I was talking to some folks at an MIT spinoff company. They may need a cash infusion this summer. Why? They got a $1 million grant from the U.S. Navy. The money was supposed to start flowing last fall. But then the Navy installed a new computer system for managing these research grants and payments. It is now “chaos” in Washington, D.C. The Navy still wants them to do this research but the money won’t flow until this summer, roughly a 9-month delay.
This is a good illustration of why you never invest in a startup! It is impossible to predict all of the ways that things can go wrong and revenue can be delayed.
Agree in principle, but there are a lot of extremely rich VC’s who’ve gotten more rich by investing in startups where things did not go wrong.
Isn’t the lesson not to _work_ for a startup? Presumably VCs backing this company are backing dozens of others. They only need one to succeed to get even richer. The working schmoes lost out because of forces outside their control.
This can happen to companies that are well beyond the startup phase. Here is a company that just laid off 20% of its workforce because a gov. contract ended:
http://www.glassdoor.com/Reviews/Employee-Review-Vecna-Technologies-RVW5793279.htm
Indeed it can happen to any company that depends on a few large customers (esp. government customers) for most of their business. In the ’70s, Boeing laid off so many people that there was a billboard put up that said, “Last One to Leave Seattle, Please Turn Off the Lights!”.
This happens to university researchers, too, though usually a university will float you a loan if the government has promised to pay eventually.
Oh, the horror of investing in a startup. We might get another sarcastic early retired blogger 🙂 Can’t have any more of that.
Thomas Perkins hopes many here agree with Phil’s post!
I was working on advanced digital control room design for new US DOE production reactor (makes fusion bomb fuel) until the Soviet Union collapsed, December 1991. We got a call from DOE, “stop work.”
First, there is an astonishing amount of “private sector” firms in the U.S. whose primary source of revenue is really contracts or grants from the federal government. The U.S. simply does not have as much of a free market system as people like to believe.
Second, as an sometimes federal government employee, I can testify that delays in paying vendors (and wages) due to “IT failures” and other bureaucratic excuses is pretty common.
the rate of return for venture capital is lower than people expect.
20-30 years ago the VC rate of return was sky-high. Then everyone and their grandma put money into VC funds and bought IPOs. After the dot-bomb-crash, in 2003, the return was 3% compounded according to a friend who worked for an investment bank at the time.
It seems it has gone up:
http://www.cambridgeassociates.com/wp-content/uploads/2014/02/B-Venture-Capital-Index.pdf (page 4)
Forget about the 20, 25, 30 year returns, those days are gone. In fact, i f you bought an S&P 500 stock fund and a decent small cap value fund (say in a 90/10 % split) on margin, I postulate you’d be above the VC returns, with lower risk. The backtesting of this is left as an exercise for the reader.