

          10. ObjectMethodology.com

            How can you fail from being overfunded?

          11. Capitalistic

            Overfunding can lead to too much experimentation. Underfunding forces the entrepreneur to focus on immediate revenue generation. I’m advising a start-up that needs ~$5M to support immediate ramping. The CEO’s growth strategy is beyond outlandish, with no ETA on returns or an exit. Imagine if he had the $5M…

          12. ObjectMethodology.com

            But that’s not the fault of being overfunded. That’s the fault of the CEO’s inability to discipline his or her self. Also, if the CEO has a discipline problem being underfunded probably would not *force* that CEO to do anything.

          13. PhilipSugar

            Nobody raises money to sit on it. You can do that at a bank. So when you raise money you are obligated to spend it. Rough guide is 18 to 24 months. So if you raise ten times the money you spend ten times the money. The problem is so many people somehow think they are never going to pay it back. Magically somebody buys you. That can workout but so can winning the lottery.If the opportunity doesn’t warrant it, all that money you spent is wasted.

          14. ObjectMethodology.com

            It sounds kinda’ like you’re saying there is no such thing as overfunding based on the idea that it “demands all money be spent”.I’m not saying a statup can’t be overfunded. I’m just saying that overfunding doesn’t cause a startup to fail.

          15. PhilipSugar

            I thought you were kidding so I didn’t reply. I see you are not. I give you Color as a good public example, I give you ReturnCentral as a private example where I sat on the Board of Directors.Eventually and that really depends on a ton of stuff, you have to reach breakeven and pay your investors back. The money is not a gift.So lets say you have an idea, you think its going to be huge, but the market says its a $1mm a quarter business that grows 10-20% a year. The market is reality.Ok, in one case you raised $500k, in that scenario your burn rate isn’t going to be so high you are profitable and you can pay your investors off. Is it a VC business? No but it can change your life because that can become a good business.In, the second case you raise $5mm. The reality is you are going to spend it to really try and chase this idea. Now you are left with the reality of having to totally cut expenses to get to breakeven which is brutal, and you are going to be saddled with so much preferred stock on your balance sheet that you realize you are never going to get out of the situation.People will argue about the market, but I am telling you it is what it is. I have been doing this since the 1980’s and by this time I have seen enough points to draw a line, and I stand by my comment.

          16. ObjectMethodology.com

            OK, so are we talking the same thing? When I invest in a company by purchasing ownership I will not necessarily be *promised* or *guaranteed* payback. I may lose my money hence the regulations about qualified investors.If I *loan* money to a business I will be *promised* my money back but not necessarily *quaranteed* my money back.Over funding is a case of investment. Over leveraged is a case of debt. Or are we using different terminology?

          17. PhilipSugar

            Look up preferred stock and convertible debt

        2. fredwilson

          i don’t accept it either. i try to change it. it is hard to change.

          1. LE

            Hard (it’s not low hanging fruit) and it doesn’t need to be changed.This more or less brings us back to the example I used before about Henry Kravis not caring about the hotel sign and firing the CEO who wanted his opinion many years ago. His business model, and his way of making money, isn’t based on getting involved in that granularity of an investment he makes. Your model isn’t based on spending time or effort other than planting and identifying (with some involvement obviously) so you can have the hits over the course of many investments. [1]For an angel investor there is no doubt at all in my mind that I could make improvements in the businesses that an angel invests in that would move the needle for the business and be good for the angel. (And I have done this.) But most likely not for a VC. To dependent on factors beyond anyone’s control or effort like the market, timing and scale that doesn’t lend itself to polishing business processes.[1] Domain selling is somewhat like this. You can’t do anything at all about the domains that you own until someone inquires about a domain and is in the venus fly trap. At that point the maximum effort is put in to trying to identify and get the most $$ from the potential buyer. But until that happens absolutely nothing else matters because the market (the buyer) hasn’t decided that the product (a particular domain) is what they want.

          2. ObjectMethodology.com

            Yep, fighting the good fight always seems to be the hardest.

          3. PhilipSugar

            I came back to this because somebody replied to a comment.I don’t think you can change it or need to worry about it. Taking on VC is an inherently really risky proposition. That is fine.Yes, you could have less risky projects but they don’t come with the rewards that your LP’s want/expect/are promised. I have done some of these projects.What you can do and you do with others like Brad Feld and Mark Suster is explain how every project doesn’t need VC funding and you can be successful even though you haven’t built a billion dollar company. I really appreciate and applaud this and that is the service that you have changed, and have not accepted.Because there are many in the VC industry that make the comments like “feed the eagles and starve the turkeys” because that is what they’ve heard and they relish the opportunity to scoff at “lifestyle” businesses. They are the ones when things don’t work out that would rather blow up a company than actually deal with reality.

        3. Capitalistic

          What do you consider to be a failure? Sometimes starting/buying a business that fails is an asset in the eyes of the astute investor. When I talk to investors, they’re more interested in hearing my war stories from my first company, even though I had to sell it two years later in a fire sale. I also lost personal and investors capital. The failure helped me in the long run.

          1. ObjectMethodology.com

            Oh my defining what is a failure would be too much for a small discussion.

          2. Capitalistic

            I agree. “Failure” can mean many things. Winding down a VC-backed company might seem like a failure, but preserving capital and limiting loss isn’t a failure. Losing capital in one investment can provide you with volumes of data/experience to support your next venture. There’s no such thing as can’t miss. You cut your losses or take profits without becoming a “double down gambler” or seething greedy shark.

        4. JamesHRH

          Most fail due to incompetent / unprepared founders.

          1. ObjectMethodology.com

            Unprepared founders would be the issue of focusing on earliest stages of the startup.

      3. Semil Shah

        hey fred. my comment may have not been written in the best way. yeah, no need to be specific about companies/founders, of course. totally understood.

  4. Richard

    Going into a deal avc uses a standard set of “light preferred” documents without negotiation, why can’t you work our the “light exit” documents at the same time?

    1. awaldstein

      Logical…but it’s hard to imagine signing most any doc around this.

      1. Richard

        No better time for avc to get this issue out there than before money is wired?

        1. awaldstein

          Wasn’t thinking about the VC at all.VCs fund the world but entrepreneurs change it.

    2. Charlie Crystle

      things get more complicated over time–it’s very hard to anticipate (employee issues, contracts, cap tables, tax stuff).

      1. Richard

        Right, but the opportunity cost of avc may be higher than any Long Tail (low probability) return in out years.

  5. Charlie Crystle

    Great post–I hear ya. I started my last company in 2002. It’s doing great as a highly profitable small company, but as Jerry said once “there’s too much hair on this dog”. It’s not a home run for anyone, and I’ve been invested for 11 years. Some friends and family for 8 years.But it has positive impact, and will continue to grow and serve, and maybe someday we’ll do a buyback to free up investor capital.This is why it’s really important as an entrepreneur to choose something you love to do–and not take that as granted.

    1. awaldstein

      Growth has its own buzz to it and when you have it, that’s what you are about.Loving something that just doesn’t work or needs to change dramatically to find some economics changes the game. Love is not always enough!

      1. Charlie Crystle

        definitely. but if you’re able to slog it out as fred says, obligation is not always enough. Love helps 🙂

    2. JimHirshfield

      Jerry who? Garcia?

      1. Charlie Crystle

        lol… too much hair on that dog, definitely

      2. fredwilson

        the jerry he is talking about has as much soul as your Jerry. they are both saints. fortunately our Jerry is still with us.

