Money Raised is a Terrible Comparative Metric for Success

Since Steve Blank publicized the findings of the startup genome project, I have seen references to the study in multiple places.

The one thing that drives me nuts is the recurring phrase, “startups that did A raised Bx more money”, like this is such a great thing.

I would love for our ecosystem to purge the notion that how much you raise should be a valid comparative metric for success. Speaking as someone who has worked for quite few well-funded companies, I know that it is not.

Statistically it is true that companies that raise money have a lower failure rate than those that don’t, but beyond that I am a skeptic that there is a broad correlation between money raised and success, and i think that success should really be counted as the return taken home by the actual founders and employees.*

Raising money is not success. It is an enabler of success. It is supposed to make success easier, but I have seen situations where the opposite has happened. I have also seen plenty of situations where the outside investors were the only ones who really benefitted from an exit.

If we want to talk comparative success metrics, there are lots to choose from with more validity:

– amount the founders and employees got to take home after an exit
– exit size and revenue/earnings multiples
– EV/R or P/E if eventually publicly traded
– growth rate and profitability

Just not “raised X more money” please.

* any analysis should prevent outliers like Facebook and Google from distorting results (ie medians are more relevant here than averages)

3 Comments Money Raised is a Terrible Comparative Metric for Success

  1. skmurphy June 15, 2011 at 7:02 am

    Giff this is a great point, Seth Godin also makes a similar point in “Getting Funded is not the same as succeeding” he observes: nn”The goal isn’t to get money from a VC, just as the goal isn’t to get into Harvard. Those are stepping stones, filters that some successful people have made their way through. […]u00a0 I don’t care so much how much money you raised, or who you raised it from. I care a lot about who your customers are and why (or if) they’re happy.”nnWhile I applaud the startup genome team’s effort to define a morphology of startups and put some numbers on it I think many aspects of their approach, in particular choice of metrics, will need to be revisited and revised before they are truly useful. nnI think there is a deeper problem: just as you cannot step into the same river twice technology and market spaces co-evolve and the success of a startup forecloses some paths by occupying a niche in the ecosystem and enables others by creating new opportunities and demands. nnAlso startups are not fighting a natural phenomenon like gravity or seismic activity but a co-evolving set of suppliers and competitors who react to and even anticipate likely moves by a new entrant. So while you can plan and design based on scientific laws for gravity and engineering principles to resist and ride out earthquakes, competition is less predictable because it’s made of people and not governed by natural laws.

  2. giffc June 19, 2011 at 8:56 pm

    Agreed. nnTechcrunch also had an article on this topic, but I nearly choked when i saw it given that funding announcements are a huge portion of their coverage and they seem to only want to write about companies once they are funded.

  3. Max Marmer July 24, 2011 at 6:44 am

    Hey Giff just stumbled across your post. Since I’m one of the authors of the startup genome report I thought I’d chime in.nnI agree with you funding shouldn’t be taken as a sign of success. It’s just an enabler. It is however a decent exogenous validation. Since we didn’t have longitudinal data we were limited in what we could consider our Y-Axis or metrics of success.nnAll the metrics you suggest require a longitudinal data set. We are releasing a a web application sometime soon, which should allow us to start benchmarking companies on the type of metrics you recommend.nn

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