If you hear the word "dinosaur" in Silicon Valley, it's usually a pejorative for an out-of-touch venture capitalist headed for extinction. But according to The New Yorker, the same grim fate awaits the current "Cambrian explosion" of new startups.
Young companies have always had a high failure rate. In 2012, the National Venture Capital Association said three out of four companies were destined for that great URL in the sky.io. The ease of launching and funding startups, however, has lowered their odds of survival, prompting The New Yorker's James Surowiecki to start a countdown to "mass extinction":
The analytics firm CB Insights logged more than seventeen hundred seed-investment deals in the U.S. tech industry in 2012, more than three times the number from three years earlier. But there's a catch: starting a company may be easier, but making it a success isn't. Competition is fierce, profits are scarce, and venture capitalists aren't generous when it comes to later stages of funding. As Gideon Lewis-Kraus shows in "No Exit," a new Kindle Single about startup culture, the life of a new company is often brutish and short.
The same "endemic optimism," that gives entrepreneurs courage in the face of uncertainty can also be their downfall, Surowiecki argues:
... studies of entrepreneurs find that, in general, they're as risk-averse as everyone else. Only when it comes to starting a business are they daring. And that's because the fundamental characteristic of entrepreneurs isn't risk-seeking; it's self-confidence. A 1997 study in the Journal of Business Venturing found that entrepreneurs are overconfident about their ability to prevent bad outcomes. They're also overconfident about the prospects of their business. A 1988 study in the same journal of some three thousand entrepreneurs found that eighty-one per cent thought their businesses had at least a seventy-per-cent chance of success, and a third thought there was no chance they would fail—numbers that bear no relation to reality. A recent paper called "Living Forever" notes that entrepreneurs are more likely than other people to overestimate their life spans.
(CEOs have also overestimated their ability to solve death.)
Surowiecki doesn't mention it, but surely the number of zeroes on recent acquisition deals has inflated the collective sense of confidence. Why else would Wall Street bankers feel comfortable saying they want to launch a startup so they can work less?
The aforementioned egos also require tender care. This guide, which made its way to the top of Hacker News this weekend, recommends reading two to three instructional books before you dare to tell a friend that his startup idea sucks.
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