        1. JimHirshfield


  6. benhatten

    Interesting post – I have heard a couple other VC’s mention that their motto is they try to “feed the eagles, starve the turkeys”. Meaning they try to focus as much of their time on the winners as they can. Which makes sense considering they are “graded” on their wins.I’m curious – how much of your time from a percentage perspective are you investing in the 2/3 that are not going to have a positive return for you?

    1. fredwilson

      90%. that line is bullshit. the eagles don’t need much from us. if they did, they wouldn’t be eagles.

      1. markslater

        ha! so true…..

      2. James Ferguson @kWIQly

        Interesting – As we start talking to investors, a question I ask is what do we really need ? Money – check, Disciplines – check (almost certainly), Other – no idea – well not really !So as hatchlings its pretty hard to know if we will soar over beautiful vistas or will end up with our necks rung, stuffed up the nether regions and helping someone else give thanks !I prefer the former, but from what Fred has said the odds are against. I guess I better sharpen those talons or pucker up ! 🙂

      3. ShanaC

        are there times where turkeys turn into eagles

        1. jagorfain

          I ilke turkeys. They are delicious with gravy and cranberry sauce.

          1. fredwilson

            you left out the stuffing

          2. jagorfain

            yeah, i know…I’ve been trying to cut back on carbs.

          3. ShanaC

            hahahahaha – oh boy, when the two of you meet in person….

        2. btrautsc

          sadly, here in the southeast they have some concoction that includes like 3 of these birds in 1. Not sure about the Xreturn, but hear it is delicious.

      4. Rohan

        Have slog it out entrepreneurs come back to build eagles in your experience?

        1. fredwilson


    2. ObjectMethodology.com

      “I’m curious – how much of your time from a percentage perspective are you investing in the 2/3 that are not going to have a positive return for you?”Well, obviously not enough!

  7. NS

    If a VC is successful in only 1/3 of investments, and it takes 4-5 years for an investment to succeed, the odds of success for the best entrepreneurs is only once in 15 years and a super success perhaps only once in their career – so entrepreneurs, just love what you are doing and slog away 🙂

  8. ErikSchwartz

    When things don’t work out you really see the quality of the VC you are working with. A good VC has the connections to arrange a fire sale or a acqui-hire. A bad VC doesn’t. A good VC also makes sure everyone gets paid for work done, a bad VC walks away from those responsibilities.I’ve worked with both.

    1. awaldstein

      Fair weather VC seems to be a real phrase.

      1. pointsnfigures

        I have seen the opposite. Struggling entrepreneur only contacts you when they are in trouble. You don’t hear from them when things are moving along. Or, when they are in trouble and you help-they don’t like your advice (because it generally is bad medicine from their perspective) and they fight you tooth and nail-meanwhile the business plummets.

        1. fredwilson

          been there done that, doing it, and will do it. its an occupational hazard of the business

          1. pointsnfigures

            I think that is the most frustrating thing. Sometimes it’s like working with a good dance partner, and sometimes you have to step on toes. Others they are dancing all over yours and your feet bruise.

        2. ShanaC

          you make me want to write newsletters about all my positive news

    2. Richard

      Right, but if USV is spending 2/3 of their time with terminal companies, does it come at a cost for new companies seeking their attention. Maybe the honorable thing is for the startup to fall on the sword.

      1. ErikSchwartz

        Totally agree. But sometimes the investors on the BOD pushes the team to work for another month or two promising to put in a bridge and then does not. This is especially bad if the investor is trying to raise a new fund at the time.

      2. Matt A. Myers

        They need to spend the time to reduce their losses (or gain as much as they can) – it’s not done for no reason. Plus, it’s relationships – how you decide to treat people.

      3. LE

        It’s a conscious decision on the part of the VC to strike a balance that allows them to attract more business as a result of that reputation.And it is a balance. Because if they don’t dedicate a significant amount of time to keeping their eye on the ball and making money and having wins (ala some of USV’s) the nice guy stuff won’t mean anything.Balance. The quintessential other world example of this is the “he’s a good father” meme. People seem to think they can dictate how much time a man (or woman) should spend with their kids and “be a good father/mother”. Otoh that same man/woman needs to bring home the bacon and make enough money to live in a nice house (because w/o a nice house you will probably be in a so so or even sucky school district ) and be able to afford to send their child to a good college. And keep your job should the economy tank.

        1. Richard

          “When you eliminate the impossible, whatever remains, however improbable, must be possible”

      4. fredwilson

        they aren’t all terminal. only 1/3 of them are. and this is how you make your reputation in the business. it is how you get to win the deal you want to win.

        1. Richard

          Here another way to look at it:Suppose we work with your probability distribution for a new investment. It has a probability parameter Theta that has one of three outcomes.For example, it has a .33 (Theta1) chance to join the deadpool , a .33 (Theat2) chance to have a 1x-3X return and a .33 (Theta3) chance to have > 3x return.After one year you look at its metrics M and you determine what is the likelihood that of the data M given Theta1, Theta2 Theta3. Lets say the investment missed its new user retention target. Lets say the probabilities are 2/3 of that happening given Theta1, 3/12 for Theta2, 1/12 for Theta3 Taken together the posterior probability of Theta is not 1/3, 1/3, 1/3. It is 24/28, 4/28 and 1/28.You could continue to work with this company but your odds of a >3X return have changed considerably vs a new investment.

          1. ShanaC


          2. fredwilson

            Yes. You can get pretty analytical about it. But like poker and stocks, human emotion is a bigger factor than you might think

          3. Richard

            Yep, we have all heard the expression “gut instinct” well it turns out the there is research going that is suggesting the gut may even be a second brain.

        2. FAKE GRIMLOCK


  9. Adrian Bye

    its really impressive to see you discussing this, fred

  10. btrautsc

    like the visibility of this post… Some historical data would be amazing, if it were possible to break companies into a few categories (names withheld) but basically:Wins: (singles, doubles, triples, homeruns – or whatever metaphor is preferable) Positive AcquihiresSlog it OutsHit the Walls…Data about # of founders, market, time of year, funding, location… could be really interesting. I’d help sort…

    1. fredwilson

      i could do that easily on the usv.com/investments pagebut i won’tthere are a lot of people who could be hurt by that categorization

      1. btrautsc

        right thing. well played.

  11. Jorge M. Torres

    Such an honest post. We don’t spend enough time studying failure. The laast part reminds me of what Fred said in his post, In Between: The Tough Place to Be:”So choose your early stage investors well. Make sure they are willing to see you through the in between phase if need be. Because they will probably need to.”That post, as well as today’s, highlight the importance of working with investors who front run commitment before capital.

  12. Joshua Baer

    Timely post for me. I’ve been trying to explain to an entrepreneur the danger of having a “bad” angel investor – which to me would be someone unethical or criminal but also just someone who is going to be litigious, threatening or harassing even if what he or she is doing is legal.When things aren’t home runs, things are often renegotiated / recapped / reworked and you want everyone to have a team attitude to make that happen or it could turn into a big mess. It’s likely to be an emotionally charged and stressful situation. As an investor or entrepreneur, I want to be sitting at the table with reasonable people.If you’re desperate, you might have to take money from bad investors. But if you have a choice, you should be pick about who you accept as an investor.This also makes me think of your recent post about Doing Business on a Handshake.

