Entrepreneurs Learned their Lesson from the Bubble Days

Ron Conway and Paul Graham share some positive and optimistic information with the TechCrunch Founder, Michael Arrington and the audience during the Social Currency CrunchUp in Palo Alto,  on Friday. Unfortunately, they both mostly addressed the outcomes for investors, who always have liquidation preferences and other protections that put them ahead of founders.

Conway who said, has invested on over 500 startups, expects about one-third of them fail, one-third get investors their money back, and one-third bring a 2x to Google-x return which btw, Conway invested in Google and PayPal early on. But that’s not the case. Conway noticed that during the Internet Bubble in 1997 to 2001 — the failure rate was about 77 percent.

Austrian business cycle theory also confirms Conway’s notion that there will be more failures in a bubble, the reason being that because government has created so much excess capital cheap money it distorts entrepreneurs/investors ability to effectively value everything. Investors overvalue companies; entrepreneurs overvalue how much they should spend on customer acquisition, as well as what exactly they should invest in.  The issue is likely to be more pronounced in whatever sector is being bubble-ized by monetary policy. i.e. if you look at investments in the real estate business during that bubble i wonder if we would see a similar story. I’m inclined to think we would.

But things improved. The failure rate in recent years — since 2002 — has dropped to about 40 percent, Conway says. He makes sure to note that that’s just his portfolio — which they’re picky about. They only invest in about one of every 40 companies they see.

Then again, seeing how some VCs evaluate a business which is pretty much structured to be highly profitable, and still end up passing on it justifies the high failure rate I guess.

He also notes that entrepreneurs have a 66 percent chance of being successful on a startup if it’s their second one. But that’s also partially because they’re often doing a second startup if they were successful the first time around.

All that said, Conway notes that his data shows that regardless of the time period — Bubble or Boom — the rate of very successful outcomes has stayed roughly the same. With that in mind, “anytime is a good time to start a company,” he concludes.

What both Convey and Paul failed to describe is Founder success — not getting shot in the head and loosing your job, or worse yet — getting diluted down to nothing.

This is the true measure of a success — not whether an Angel can recoup losses.

Based on other reports I have read and my own experience as a serial entrepreneur since the late 90′s, I would say over 70% of founders get nothing at the end.

Here is their interview:

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