Professional investors want to live by this rule. With the first round of funding, there should be milestones to be achieved. If they are not achieved within the expected time, the reasons must be analyzed and acted upon to avoid loss of capital beyond plan or expectation.
And if the vision of the entrepreneur is flawed, or the product impossible to create within cost and time expectations, or the demand impossible to quantify, or revenues never close to plan, then it is time to rethink the plan and product. An excellent management team is perhaps the greatest asset for any company because it is just this team that has historically been able to make a drastic alteration of the plan, ultimately making a failing vision into a wildly successful one.
But if neither great management nor the entrepreneur’s vision for the product shows real signs of success in the market, it is the hope of professional investors that the company fails fast, reducing further expenditures of remaining capital and protecting the assets purchased with the original investment.
[Email readers, continue here…] My favorite story of a fast failure was of a technology incubator started in the year 2000 with optimistic money from a number of angel investments, including mine. Within a month after the tech crash, the founder of the incubator (who remains a close friend) decided that it made no sense to incubate companies that were not likely to receive new investments soon following incubation in the winter-of-cash that followed the tech crash. He volunteered to close the incubator and returned 96% of our investments to all of the angel investors. (That return proved to be the best investment return any of us saw in the several years that followed.)
Half of all professionally managed venture capital or angel investments fail. There should be no shame to the entrepreneur in admitting such a failure. Some angel and VC investors will give special credit to those entrepreneurs who have experienced failures when investing in their next effort. The lessons learned are difficult to teach and are great assets in the next effort.