    1. pointsnfigures

      all capital is not good capital. some is dangerous. 95% of the time good liars tell the truth.

    2. fredwilson

      i like to compare it to a marriage. it isn’t, of course. but it does get the point across

  13. csertoglu

    I really think it’s the “slog it out”s that build a good VC, not the hits.

    1. fredwilson


  14. William Mougayar

    It’s interesting that the ecosystem is biased toward the 1/3 that succeed, and we treat the other 2/3 as the “exception”, whereas it’s the opposite that actually happens, i.e. Succeeding IS the exception.When you enter as a startup, your objective from day 1 is to defy the odds of failures and be the exception.

    1. awaldstein

      You don’t build a model based on what doesn’t work but on what does.The model works cause there are winners. It’s not the percent that loose, it’s the percent that win and carry the whole game.Honestly, it’s that way with everything from ideas, to campaigns to investments.

      1. reece

        well put, Arnoldand it’s not like we don’t know about all the failure out there… we just need to collectively focus on what works, what we CAN do to succeed…

        1. William Mougayar

          True, BUT succeeding is part doing the right things, and part NOT doing some wrong things. If you keep your eye on both, it helps your overall odds of success.

          1. Cam MacRae

            ..and those who ignore history are doomed to repeat it.

          2. LE

            True. But sometimes though history (or what you read) doesn’t reveal all the nuances and details that go into a decision or why something actually happened. [1] To me details really matter. The cross examination is critical. Stories can be spun any number of ways depending on bias and what point the writer is trying to prove.[1] We hear the famous story about Steve Jobs father talking about the back of the fence painting being important and how influential that was to Steve in terms of the way he did things. But do we really know that was the only thing that influenced the way he was? Or how important that one factor was vs. maybe someone he met in high school that said 20 things like that?

          3. FAKE GRIMLOCK


          4. ShanaC

            and yet I am constantly surprised by how little businesses study history

          5. awaldstein

            Of course you are right but decision making at a start up stage is simply not that logical and there is never enough quantifiable data.Logical to think about. Focused and serious to do but it’s always a leap of faith. There is not a list to be followed or a sacrosanct group of stats that give real assurance.

          6. LE

            Agree. And was going to say the post mortem is always key. Same as FAA does with plane crashes each one is a chance to learn and improve the system.

          7. ObjectMethodology.com

            Another good observation. How much coffee have you had today? I think I’ll increase my intake.

        2. awaldstein

          Yup. The great conundrum of course when in the process you rarely know why things don’t work with clarity enough to base decisions on.Data-based decisions, post-mortems are necessary but more aspirational than real in early, even mid stages.

      2. JimHirshfield

        Early days you don’t know what’s gonna work. So, @915ee22847dcafb04dfa9c5466e6fccd:disqus has a point. Startups start as failures waiting to happen in that the overwhelming force of gravity is pulling them down.

        1. awaldstein

          Not my way of thinking.It’s like saying that because you are going to die, you can strive for health.You never know what’s going to work. And even worse, you most often don’t know why things don’t.If you can’t defy gravity you can’t build a business. It’s just that not simple!

          1. JimHirshfield

            Not saying one can’t defy gravity. Just saying it’s there, and in the absence of all else, you fall.

          2. awaldstein

            Sorry to be so dramatic ;)Gravity to stay still. To not change. To not keep pounding forward sure is there.In life and business both.

          3. panterosa,

            Arnold, you sound very “Inherit The Wind” this morning!

          4. awaldstein

            Funny…Inspired realism suits me well lately.

          5. Rohan

            Agree. This assumes it’s -1 or +1. There’s 0 in between too

          6. ObjectMethodology.com

            “It’s just that not simple!”Cool.

        2. FAKE GRIMLOCK


        3. James Wrubel

          This reminds me of how you learn to fly in Hitchhiker’s Guide. Throw yourself at the ground and miss.

      3. ShanaC

        well, sometimes the what does work is the process of disinclusion?

        1. awaldstein

          True of course but it informs not defines.Not a big believer in definitions and processes that define what they aren’t.

    2. Elia Freedman

      Survivor bias.

    3. ObjectMethodology.com

      Yes, good observation. The sad part is the 2 failures probably don’t have to be. Maybe when inventing totally new products or services. But, most of the time not.

      1. PeterisP

        Well, the whole point of a startup (as opposed to a “normal” new business) is to run an ambitious experiment for something that hasn’t been done or isn’t being do – and if you’re getting 30% or 50% success, perhaps you aren’t being ambitious enough and should pick&fund ideas with 20% or 10% success rate but a larger upside if it happens?

        1. ObjectMethodology.com

          I guess you’d need to assume that all failures can return big dollars in the future. There are companies that are mature and still invent. So, maybe it’s not really good to judge an investment based on risk. There can be big returns with less risk. Albeit that doesn’t bode well for the (I think its called) balanced market theory? The theory that says you must take on more risk to get more returns.

          1. ObjectMethodology.com

            Oops… That should say “… you’d need to assume that all failures can’t return big dollars…”

  15. Richard

    Fred, why not set up a separate special purpose vehicle and that would buy the preferred equity of these underperformers and have a separate team handle it?

    1. dremoran

      There’s an industry of secondary funds that specialize in buying up the “slog it out” companies. USV wouldn’t need to create an SPV — they could just sell their equity directly.

      1. Richard

        Ok for a full exit, but I can see where something less terminal might be usefull. Think of it as sending your injured player to aaa ball rather than a full release.

    2. Matt A. Myers

      Wouldn’t that just be another layer of work managing that team? I imagine it at minimum it’s no less work – as they’d still want to get as much returns from selling to the SPV, and I don’t see them getting that if that’s the purpose of the SPV team.

      1. Richard

        You have to look at things as probabilistlcly. All companies die. This only issue is when. That’s not to say that a company can not make it back to usc after being sent down to their avc. One could argue that this may b the medicine that they need.

    3. fredwilson

      i think you will need to explain in more detail why and how this would work for all parties

    4. ShanaC

      at some point the lack of income would have to come out….

  16. christopolis

    Wondering if you can put numbers on time and revenue/traction before you feel they are in the 2/3rds camp? Or is that totally on a case by case basis.

    1. fredwilson

      we will generally know within a couple years. but you can be surprised on the upside which is why this is the hardest part of the business.

  17. reece

    solid, honest post @fredwilson

  18. JimHirshfield

    I don’t think it’s always black and white, as some comments imply. Probably isn’t most of the time. But one aspect that I think magnifies the “struggling” companies is the degree to which the portfolio has monster hits. The startup with “only” 20% growth in revenues/users looks like a looser next to a success like Twitter, no?

    1. fredwilson

      20% growth in revenues is about the border line between being sexy and boring to investors and acquirers

  19. Bo Sartain

    The startups that fail are not failures if the entrepreneurs pick themselves back up and learn from the mistakes they made. I wonder how many of the 1/3 that are hits were started by entrepreneurs who were in the 2/3 bucket before. I have heard that many investors don’t like to invest in first time entrepreneurs, and a failed startup in the past is not at all a strike against the entrepreneurs.

    1. JimHirshfield

      So true Bo. Failure is education. A very valuable education.

      1. Matt A. Myers

        And it’s always more helpful and valuable if someone is willing to support you through mistakes (if any were made), etc..

