Why are VCs investing in Top-Down ventures when they fail the most?

For any and all startup ventures, the failure rate of funded companies is about 90%, that is, 9 out of 10 projects that are doomed even after they have money. So how and why do these companies get funded? Well, let’s start with the problem, and then we will look at the why.

In a Top-Down approach, we are starting with business assumptions. This is preached as The Way to start a startup. “Understand your business!”, and founders become pregnant with this thinking believing it will result in the perfect startup baby. They do market research, they do questionnaires and they do predictive financial projections based on the information they gather.?

Venture Capital likes this, this is how they too learned it should be done. Make a plan based on the business assumptions, create a path forward, raise the money and then hire people to execute the assumptions plan. Sounds good, but it is why 90% of funded startups fail.?

A startup is a company looking for a business.

The idea that we chose a dream business and then build a successful company around that dream is a pipe-dream.?

Reality is as Henry Ford said, “if I ask people what they want, they will say a faster horse”, and we had the game industry investors in the 90s saying the market research showed that girls did not want to play video games, and no one questioned if that was because there were no games on the market that girls liked.?

Finally, by the time a venture is mature enough to enter the market, the market will have changed, so the top-down approaches that VCs and business schools love so much are really really bad criteria to found or fund a startup.?

In a Bottom-Up approach you start with the basics of what you believe your venture will be, you evaluate the uniqueness, benefits, benefits of the benefits. Until you can say “I believe our product can have a positive impact on the market”. Then look at the core needs of the company, and start building upwards.?

So can we not combine these? Have a perfect mix of business and product evaluation. Well here is the thing, most successful startups pivot out of their original business idea and market but keep the same product.?

A few big examples of this would be; Google started as a Data-Base company and became a Web search company. Facebook started as a college student platform and became a global communications platform. Amazon started as a US online mail-order for books and became a global online mail-order for everything. A small comment here is that two of these were started with Bottom-Up approaches, but presented as Top-Down, one was Bottom-Up and presented as Bottom-Up and struggled to raise money.

Founders need to stop listening to investment “gurus”, and startup “experts”. Stop going to Entrepreneur seminars and workshops. Building ventures that don’t fail is to build Bottom-Up and be ready to pivot the business as needed. Or “Think Bottom-Up and pitch Top-Down”.

But let’s get back to VCs, as most VCs are business educated, and even so-called “tech” people in the VC world are more interested in business than in tech. So VCs will fund companies that fit their thinking. To quickly jump back to Google, they had a huge problem getting funded, at one point they even tried to sell themselves to Yahoo for $1M, Yahoo did not buy.?

We all have a tendency to like what we know, and that is the same for VCs. Business people spend years and years learning about markets and customers. So they will invest in plans and presentations that focus on explaining the Top-Down and that might not even work when you start looking at it from a Bottom-Up approach.?

Maybe this article should be named “How to make pitch decks VCs invest in”. Anyway, there it is, Top-Down vs Bottom-Up evaluation for how to do ventures that succeed.?