How can we avoid the next overhyped start-up failure?

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Direttore senior e analista principale

My colleague Matilde della Fontana was recently quoted extensively in this article in Sourcing Journal, which focused on the recent USD five million funding of algae startup Sway. The article is pretty good, and Matilde provides some much-needed balance, highlighting the big challenges that Sway faces in scaling up both algae production and purification. Most press coverage on emerging innovations — especially those on funding rounds — don’t do much other than republish the claims from the startups and funders, so kudos to the author, Jessica Binns, for really engaging with the issue. 

It got me thinking about press coverage of startups, though, because even this very good article has issues, including one big one: There’s no acknowledgement that Sway is highly likely to fail! Let me be clear: It’s a good thing that Sway is probably doomed — and it’s not a criticism of Sway specifically. It’s trying something really novel! If it works, it will be a big deal, but like most big ideas, it’s unlikely to work. That’s OK; we have a very active and diverse startup ecosystem in America, all working on big ideas — only a few of them need to succeed for the world to be a better place. Sway is based in Silicon Valley, the heartland of the “fail fast” ethos that necessarily involves a lot of startups going out of business. So why does news about startups seem to ignore this essential context?

For once, I don’t blame either the venture capital (VC) system or the startups. I think it’s at least reasonable for a journalist to assume that our startup ecosystem is at least moderately effective at scaling up tech. And while it could certainly be better in a lot of ways, it does basically work. The startups are also not really at fault here: To be a startup founder (especially in STEM), you have to be a bit crazy. How many successful founders have said something like “If I knew what I was getting into, I never would have done it?” We can’t ask founders to be realistic about their chances of success: Their unrealism is crucial to their ability to take risks. 

Journalists are in a tough situation. There’s an urge to appear unbiased that often results in a lack of critical attention to startups’ claims. There are also realities of working on tight deadlines with limited resources. The positive statements from startups are blasted out on wire services and very easy to find, but it’s a lot more work to hunt down a credible expert to get a balanced view (again, kudos to Jessica on the Sway piece). Plus, positive or overhyped coverage often drives more sharing and engagement. It’s not a system that promotes careful analysis of claims by startups and VCs, particular at an early stage, where skepticism is needed. Many journalists, especially local ones, do a good job of covering startups folding, but at that point, there’s not much value in a balanced view. 

This newsletter is read by a fair number of VC firms, especially corporate VC firms, and it’s here where I think the burden really falls. VC firms are the ones most directly evaluating risk, and we really need them to be clearer about that role in their communications. Again, this is tough due to the nature of the business. When a VC group puts out a press release about a funding round, it has just made a decision that it’s a good idea; no wonder it tends to present the company as a sure winner. VC firms certainly know in general that most of their investments will fail, but they of course think each one is a pretty good idea at the time.

My ask to the investors reading this newspaper is twofold: On a public-facing level, acknowledge that you are taking a risk! It’s good to be positive about these startups, but I think just the recognition that you are placing a bet will open up more space for evenhanded discussion in the media. In private, ask startups how they will know when it’s time to pull the plug. I’ve seen a ton of pitch decks over the years, and I can’t recall one with a slide on how the startup will know it has failed. Press potential ventures on this point: Is it a critical performance metric? Process economics? A certain level of sales or deployment? 

The reality here is we are trying to solve a major societal issue — climate change — with a system that has a lot of risk. There’s a very real chance that we will fail to solve some of the most pressing climate tech issues and suffer the consequences, measured in lost human lives. The “fail fast” mentality loses a lot of its shine when the thing failing is the unwinding of anthropogenic climate change and not a website for rating pictures of college students. Recognizing that level of civilizational risk is a little heavy for an article about an algae plastics startup, but getting us all in the habit of evaluating startup claims more skeptically will help drive better decision-making throughout the system. 

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