      2. ObjectMethodology.com

        Brad Feld contends you don’t learn anything from failures. I don’t think that’s quite right. I think that failures don’t necessarily teach you the *right* things. But, maybe he’ll comment about this.I just hope we don’t get into an offshoring argument over this. lol

    2. fredwilson

      you are right. past failure is a badge of honor in our shop.

      1. Carl Rahn Griffith

        Wow. Do I get a badge?! 😉

        1. Charlie Crystle

          how about a tattoo?

          1. Emil Sotirov

            Scars are the best tattoos.

          2. Carl Rahn Griffith

            I have plenty of very bloody emotional/financial ones from business. Sadly, they have no machismo value as they are all on the inside 😉

          3. Emil Sotirov

            True machismo is the “inside” one… muscles in movies are metaphors only (not many people get that… but that’s another story)

          4. Carl Rahn Griffith

            That’s reassuring to know. The duelling-scars of modern-life somewhat lack the perverse ‘glamour’ of those of yore…Muscles in movies as a metaphor – interesting. As in the sense of our also being awash with violence in movies/TV/games? It appalls me and it seems relentless…
“An extraterrestrial being, newly arrived on earth – scrutinizing what we mainly present to our children on television and radio and in movies, newspapers, magazines, comics and many books – mighteasily conclude that we are intent on teaching them murder, rape, cruelty, superstition, credulity and consumerism. We keep at it, and through constant repetition many of them finally get it. What kind of society could we create if, instead, we drummed into them science and a sense of hope?” ~ Carl Sagan.

          5. FAKE GRIMLOCK


          6. Carl Rahn Griffith

            Indeed. All the great thinkers are gone, sadly.We live in utterly mediocre times.

          7. FAKE GRIMLOCK


          8. Carl Rahn Griffith

            Hmmm, I admire your optimism, FG! 😉

          9. FAKE GRIMLOCK


          10. Carl Rahn Griffith

            Ditto. There is a middle-ground, however: pragmatism 🙂

          11. Carl Rahn Griffith

            Lol. Well, I got a Tigger tattoo for my 40th – would love another one, but my wife insists that was a one-off – no more 🙁

  20. chrisdorr

    Beautifully stated. One question. Have you ever backed a founder who was initially unsuccessful with you in a second company that they created?

    1. JimHirshfield

      I’m aware that he has…but not my place to single out individuals or companies.

    2. fredwilson


  21. John Pasmore

    Certainly lots of valuable comments in the thread – these situations can test documents that you may have thought were boilerplate like the Shareholders Agreement or Articles of Incorporation. Joshua’s point about investors is important and you have to think about what’s required if you ever need to amend the foundational documents — control can shift (uncomfortably) if you’re not careful.

  22. Steve

    Which category would BugLabs fall?

    1. JimHirshfield

      Do you really think he’s going to single out portfolio companies like that?

      1. wiwa

        Why not? maybe case studies in MBA mondays

        1. fredwilson

          Jim is right that i am not going to single out portfolio companies without their permission. but i think the answer is obvious.

        2. JimHirshfield

          Just from reading this blog for many years. Not his style.

  23. zackmansfield

    One interesting side point here: while Fred talks about slogging it out with a portfolio of companies, for the entrepreneur, it’s their only company (they get no benefit of a portfolio approach). This can lead to tension at times before everyone is on the same page that it’s going to be a “slog it out” ride…often the entrepreneur (who is naturally very optimistic, hence an entrepreneur) still thinks it’s a homerun opportunity.While the VCs you want to work with are the ones who will work to do their duty and slog it out, the same can be said for entrepreneurs. You can tell a lot about someone by how they handle life when things aren’t going well. As a banker, seen both good and bad wind downs of companies and relationships either strengthen many fold or crumble forever.

  24. Barry Nolan

    Startup Disney: Glamorous, glorious, and easy. Startup Reality: Grind, battle, each day.The latter, I suspect, is as true for the Babe Ruth’s to the wannabe’s.

    1. awaldstein

      Read “Born Standing Up’. Steve Martin’s auto bio. He played to empty rooms for a decade then was an overnight success.

      1. Barry Nolan

        Angry Birds was Rovio’s 52nd game. After 8 years, and near bankruptcy.

      2. falicon

        Loved that book as well…I’ve been playing to my own version of empty rooms for awhile now as well…not sure I’ll ever end up being an overnight success, but I’m enjoying the journey and there are worse ways to fill a career 😉

        1. fredwilson

          you’ve got the talent Kevin. work on your focus.

          1. falicon

            I would argue the missing bit is team not focus…there is a lot more focus to what I’ve been doing than there appears to the outside eye 🙂

          2. Carl Rahn Griffith

            Yin and Yang is very important – I feel I’ve been compromised for too long in not having found my Mr/Ms ‘Right’ in that respect. Partnership is so important I feel – thankfully I resolved it in my personal life (at last) over a decade ago, but in business, it’s been a lot more tricky…

          3. falicon

            Agree 100% with you…I have struggled for over a decade in finding what I call my ‘Steve Jobs’ as well…and the older I get, the more picky/finicky/demanding I become on what that person has to bring to the table…sometimes I think it’s just a fact of coming from a small rural town and not getting into the NYC startup world until after I was past my 20s (my interest/opp. to be out networking, drinking, and such is much less the older I get).For the most part I’ve stopped looking for the missing partners…and instead focus on the product and the customers…my belief is that if I focus on that approach, the rest will eventually work itself out one way or another…we’ll see 😉

          4. Carl Rahn Griffith

            Ditto – good thinking, Batman!

          5. PhilipSugar

            But that is the team part. Just my stupid opinion. I have found over the years, really smart creative people love to start on projects, they love to get them to the point where they themselves can use them, but they hate doing the nitty gritty day to day stuff for a long period of time to become successful. Its that crappy little detail stuff that long term makes you successful.Frankly, I don’t think its possible to do both. I know I can’t.

          6. falicon

            I agree – I am not good at doing both either. I struggle through and do best I can with the nitty-gritty day-to-day stuff because I don’t have a choice if I want them to get to a profit…but getting a team together would be much more ideal.

          7. PhilipSugar

            Then get one together.

          8. falicon

            Sage advice my friend…sage advice.I have a knack for finding people that want me to join their team/efforts (not vice versa)…so yet another area I struggle with but continue to work on.Always so many things to be working on and improving…but that’s part of what makes life so much fun! 😉

          9. fredwilson

            you certainly know yourself best. i just see you working on so many things. and its hard to succeed at that many things.

          10. FlavioGomes

            I second that Fred from first hand experience. Letting go of the pet projects to focus. A very hard but often the most rewarding decision you can make.

          11. falicon

            That assumes you have a business that is suffering (or at the very least could be exploding more) but just needs more of your time and focus…I certainly go in spurts where this is the case but for the most part, I do not yet have something that would explode if I just put more of my focus/time into it…Of course, I could be delusional…it wouldn’t be the 1st time I’ve been accused of that 😉

          12. falicon

            True – though it’s not much diff. than how each of you operate at USV (I would guess you actually have your hands in a wider variety and more projects than I do)…but instead of money, I put tech. in.At my core I’m a dev. so building stuff out of nothing is my real drive (and focus)…for my personal stuff, I operate around two basic themes (discovery utilities and sports tools/services)…though mostly unrelated, I picked those because that’s where my own needs and interest lay.Where I historically fall short is on growing any of my own projects beyond a small lifestyle business (it’s a skillset/focus that I need a ‘missing’ teammate to bring to the table)…but the older I get, the less I worry about or focus on that (the lifestyle ones I’ve got going; along with my usual consulting and day gig earn enough to keep the game and fun going for now) 😉

      3. fredwilson

        i loved that book.

