The other side of perseverance

26th March 2018  

by Daniel Kratkovski, Analyst at U-Start

Hardly can one find a virtue more celebrated in the entrepreneurial community other than perseverance. For the right reasons, its celebrated in various forms: acute sense of frugality, determination, and above else, unceasing belief in the purpose of one's actions. However, perseverance, if misdirected and confound, can metastatize into what I'll refer to as malicious endurance. At that point whatever's left of perseverance is stubbornness at most. Although it's clear how perseverance can be instrumental in driving entrepreneurship, its forms can also incur damages in the ecosystem by simply refusing to wind down. Make no mistake: the cream always rises to the top, however a cast of zombie startups with limited-to-no traction and no market-fit can slow the cream down.

How quickly the startups wind down is important as much as how quickly they grow: they show the time the entrepreneurs need to get a response from the market, iterate on the product and assess the potential scale of their solutions. It can also be seen as a proxy to measure the health of the ecosystem: if failing startups wind down faster, resources will be directed more efficiently and talent will not be stuck in ailing enterprises. Fundraising market will enjoy more efficient resource distribution. Increasing the velocity of company cycle is paramount considering time as a function of the health of our internet economy. And to my mind, this applies more to entrepreneurial communities in Europe than to the US startups. There's a certain celebratory tone in countries all around Europe, applauding technology startup creation. However it is not their birth we should be celebrating, it's their journey - how did it live up to its potential, how responsive it was to feedback from customers and the market, how efficiently did you reach your goals. We should not be celebrating startups for being born, but rather to the meaning their activities bring. Even when winding down, a startup passes on important knowledge to other players about what fundamentals should it get right, what should it consider when entering a given market and other important factors. This is not to be taken for granted - the faster we learn what doesn't work the faster we can build something that does. To my mind there are several factors at work, slowing down the velocity of company building and increasing the malicious endurance:

1. Failure is still frowned upon - which I find objectively ludicrous. In less developed European ecosystems a failed founder could be seen as 'damaged goods'. Far from it, this often portrays objective judgment and the desire to use resources in most efficient way possible. Sometimes the startup/team/product does not work and requires regrouping. This shows how an entrepreneur is able to recognize market feedback. Not all broken cars are meant to be fixed. We're better off making sure that the new one doesn't break for the same reasons.

2. The proliferation of bridge rounds. As investors, we acknowledge the obvious needs to maximize the company for growth, and therefore adapt our investing habits accordingly. But just as great startups use bridge financing to accelerate growth, failing startups use it to prolong its already-limited lifespan. It's essential to understand if the bridge financing is driving momentum or filling out the gaps. Since it can often be both, it's up to investors to provide more scrutiny to bridge rounds and the goals it aims to achieve.

3. Teams with 4+ founders. Social groups are sticky and incessant to pressure – and so are founding teams. As much as talent is appreciated, velocity of iteration and speed of decision-making is as well. Although we love to be proven wrong, in our experience having a really big founding team can slow things down where you would like them to go faster. You have to account for everyone’s opinions when growing, but also when winding or slowing down.

4. Perceived redundancy or acquihires. When it comes to M&A, acquihires are almost unheard of in most European ecosystems (except for technology and life sciences sectors). Talent development is perceived more pristine when it’s hired and not acquired – which is detrimental and counterproductive. Startups fail to fulfill their missions for various structural reasons – often corporates are better suited to ensure the development of the mission. Ideas don’t simply die off, people continue working on projects they care about and the impact is achieved faster.

Disclaimer: this is not to underscore the importance of general endurance in entrepreneurship. The unpredictability of the journey often dictates complex circumstances: delay in getting a market response, excruciating waiting periods before capital inflows, constant iterations to find the right fit. Frugality and the constant desire to break-even are admirable and are a present function of a great majority of great tech companies.