A Closer Look at Start-Up Risk

Claire Cain Miller reported on the front page of the business section in Sunday’s New York Times that, “Silicon Valley can seem like the land of overnight success. College dropouts show up and become billionaires a few years later. Mark Zuckerberg was a billionaire by the time he was 23, and Facebook paid $19 billion for WhatsApp when it was just five years old.

“But despite their hold on the imagination, these examples aren’t typical. Much more representative are the companies you never hear about because they never get off the ground.

Venture capital firms invest in 1 percent of the companies that pitch them. The overwhelming majority of entrepreneurs who are funded are white men. Just 1 percent are black, 8 percent are female and 12 percent are Asian, according to data from CB Insights, which tracks private companies and investors. Even for start-ups that raise money, the mortality rate is high, with most dying after an average of 20 months and $1.3 million in financing.”

The article pointed out that, “In recent months, the fund-raising atmosphere has cooled as venture capitalists react to the poor stock market performance of some public tech companies and question whether the recent fast pace of investment is sustainable. Venture capitalists are making fewer investments at lower valuations.

“‘There is this delusion that it’s easy to raise money in Silicon Valley,’ said Sam Altman, president of Y Combinator, a mentorship and investment program for start-ups. ‘Raising money is incredibly hard.’

“Nonetheless, Silicon Valley keeps seducing people. For those who come, the risk is worth the potential reward — not just riches, but also the more dreamy belief that tech entrepreneurialism is a force for good.”

Sunday’s article also noted that, “Venture capitalists, who hold the keys to success in Silicon Valley by providing start-up money, are even more likely to be white and male than tech company employees are. Theirs is an insular business. Most investors accept pitches only from entrepreneurs who come through an introduction, and they tend to finance people who have succeeded before, or who remind them of those who did.

“According to a 2014 study published by the National Academy of Sciences, investors prefer pitches by men, particularly attractive men, to those by women, even when the content of the pitch is the same. In addition to studying the results of three entrepreneurial pitch competitions, the researchers conducted two experiments in which a representative sample of working adults heard identical pitches in male and female voices. Sixty-eight percent of people preferred to finance the company when it was pitched by a male voice, while 32 percent chose the female.”

Ms. Miller indicated that, “Some investors are working to change this. Venture firms like Kapor Capital were formed specifically to finance start-ups with a diversity mission and to prioritize underrepresented founders. Others fill their partner ranks with people who are not white men.

“‘Deal flow comes in through people’s network, and if you’re a young woman or a person of color, a lot of times you just might not know who that senior person is at that top-tier firm’ said Joanne Yuan, an associate partner at Cowboy Ventures, whose investment team of four has three women who are minorities. ‘Our portfolio looks more diverse because we know a lot of people who aren’t white males.'”

More broadly, the Times article stated that: “The flip side of overnight success in Silicon Valley is overnight failure. Start-ups can be so dependent on a single investor or partnership that a turn of events can change their fates.”

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