      4. Carl Rahn Griffith

        He had rooms?! Luxury!NB: ideally, you are familiar with the Monty Python ‘4 Yorkshiremen’ sketch to fully appreciate that reference ;-)So, here it is … http://www.youtube.com/watc

    2. Kirsten Lambertsen

      I love being reminded of Babe Ruth – inspiring.



  25. Matt A. Myers

    So are VCs regularly approached or in contact with bigger companies who are looking to acquire teams?

    1. fredwilson

      mostly it goes the other way. we reach out to them.

      1. Matt A. Myers

        Because you can see a potential fit?

  26. takingpitches

    Fred, first I love the explanation of the “fire sale”/aquihire scenario which we see so much of. Thank you for that.second, the larger point, is karma. besides being important as the right thing to do, it’s so important even from a practical sense. when i was at a law firm, i had a client who was an alumnus, and was treated so well on his exit, that he looked for every opportunity to use the firm he could as a client after he eventually became a GC of a very important public company.now, that grace on exit happens much less often, and it is easy to see how it will put the firm in a bad position 5-10 years out, as there is not enough to distinguish it in a very competitive world where there are a lot of options.

  27. PhilipSugar

    One interesting point to bring up, that also isn’t written about is behavior to prevent companies from “slogging” it out.These include pushing mergers, taking (or more likely trying to raise) money you know in your heart you don’t need instead of refocusing, and taking a Hail Mary pass with new management.You learn more about somebody’s character in tough times versus good, and I know there are exceptions but I have seen much bad behavior in the name of “we didn’t start this not to change the world” or some variation. That’s correct, we didn’t, but if reality presents us with what as known as life, you need to deal with what you have not what you want to have.The middle case is the hardest one. I can tell you from real life experience there are many companies that have become overnight successes after ten years. There are many companies that haven’t changed the world, but changed the life of those that have built them. But there are many opportunities that have been wasted along the way.

    1. fredwilson

      yes. i really like your last paragraph.

    2. Elie Seidman

      Great line. “but if reality presents us with what as known as life, you need to deal with what you have not what you want to have.” What you have may not be what you wanted to have but it may not be bad either and if you work at it persistently, it might end up being a 10 year overnight success. Or maybe it won’t be. Which is why the middle group is tough – for both VC and entrepreneur.

  28. Farhan Lalji

    Urgh. As an entrepreneur going through this process is difficult. When you’re filled with so much passion at the outset and then realise that you might be in that other 2/3 it’s heartbreaking. The question is if you’ve realised it how long do you slog it out for when it’s becoming more obvious that there’s no more cash and the best option might be to stop. As hard as it might be for a VC to deal with this situation, it’s the entrepreneur’s life that it’s effecting. Really tough on this side of the table.

    1. fredwilson


    2. ObjectMethodology.com

      Hmm… What does the typical entrepreneur do to ensure success? I think not much. We tend to “know we’re right” and “know our stuff is better”. Maybe if we become ankle biters with 10% innovation we’d do better?

  29. jason wright

    Setting aside the obvious measures of success and failure, I wonder if there are a set of more obscure characteristics common to the hits, and a different set common to the strikes?Have you made that kind of marginal analysis?

    1. fredwilson

      hits get to product market fit early and then take advantage of that fact by executing well against it.



  30. wiwa

    Which one is tasty labs

    1. fredwilson

      the fact that you asked the question means you know the answer

  31. Steven Kane

    thank you for the simple candor and transparency, fred – you a rare breed

    1. fredwilson

      so are you Steve

  32. Pete Griffiths

    Well said.

  33. FlavioGomes

    10X return is success defined for a VC.Building a great, highly energetic team, having happy customers who speak your praises and sustaining reasonable and growing profit is success defined for most entrepreneurs once they get past the fantasy of some crazy odds.Choose your path wisely.

    1. fredwilson


  34. David Hirsch

    Fail fast, fail cheap. As an operator and VC, the biggestthing I’ve learned since we built Metamorphic is the slog it out scenario.While we always try to be aligned with our entrepreneurs; have a shared vision;and be a partner, without entrepreneurs, a follow on investment is not a right,it’s a privilege. This needs to be treated as a new investment opportunity. Theabsence of this potentially prolongs an inevitable slog it out scenario thatwill consume unhealthy time and have good capital potentially chase badcapital. I understand this is sometimes isn’t clear and nothing in nature is astraight line, so why should investing be, but there is a grey area around howto help/when to help. A company doesn’t need to be failing for me not topotentially follow on. But my observation as a 5-year VC after a career atGoogle and many other startups is that there seems to be a philosophy thatfollow-ons always happen. When we do make an investment, we try to allocate 2-3times that for follow-ons, however just because we do that, doesn’t mean thatinvestors have to follow on. Back to the straight line, many great companiestake lots of turns and “pivots” as we knowbefore figuring out. Complicatedbecause of where iteration happens, but follow-on investments need to betreated as a new investment opportunity, even though it’s not always black andwhite. At the end of the day we bet on big markets and big teams and recognizethat products and companies iterate and evolve so by no means am I suggestedthat we as an industry shouldn’t continue to support that iteration andevolution. Obviously not one size fits all, as different investors invest indifferent stages. However my number one observation as a newish (5 years) VC,is that there has been this behavior of follow-ons just being innate. – @startupman

    1. PhilipSugar

      From the entrepreneur perspective: Doing a follow on that is not warranted hurts the entrepreneur. Yes its painful as hell not to get the follow on, but you are correct, if there is no traction it is better to face that reality now. If there is some, but not what is warranted from the investment, then throwing more money at the problem instead of refocusing just means you’ve added even more preferred money into the cap table, which puts a ton more hair on the deal for the entrepreneur. I will say that I really don’t like the “fail fast” mantra because people misinterpret that.

      1. fredwilson

        exactly. the problem is the ones that are “getting some traction”.

    2. pointsnfigures

      Previous investment costs, including time and effort are sunk when it comes to next rounds.

    3. fredwilson

      this is the hardest part of the business. picking winners is a breeze compared to this stuff.

  35. Donna Brewington White

    Slog-it-out companies. Are these basically “small businesses”?Do some of these become candidates for private equity or are they just too small to be attractive to a private equity investor?

    1. awaldstein

      You hit on something here.Sometimes you can build a business that works, as in ‘lifestyle’, as in support a handful of families well.A success, as Fred said, not to the VC and a different ballgame that really is a #fail from an investment perspective.

    2. fredwilson

      some can be quite large. i know of “slog it outs” that are $50mm or more in revenues now.

  36. pointsnfigures

    Add in the ones you are invested in, almost go out of business but find a way to raise capital and the original investors get crushed down in the cap table-with no chance of return.

    1. fredwilson

      you must have the right and the ability to put money into all future rounds. if you do seed, angel, or VC and don’t negotiate for that right, you are a fool.

      1. pointsnfigures

        Agree. Learned the hard way, once…….

