Bad Rumors About Startups Spread Fast
Let me write about something almost nobody talks about, but that everyone in the industry already knows.
Bad rumors about startups spread fast.
“So-and-so is apparently about to run out of cash.” “I hear the key person at such-and-such is quitting.” “They said they’d close their funding round last month, but the lead investor apparently backed out and it fell through.”
There are all kinds of patterns, but this kind of information circulates extremely fast.
It actually runs one or two years ahead of the general public.
That’s how it works. Pretty amazing, right? (laughs)
The reason information moves fast is mainly because “the industry is small.” And because “for people who value speed, information matters enormously.”
Information is only worth something once it circulates. Someone who only hoards information for themselves will eventually stop receiving any. Someone who properly shares useful information (not the low-grade kind of thing like leaking confidential material, but genuinely useful information) will in turn keep receiving useful information back.
Bad rumors are sometimes useful.
A rumor that so-and-so is quitting is a mouthwatering piece of advance information for another company that wants to hire someone close to that person. Startup executives (and key personnel) are, for the most part, all connected to each other. Meeting up individually or grabbing a meal together is easy. And naturally, when they do, it’s only natural that the topic of that person’s next move comes up.
Information about a rejected funding round is useful for building your own fundraising strategy. Things like, “Ah, so that VC doesn’t invest in this category after all,” or “It looks like there’s a glut of capital at such-and-such firm,” or “money flowing from here ended up doing this and that.”
Someone else’s management failure becomes a cautionary tale for your own management. Failure patterns tend to look pretty similar across the board (even though I say that and still end up making the same mistakes myself).
That said, the fact that rumors or backchannel information are circulating at all means the startup in question is, in some sense, a “hot startup.” There’s little value in spreading rumors about a company that just started and that nobody knows anything about, or one that everyone lost interest in ages ago.
And here’s the genuinely interesting part:
hearing the bad rumor behind the scenes while seeing the good news out in public
happens extremely, extremely often. This is what I meant earlier by “running one or two years ahead.”
Behind a funding press release, you hear that the chance of launching within the year is already gone. (Why? Isn’t that what the funding was for? Well, actually, there’s a clear answer to that.)
Behind a Facebook post bragging about poaching a bunch of highly skilled talent, you hear that the lead engineer burned out mentally and quit. (Wait, wasn’t he the one holding the company together? What are they going to do now? Well, that’s exactly the point.)
While watching WBS and seeing “Won such-and-such award!”, behind the scenes you hear the company is in financial trouble and probably won’t make it to the end of the year. (Are they okay? Well, no, they’re not.)
There are countless companies that look great from the outside while actually being finished on the inside. One bad decision, one lost person, and it’s all over — that’s part of the fragility of startups. But generally speaking, a company that has already raised funding in the hundreds-of-millions-of-yen range or more won’t die that easily within a year or so, barring some major blunder. Especially in Japan, where personnel costs haven’t inflated all that much.
In other words, a company dies one or two years after the information first starts circulating.
But what’s interesting at the same time is that none of this circulation of information carries any gossipy vibe at all — everyone handles it in an earnest, gentlemanly way. There’s a shared stance of “let’s take care of our own footing first, rather than get excited about other people’s good or bad news,” and when something unfortunate happens, a stance of “thanks for finding the pitfall on everyone’s behalf.” That’s maybe another kind of “strange feeling” unique to the startup world.
Originally published in Japanese at https://clazytech.com/2020/02/346/. Translated with LLM assistance and reviewed before publication.