Finding gold in glitter : a framework for assessing the prospects of early stage ventures

Abstract

During the last decade and half, the hi-tech industry has seen a phenomenal pace of innovation fueled primarily by venture capital funded startups. In spite of the innovation pace, very few of these ventures have gone on to become successes that have created wealth for all the stake holders involved. The failure rate of early stage ventures is still very high. A maxim of the VC industry from the late 90's and 2000's is, for every 10 venture investments in a VC portfolio, two fail soon; five were walking dead and unless someone bought them out they would eventually die; two returned average returns and only one would go on to become the phenomenal success - an outlier like Google, Amazon, eBay or an YouTube, on which the entire portfolio return depends. The current approaches to evaluating these early stage venture plans are not very reliable. What we need is a new paradigm. To pursue any endeavor and achieve desired success repeatedly we need certainty, consistency and predictability - none of which exists in the hi-tech venture business. In order to get there, we need a shift in our current paradigms on evaluating hi-tech startup ideas. We need a new model that clearly explains the forces that the products from those ventures would be subject to and help us understand why things happen the way they do. It should help us clearly relate the effect with the actual cause. This would go a long way to help us make better decisions and would provide a start in introducing certainty, consistency and predictability in the business of hi-tech ventures.

(cont.) This would improve the rate of venture success. Early stage ventures would not be a game of chance anymore. This thesis puts forth a new framework drawn from multiple sources to help assess how a proposed early stage venture may perform with its intended strategy. The framework is then validated by applying it to a series of ventures - past and present, to check how it stands up.