  37. MFishbein

    Fred and readers – would love to get your thoughts on something…given the risk associated with a startup (1/3 as Fred says), it makes a lot of sense for investors to take a portfolio approach and diversify. Do you think it would make sense for founders/early employees to do the same? Investors diversify so why shouldn’t entrepreneurs? I know investors want to see entrepreneurs who are laser focused and passionate about solving a given problem, but is that really in the best interest of the entrepreneurs? Is that logical? Is it not a double standard – ie why shouldn’t an investor be laser focused an passionate about one problem? I know there would be a problems with entrepreneurs working on multiple companies simultaneously, but I’m curious to hear your thoughts on this topic.

    1. fredwilson

      risk and reward. jack dorsey will make more money on twitter than i will.

      1. MFishbein

        Do you believe entrepreneurs/startup employee should (or should have a way to if they choose to) adjust their risk/reward profile?James Altucher says yes 🙂 https://twitter.com/jaltuch

        1. fredwilson

          They do. They can sell early or sell some of their stock. Both happen all the time

    2. ShanaC

      ok, great, and how?

      1. MFishbein

        Any ideas? :)Could be one team working on multiple companies, one personal working with multiple teams, etc. For example: http://www.novaspivack.com/…Likely with time being allocated to the opportunities getting more traction – like Fred describes, or the way VCs double down on their winners (ie http://www.slideshare.net/d…There is traditional consulting but that seems to be far on the other end of the risk/reward pendulum and not as appropriate for building a startup. Maybe something in between?Not really sure what it would look like – just something I’ve been thinking about lately.

  38. Donna Brewington White

    Thanks, Fred. This type of post is one of the things that makes AVC so great.

  39. Seth Lieberman

    As managers the goal is spend more time with the “A” players, fire the “C” players and move the “B” players up or out. The classic mistake, which is easy to make, is to spend all your time with the “C” players trying to fix them. Fred- if you approach your portfolio the same way how do you think you have allocated your efforts, time and money against A,B and C (from an IRR perspective) and do you see any differences?

    1. fredwilson

      the thing that is a bit different in VC is the A players don’t need that much of our time. we try to help them as much as we can. but some don’t need much help. it’s the B players that suck up so much time. the C’s take care of themselves eventually.

      1. Seth Lieberman

        Yes but, yes but. Could you get a 20x instead of a 10x with the A companies with more focus? A’s don’t “need” your time, but could you add more value if you spent the time?

        1. fredwilson

          we do spend the time. but remember we aren’t management and it is management who makes these things work. so we spend time/add value by helping to identify, source, recruit, and retain the talent. i’d say that is probably 70%+ of the value we add in the As



  40. matthughes

    I imagine there are some humdinger stories behind this post.Some good, some bloody.

  41. SD

    This is such a good post it hurts. But with VCs, investments are part of a portfolio…and for successful VCs, the failures are usually offset by big successes. Entrepreneurs, by contrast, are “all-in” – they are the sum total of their current project.Starting new projects, whether as an entrepreneur, or as some other type of leader is such personal investment….it is so invigorating when things go well – its a rush that makes you feel like your life has purpose.But when things dont go well – I mean having picked the wrong market, or failing to execute…not just setbacks along the way – it can undermine your sense of who you are. It can create doubts about your own judgement.But there is no such thing as resilience without failure. And when things dont go well is exactly when you develop the scar tissue that makes you stronger the next time around.

    1. fredwilson


  42. William Mougayar

    Shout out to @bijan who says that both the entrepreneur and the VC are nuts:http://bijansabet.com/post/… “Most startups don’t work. The odds are against us right from the start.So you gotta be a little crazy to start a company. And you gotta be a little crazy to invest money and time into a startup.And that’s why we are drawn to each other.We are both a little nuts.”I added this quote that I saw the other day:”Life is all about finding people who are your kind of crazy.”

    1. fredwilson

      yeah, i liked Bijan’s post a lot.

  43. markslater

    All VC’s are not created equal.If there are 5 VC’s i’d like to work with given the opportunity – fred would be one of them along with my current VC (Rich levandov), scott johnson at NAV, antonio @ matrix (although he is currently in my competitor) and bijan (dont know him that well – just keep hearing great things)the list for who to avoid at least up here is far longer and requires a PM ;)point being – there are not a huge number of the good guys – its worth doing homework to make sure you hit that list if you can though.

    1. fredwilson

      there are a lot more than that out there. but your list is a good one.

      1. markslater

        i am hindered by my lack of coverage on the west coast and somewhat in NYC.

  44. Roman Giverts

    I’d love to hear a post about companies that slogged it out until eventually making it big. I think even the most successful companies go through slog it out phases. The question is how to go beyond that. How to turn yourself into a more strategic acquisition target

    1. fredwilson

      i will do that. i will need permission to write about them from those involved though.

  45. John Revay

    “And that’s the paradox of being a VC that cares. Which is the only kind of VC you want to work with”I would love to have Fred’s list….of VCs that care, tested over 20-30 years I am sure this would be a great list of people to work w.

    1. fredwilson

      contrary to popular opinion, there are ton of VCs who care. the list would be long.

    2. LaVonne Reimer

      It may be that my first experience with VCs (that dot-com bubble) was folks placing bets in areas that weren’t really their sweet spot. When everything sort of hit the fan it looked like the role they would play in guiding a startup through the tough decisions and wind-downs depended on how well they understood or cared about the space. So just because a VC might be a bit hands-off when the going got rough didn’t mean they weren’t generally one who cared.

  46. Merten Wulfert

    “I don’t see much sense in that,” said Rabbit. “No,” said Pooh humbly, “there isn’t. But there was going to be when I began it. It’s just that something happened to it along the way.”The post reminded me of this quote.

    1. Tyler Hayes

      I’ve never heard this and I really like it.

    2. fredwilson

      I love Winnie The Pooh. So much wisdom.

      1. Carl Rahn Griffith

        A hero. Crazily overlooked stories and wisdom. I always have a few of the films recorded on my digibox for watching at low-times. Hence, my Tigger tattoo from a few years ago – I have always associated more with his being none-too-bright-and-clumsy-but-bouncy-deluded-optimism – Pooh is someone I could only aspire to be 😉

        1. Cam MacRae

          I had Tigger on my desk for a long time. Squeeze his hand and…The wonderful thing about tiggersIs tiggers are wonderful things!Their tops are made out of rubberTheir bottoms are made out of springs!They’re bouncy, trouncy, flouncy, pouncyFun, fun, fun, fun, fun!But the most wonderful thing about tiggers isI’m the only one.IIII’mmm the only one. Woohoohoohoo!

          1. Carl Rahn Griffith

            Mine does that. His classic signature ditty. Love it. Not the tattoo, I hasten to add, lol 😉

      2. Donna Brewington White

        I love Pooh too. I had the excuse of reading the entire volumes aloud to my kids, but I think I enjoyed it more than they did.

    3. ShanaC


  47. Carl Rahn Griffith

    Well said.Empathy and VCs/Startups should be a given, but more often than not it’s an oxymoron.

  48. anne weiler

    Can you elaborate on “slog it out” companies? Is this just 80% of business? 🙂

  49. John

    it would be great to figure out how to extract more value out of the 2/3 through M&A or JVs. Maybe there is a business in realizing value out of “slogging it out’s” sort of a sub VC? 🙂

  50. Simon Clark

    Fred, you outdid yourself with this remarkably honest and realistic post. You are quite right that we spend a huge amount of time on the companies that didn’t work out, probably more than our investors would like to know, but that is our responsibility and duty. In an odd way, it can also be professionally satisfying to turn around a business that is crashing and find a way of rescuing it and finding a home for it, even if the financial rewards are usually pretty small.

