By now, most of you have heard of Facebook’s $1Billion sale of Instagram, an app developed by a bunch of young 20 somethings that lets users post photos. Today, Instagram has about 50 million users which works out to about $20/ person. “Cha ching” for anyone involved …
Punditry aside about whether it is a shrewd deal for Facebook – instead of “cha ching” – all I hear is hissing as the air escapes from Boomers’ retirement funds.
It is alarming and here’s what I mean.
You see, I have worked with tech ventures for over a dozen years, starting at Bell Labs New Ventures and continuing to this very day. In that time, I have worked with many startups, often gratis, because it’s so rewarding when my expertise can really make a difference in the early days of a venture. CEOs have the product vision but they rarely have marketing know-how to get the product to market. That’s where I step in. I help startups assess their market potential so they can monetize.
And in the dozen years or so I have been doing this, I see an alarming new twist to the never ending parade of venture dreams that haunts me. I liken it to the disturbing “Gold Rush” era where many more prospecting failures bankrupted folks versus the rare, outlier successes.
In today’s day and age – here is how it goes down.
Johnny or Jane are in college and – wham – they hatch an idea for a company often inspired by the innovation incubators on every campus. The idea grabs their passionate attention because at least they can try and make it happen versus trying to get a job which is tough and depressing.
Mr. and Mrs. SupportiveParents are happy their kids have found something that inspires them, so they cover more of their kids’ living expenses so the kids can commit themselves to their “passion.”
After about three or four months, their idea has some substance and the kids realize they need some money to create a “demo”. Of course, there is no cogent business plan (if a business plan even exists) but Mr. and Mrs. SupportiveParents kick in the $10,000 or $20,000 to create said demo – on top of the extra expenses they are already incurring to keep their kids in school. (This is when you can start to hear the air escaping from Mr. and Mrs. SupportiveParents 401K accounts!)
A couple of months later said demo is “almost done” but not quite because the kids did not really do a business plan and as they worked, the idea kept changing (translation = more cost). “But I only need another $20,000 to finish it off. Then it will take off because it is so cool. Please …” Again, as we would expect, Mr. and Mrs. SupportiveParents step in and shell out what their kids need.
Slowly but surely, over time, as their kids refine their idea; there is steady attrition of the parents’ savings plans because startups need constant funds. This tableau is playing out again and again and I know it because I have met too many Mr. and Mrs. SupportiveParents in the last few months who have depleted their savings by $150,000 or more to help their kids live their passion.
It is frightening to see since most new ventures are “high risk” in the best of circumstances, making them wholly unsuitable investments for most any Boomer given their proximity to retirement. And if that’s not bad enough, it’s even worse once you understand that kids’ ventures, proportionately, have a higher mortality rate because they are borne of 90% enthusiasm and 10% practicality despite their parents’ 100% support 100% of the time.
This is a dangerous combination – especially in frothy times like ours where opportunities for kids are limited yet perversely, the potential for untold wealth is tantalizingly possible.
And this brings me back my point. The Instagram sale was an aberration – a fluke – an outlier event – possible because of a unique set of circumstances. Yet it infused a new level of Gold Rush fervor into the passionate hearts of ambitious young entrepreneurs despite the reality that the chances of striking it rich today are about equal to striking it rich in the Gold Rush of 1848. And just as sadly, their loving parents are funding these ventures despite the improbable odds.
So while many people hear the “cha ching” of $1B, all I hear is the air escaping from parent’s retirement funds. It is not a happy sound. Not at all.
P.S. – I am posting this as my personal Mother’s Day present to Mrs. SupportiveParent. Be careful – please!
Filed under: Facebook, New tech venture, profitable business model, startup, Technology, VC, VC funding | Tagged: 401K, Boomers, Gold Rush, Instagram, judy shapiro, Mother's Day, retirement funds | Leave a comment »