The Destruction of Perfectly Good Tech

The Destruction of Perfectly Good Tech

The Destruction of Perfectly Good Tech 150 150 Basis State - We Find Exits for Software Companies

Startup failures send perfectly good tech to the scrap heap. That’s nothing new. What is new is that more and better tech is getting abandoned earlier. It’s an inefficiency created by our convergence around a common playbook.

It starts with taking the path down a very narrow funnel

The standard startup playbook goes something like this: build a product, get some market traction, raise capital, scale revenue, sell for a multiple of revenue. The machine that generates VC returns and founder fortunes has been tuned to this sequence of events.

More often than not, the plan derails somewhere along the way. When the breaking point is revenue at scale, perfectly good tech is often scrapped.

Trouble begins with a big leap from a solution to scalable economics

As entrepreneurs, we look for problems without available solutions. “Hailing cabs is the worst, I wish there were a better way.” Then we create a solution, and can usually find some customers to pay for it.

But a good solution and promising early adoption don’t necessarily portend good economics at scale. As we move beyond early adopters, the cost to acquire customers often outstrips what they’re willing to pay for the solution.

A bootstrapped business that faces this scale constraint can stick to its profitable niche, drop its acquisition costs through channel partnerships, or trim overhead to operate at a slimmer margin. Any of these would be rational moves to keep the business healthy.

However, any of these moves is anathema to the VC-backed playbook. The goal is scalable revenue, and your job is to pivot until you find it, even if the odds start to look slim.

Then, investors get fatigued

The beginning of the end is when your seed investors show fatigue. The runway is getting short, your investors are hesitant to re-up. Without their support, your odds of securing new investors are severely hampered. You are facing a period without cash, or a down round that will likely impact you and your co-founders.

Finally, founders get fatigued

Faced with a down round or a period without cash, you and your co-founders might question the mission. You could look for a buyer, but with a telling P&L and balance sheet, buyers will smell blood and negotiate from a position of strength. Your perfectly good tech is valued as scrap as you near the end of your runway.

By limiting our options, we destroy value

The value of tech and the scalability of a business model are two very different things, but once you are on the VC track, the two become conflated. When the scalable business model fails, it drags the tech down with it.

It doesn’t have to be this way. Good tech can have value within a niche, or wearing another company’s brand, or folded into another company entirely. Just because the tech doesn’t scale as a standalone business model doesn’t meant it is worthless.

When an entrepreneur creates a solution to a problem, it might become an acquirable asset, or a small/medium-sized profitable business, or maybe even a scaled enterprise. Any of those outcomes can create wealth. But in our adherence to a common playbook, we’ve voluntarily crossed two options off the list, and left ourselves with scaled enterprise or bust. The unfortunate result, among other things, is the destruction of perfectly good tech.