    1. fredwilson

      it is good for the soul Simon

  51. Boris Wertz

    I have seen a few times now that a “slog it out scenario” can turn into a really successful company that finally finds product-market-fit – it can happen if you have super-committed entrepreneurs that operate on a low burn-rate so that they can try many things and / or wait until the market is there.

    1. fredwilson

      yes. i have seen it too Boris. that is one of the reasons to stick with them.

      1. PhilipSugar

        Here is the question I have, since you have many more dots to put to lines than I do. I agree completely with Boris’s statement. How many times have you seen the success after doing a really tough raise and staying on the same trajectory?

        1. Boris Wertz

          It is probably back to Fred’s original probabilities of 1/3 of the deals becoming real winners, perhaps even less

          1. PhilipSugar

            No that is not my question. You do a raise. Things do not go as planned, but you don’t hit the wall. Three outcomes: Yours, Some sort of Hail Mary, a follow on against best judgement.I have seen the first work, my sample size on the Hail Mary’s is big enough to say no way. Fred’s sample set on the last is conservatively 10x mine.

        2. fredwilson

          These successes that take a long time almost always require a change in strategy. I can only think of one that was simply a matter of time and money



    2. ShanaC

      how low is too low?

  52. David Petersen

    I’ve never completely understood or accepted the belief that businesses should fail at such a high rate.I’ve started 4 businesses, and all 4 businesses continue to run and turn a profit. Some small profits, some bigger profits. But still. They all exist.I don’t think you have to be particularly talented or smarter than anyone else who is running a business, either.Just operate based on a simple philosophy: If you improve your product a little bit every day, it will eventually be good enough to be a viable business. It’s impossible to improve something forever and not have it eventually become useful and profitable.Of course, there were 2-3 year periods where we lost money and kept working against all odds, and that may be the real secret. Don’t give up. Just keep making your product better. One day, it will turn into a viable business.https://sphotos-a.xx.fbcdn….

    1. Carl Rahn Griffith

      That’s cool, David. I haven’t got a problem with failure, per se – which is just as well, lol – but it really pisses me off when it is entirely avoidable; and often it is: all too frequently egos, power-games and sheer pig-headedness kill an idea/company. That’s the real tragedy…

      1. David Petersen

        I suppose it’s impossible to keep working at something forever if you and your co-founders or investors can’t agree on direction because of ego or any of those other reasons. Or just hate each other.

        1. Carl Rahn Griffith

          Business is simple. But, people are complex…

    2. ShanaC

      I like your philosophy – but is that the reason why your businesses succeed? or is there something else going on

      1. David Petersen

        I don’t know, I think it may really just be all about persistence. And not taking on so much overhead that you can outright fail instead of just treading water until you come up with something sellable. Which does preclude swinging for the fences from the outset, I suppose.If you spend 8-10 hours every day making something better, every day, it will be good eventually. I don’t see any way around that logic.And the people who use it will guide you towards what you need to build, the same way the laughs guide a comedian towards the jokes he should tell :)I’m sure there is some minimum threshold for intelligence and talent that one must possess, but I think that by the time a person is reading and commenting on AVC, they are way above it.



  53. PH

    Great post Fred. How actively do you seek to manage slog it outs? In other words, what does the world class VC do in that instance to separate him/herself from the average or worse VC?

    1. PhilipSugar

      “First do no harm”Adding one letter to failing makes all the difference. The letter is l and it stands for loser, and the word is flailing.

      1. fredwilson

        We had the same reply. Just said it differently.

    2. fredwilson

      Be a mensch. Focus on all the stakeholder.

  54. Carl Rahn Griffith

    I’ve always thought it is such a shame there is no equivalent in commerce/politics…http://en.wikipedia.org/wik

  55. FlavioGomes

    Show of hands…who here would love to have founded a nice and tidy 7-10 mil a year business with 10-20% net profit. The team paid market rates. Growing at average 20 percent year with a decent rnd budget (after a nice dividend to stakeholders) to ensure your relevancy for the foreseeable future? and some decent options for a pay window if you think its time…..I call that a pretty good win in my books. It doesn’t have to be a uber smash like FB, Twitter etc etcSome call that a lifestyle business, as if that’s a pretty shitty place to be…in my books I call that a win any day every day. The math doesn’t work for most VC’s…but it’ll work for the founder and the team, 9 times out of 10.



      1. FlavioGomes

        Sure…an/or find folks with a bit of cash that think that’s a reasonable place to be. Thing is..alot of startups that would have otherwise made some really great businesses got caught on a track they shouldn’t have been on because the race to the top was timed and they blew their brains out to beat the clock. The bar got raised too high.Sometimes VC’s are doing you a favour if they pass on your project. Even though it feels like a kick in the teeth when they do.And to be clear I’m not advocating not to pitch. Some of the best experience you could possibly get is a meeting with Fred or any other VC and let them shoot holes in your plan and give you ideas on how you can do better. I would say almost invaluable experience.But really internalize your opportunity and if its best served the VC route.

        1. FAKE GRIMLOCK


          1. FlavioGomes

            Absolutely!And Rockstars suffer from addiction, dimentia, and other disorders.Roadies get their fair share of chics!

          2. FAKE GRIMLOCK


          3. FlavioGomes


          4. FAKE GRIMLOCK


          5. FlavioGomes

            U ROCKSTAR

          6. FAKE GRIMLOCK


          7. FlavioGomes

            Love it!

          8. FlavioGomes

            Here’s hoping you reach 50 large…I want that shirt!

          9. FAKE GRIMLOCK


          10. btrautsc

            everyone listen to rockstars though. ‘supposedly’ them not suck. normal people want more other people to listen to them and think they not suck too. so they want to be rockstar. think talk about ‘crushing’ for startup, raise money from vc rockstar(s). engage infinite loop.

          11. FAKE GRIMLOCK


    2. fredwilson

      just own it 100% yourselfdon’t invite outsiders into the cap table

      1. FlavioGomes

        Ideal, but some outside capital for initiatives that require more than you can generate operationally, with folks who are aligned with your success principles, and whom enjoy a medium risk rate with some liquidity via inside trades and or dividends is aok with me too.



    1. Jonny Schnittger

      Indeed too many “soft” developers out there… there isn’t enough trial-by-fire training in large companies 🙂

    2. fredwilson

      i need a picture for that!



        1. fredwilson

          i backed it already. i am one and done on Kickstarter

          1. FAKE GRIMLOCK


          2. fredwilson


  57. jagorfain

    Forgot about third option, “Cut bait” but then again, I’m a writer and no VC-type person, but there has to be a time when it’s obvious it isn’t going to work, circling the drain, etc. How long is it viable to throw money at it?

    1. FlavioGomes

      That’s the crux of the problem. First time startup founders must conjure up so much belief in order to even get an audience or build that first prototype…that its nearly impossible for them to lower the expectation. They feel its the worst possible sin they could make. Commendable conviction, but it such a dangerous mind space.Second and third startup founders, usually have a better sense of this and make that call easier.

    2. ShanaC

      Well, how do you measure viability?

  58. bussgang

    Great post, Fred. From such a successful VC, the message is even more impactful. It’s amazing to me that some VCs remain arrogant or promotional despite the low batting average. Outside of a whacky 6 year period in the mid-90s, this is a very humbling business.

