Schr?dinger's Startup

If you aren't familiar with the thought experiment known as Schrodinger's Cat, it's essentially an example of a Quantum Mechanics paradox in which a cat is placed in a box with something that can kill it (usually something radioactive), and that the cat is both alive and dead until the observer opens the box to see it. It's meant to illustrate how particles can exist in multiple states at the same time. Similarly, early stage startup companies with various risks to solvency (i.e. aren't profitable yet) seem to be another example of this paradox.

This is because startups can simultaneously have the potential to become wildly successful, and the potential to become completely insolvent. Even so-called unicorns that have raised billions suffer from this paradox, so long as they aren't profitable. Until either profitability or insolvency actually occurs, it is often in the eye of the beholder which is true, and sometimes simply opening the box to observe the startup is what triggers its demise.

I was reminded of this phenomenon by a recent tweet from a venture partner of a VC fund. In the tweet, the VC mentions how she enjoys reading quarterly updates from their portfolio companies, but laments at how few include hard metrics for key performance indicators. While I can sympathize with the VC, and would probably expect the same if I were an investor, I empathize with the founders. I can only assume that the founders don't see meaning in their own metrics yet, and don't want to be judged on those metrics until they are less subjective. In other words, they aren't ready to open the box.

And for good reason. VCs have the power to determine the fate of a startup by starting a chain reaction of events that can lead the company to a premature liquidation event -- essentially opening the box and rendering the startup dead, even when the founders or other partners emphatically see the same startup as very much alive. I'm reminded of the bar scene from HBO's 'Silicon Valley' when Goolybib's founder has the epiphany [link audio is NSFW] that if he had taken less money then he wouldn't have lost control of his company to investors and been forced to sell his company at a loss -- forced to open the box.

Certainly not all startups are so fragile, and not all VCs are so destructive -- and sometimes both are confident enough to keep what's in the box a surprise for an IPO or exit!

Indeed there are plenty of books written about how transparency and cooperation between startups and their investors is not only beneficial, but absolutely critical (and legally required). But sometimes it seems that startups are sacrificed on the altar of "fail fast" too soon because of the impatience or subjective criteria of their investors, and it's in these cases that failure can and should be avoided -- usually just by managing expectations and effectively communicating milestones for both positive and negative outcomes with reasonable contingency plans for the latter -- but for the sake of this metaphor let's just say it's by not opening the box.

And that's easier said than done.