It must be really frustrating for first-time entrepreneurs to look at colour or Airtime.While they’re struggling to raise money for their startups as unestablished names in tech, serial entrepreneurs like Sean Parker and Bill Nguyen are able to raise tens of millions of dollars on almost sheer clout — and then their businesses flop in a matter of months.
colour raised $41 million and was just acquired by Apple for only a few million. While it’s still early for Airtime, which raised $33.5 million pre-launch, one of the co-founders has already departed and the site only has about 400 daily active users.
Studies prove it takes first time founders much longer to raise rounds than serial entrepreneurs — 21 months versus 37 months on average, according to a Harvard research report. But a lot of first-time, bootstrapped entrepreneurs don’t have 37 months to spare before they run out of money and their startups fold.
Even the smallest sliver of colour’s or Airtime’s fundraises would give many first-time entrepreneurs — who have enough drive but not enough resources — a fighting chance.
Of course, there are a lot of VCs who have taken gambles on first time entrepreneurs. Some even prefer them because they’re more naive, and they’re not afraid of startups — they don’t yet realise how difficult founding a company can be.
But in cases like Airtime and colour, why would an investor throw so much money at already successful, financially stable founders when they could be investing it in young hustlers who still need to win?
For starters, serial entrepreneurs are statistically safer bets for investors. One Harvard study found that VC-backed entrepreneurs who have already taken a company public have a 30% chance of succeeding the next time around. First-time entrepreneurs’ likelihood of success is only 18%. Even entrepreneurs who have tried once and failed have a higher chance of success than new entrepreneurs at 20%.
And as far as proven track records go, few people look like better investments than Nguyen or Parker. One of Nguyen’s companies exited for $850 million in stock. Another, LaLa Media, was acquired by Apple for $80 million. Parker founded Napster and was Facebook’s first President.
And although neither may be as financially driven as a first time entrepreneur, they have other reasons to strive for success.
“The expectation thing definitely weighs on me,” Parker told Dealbook. “There’s a sort of fear of launching something and failing. How can you as an entrepreneur that’s had success, has a reputation, ever build the courage to go and do something again?” he says.
Then there’s the fact that serial entrepreneurs fail fast. Betterworks, for example, shut down less than a year after raising $10 million. Its founders, which both had successful startup exits prior to Betterworks, probably returned a good chunk of change to investors when they called it quits.
Even colour could have gone much worse for its investors. Nguyen’s company still has a reported $25 million in the bank, and it was acquired for $2-5 million, so most of the $41 million won’t be lost.
First time entrepreneurs, however, don’t always know when to stop and they may keep pivoting until all of an investor’s money is gone.
In terms of the frustratingly large investments colour and Airtime received versus the few hundred thousand dollars first time founders struggle to raise, it comes down to the fat versus lean startup debate.
And, from the lean perspective, first-time founders might be better off.
Ben Horowitz has said “running fat” can be the best way for a startup to succeed, but Fred Wilson countered:
“I have never, not once, been successful with an investment in a company that raised a boatload of money before it found traction and product market fit with its primary product…But it has happened…You can also win the lottery. The odds aren’t great that you will. But millions of people play it every day. I don’t.”
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