  59. mike

    I hope you will do a post on VC responsibility when a company is approaching the wall, cash is running out and there might be a deal. What are the ethics and the VC mindset? For his investors, he wants to wait until the last possible moment and beyond to hope an investor or buyer is found. Instead of an orderly shut down, employees don’t get paid and creditors get stiffed. What is right?

    1. ShanaC

      and people wonder why I want to do a course on business ethics

  60. Sebastien Mirolo

    The VC/Surfer metaphor looks more appropriate.You spot a wave forming on the horizon, you paddle as fast as you can, jump on board and try to keep your balance the whole ride. Exiting the wave with style is also required. Many times it is hard to predict how the wave will break out big, and since your committed you have to keep going until the end, only then paddle back to the line.Along the way other surfers might also cramp your style, trying to catch “your” wave.Baseball is hit and run. It is very difficult but hardly describes the kind of adjustment required to keep your balance the whole ride through building and selling a business.

  61. Fred Destin

    “The paradox of the VC that cares’. Yet again simple prose from the Big Fred that hits right home. It would be so rational and so easy to just call the dogs “dogs” and move on. It would be so pleasant to only focus on the ones that you know will make money. It would be so convenient to tell your LP investors that you only spend your energy where you see returns. Yet here we all are, toiling away in obscurity on companies that are going through the hard, hard journey of the slow build, bleeding cash and talent and never quite fulfilling their promise. Sometimes they turn out OK (the hardest company build I have ever been involved with, by far, is DailyMotion and we did eventually hit scale) but most of the time miracles do not happen. Latebloomers are a mirage for most, yet fighting for them is, indeed, also what we do.Choose to stand at the battle of Thermopyles and die on field. Valiantly.

    1. fredwilson

      congrats on Daily Motion of the rumors are true

  62. nathan artz

    It would be really interesting to hear about a compilation of your notes about the companies in their early stages, and then your notes and thoughts post success or post mortem. Specifically, if you provided commentary on what you were thinking throughout the process. I.e. we’re you subject to any biases?

  63. Jon Michael Miles

    I worked for a music startup in SF that was VC backed. The whole thing hinged on aggregated web traffic and CPM based on that. No proprietary technologies outside of the databases that were built. As soon as the ad revenue model changed, the company was shuttered. No long slog, no wall, just boom, we’re done. Pretty efficient actually.

  64. MeetingWave

    I agree “zombie companies” and “the living dead” are not good labels for operating entities that continue to iterate and execute despite not “taking off” yet. Instead, I think the labels are better applied to startups that are out of funds and no longer progressing forward.

  65. paramendra

    One of your best posts ever.

  66. Meegeek

    Wow, working at my second start-up since ’07. First hit the wall (but the original founder is still working at it in a basement somewhere), the current is really slogging through it and everyday I feel like pulling the eject lever. Maybe I should. That would mean my next one would be a home run!

  67. Alejandro Cosentino

    I hit the wall in a company that Fred invested a lot (Free ISP Gratis1 from Starmedia in 90s across Latam). I learned a lot from taht time and from shutting down the company and the process involved on that. Today I still remember those lessons that then I applied them in the rest of my career being an entrepreneur. The best lesson I’ve got was: take time to transform a corporate executive (me in the 90s) into a entrepreneur (me now). Great post 🙂

    1. fredwilson

      blast from the past. those latin american investments taught me a lot.

  68. John Hamilton

    If your investment appetite goes beyond startups, there are other deal structures that begin to address some of the downsides you describe. Of course, each of these alternative deal structures also have their own tradeoffs but I find it helpful to know about the broader choices. One of them is royalty financing where the investor gets paid out of cash flow (% of future gross revenue) and fills the gap between debt and equity. This is only for businesses with strong GPM, management teams and over $1 million in revenue, but its a good option that offers a good IRR (you get paid the next month after closing so it acts like mezzanine) and does not ask the entrepreneur to give up control, ownership or to sell their business in the next 3-5 yrs. The batting average is much better because it is later stage investing and lower risk profile, but does offer a good IRR. To learn more check out http://www.Vestedforgrowth.com

  69. Jared Schaffer

    One of the most neglected topics, the exit strategy. Thanks for addressing the particularly ugly side of the business from both objective and subjective points of view. How can companies position themselves for acquisition while simultaneously executing an aligned yet independent vision? Metrics? Team?

    1. FlavioGomes

      Demonstrate a profitable growing topline with your brand being respected in your direct marketplace and those opportunities become clearer.

  70. Eric Vanderschaaf

    @fred, so there’s the other 2/3. And 50% of those don’t work our for investor or founder. Lots of those shut down or fire sale or bankruptcy. How can I get in a position to screen those companies before they are shut down or sold (yours and other VCs)? I’m actively looking to scoop up companies like that and would love your thoughts.

  71. MPM

    “In the “slog it out” scenario, the VCs are often left holding the bag. They have a lot invested in the business and have a responsibility to figure out how to get it out.”Having been on both sides of the table, I’ve found it’s much easier for VCs to write-off a $500,000 seed investment than it is for an entrepreneur to turn his back on the vision and employees that he has invested 100% of his time and energy developing (especially when the VC model is predicated on “striking out” more than 50% of the time). In most “slog it out” scenarios I have personally been involved with, VCs are far more likely to simply disengage/deprioritize the company, leaving the founder “holding the bag” to figure out how to create value.

  72. MPM

    “In the “slog it out” scenario, the VCs are often
left holding the bag. They have a lot invested in the business and have a
 responsibility to figure out how to get it out.”

Having been on both sides
of the table, I’ve found it’s much easier for VCs to write-off a $500,000 seed
 investment than it is for an entrepreneur to turn his back on the vision and employees that he has invested 100% of his time and energy developing (especially when the VC model is predicated on “striking out” more than 50% of the time). In
 most “slog it out” scenarios I have personally been involved with, VCs are far
more likely to disengage/deprioritize the company, leaving the founder “holding
the bag” to figure out how to create value.

    1. FlavioGomes

      That is side of things rarely brought to light. And it’s not turn back only to vision or employees…it often includes family and friends in that decision. Super hard scenario.Those that persevere, soldier on and win….is what inspires most of us 🙂

  73. Capitalistic

    Very important post. The most troubling scenario I have seen are situations where a company is too old to be considered VC-ready and too immature to be considered PE-ready. I’ve begun to suggest to clients that they should consider an LBO to support operations of the zombie or “sleepy” company.

  74. Marc Barros

    Hey Fred,Would love to see a post that goes deeper into slogging it out. I’m not sure all investors handle it the way you do, but talking objectively about how the investors and entrepreneur can work well together in this scenario would be interesting. No investor wants to be in a slog it out and people don’t want to work for a company that feels like it’s going no where. Often the investor and entrepreneur don’t get along in a slog it out result.I do believe they can be successful companies, just with a different definition of success, often far different from the original premise.Talking about why people don’t give up (the investor on their money or the entrepreneur) would be interesting.

    1. fredwilson

      thanks. i will look for an opportunity to do that

      1. Marc Barros

        If you ever get to it, I’m happy to help with the entrepreneur perspective if you need. I just went through this recently.

  75. David Miller

    Is there a business in 3rd-party-managing “slog it out” situations on behalf of the VC so they can spend their time on other things?

    1. fredwilson

      maybe. but there are a lot of personal relationships at hand that would be unwound in that scenario