Bad Rumors About Startups Spread Fast
Let me write about something few people say out loud, though everyone in the industry already knows it.
Bad rumors about startups spread fast.
“So-and-so is 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 pulled out and it fell apart.”
There are all kinds of patterns, but this kind of information circulates incredibly fast.
Fast enough to be 1 or 2 years ahead of the general public.
That’s how it works. Pretty amazing, right? Ha.
The reason information travels so fast is mainly because “the community is small.” And because “for people who value speed, information matters enormously.”
Information is only worth something once it circulates. Someone who just hoards information for themselves eventually stops receiving any. Someone who properly shares useful information (not the low-grade stuff like leaking confidential material, but real value) eventually finds useful information flowing back to them too.
Bad rumors are sometimes useful.
A rumor that someone is quitting is drool-worthy advance intelligence for another company that wants people close to him or her. Startup executives (and other key people) are all connected to each other, more or less. Meeting up individually or grabbing a meal together is easy. And naturally, when that happens, the topic of what he or she plans to do next comes up quite naturally.
Information about a rejected funding round is useful for planning your own fundraising strategy based on it. Things like “guess that VC doesn’t invest in this category after all” or “seems like there’s excess cash sitting around at such-and-such firm” or “the money that flowed out of there ended up over here doing this and that.”
Someone else’s management failure becomes a cautionary tale for your own management. Failure patterns tend to look alike across the board (though I say that and still make the same mistakes myself).
That said, the fact that rumors or backchannel information are circulating at all means the startup in question can be called a “hot startup.” There’s little value in circulating rumors about a company that just launched and nobody knows what it does, or a company everyone lost interest in ages ago.
And here’s what’s genuinely interesting:
hearing the bad rumor behind the scenes while seeing the good news out front
happens extremeeeeeeeeeeeeeeeeeely often. This is what I meant earlier by being “1 or 2 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 good answer to that.)
Behind a Facebook post about having poached top-tier talent, you hear that the lead engineer got mentally worn down and quit. (Wait, wasn’t he the one holding the company together? What are they going to do now? Well, that’s exactly the situation.)
Watching WBS about winning some award, behind the scenes you hear the company is in financial trouble and might not make it to the end of the year. (Is it going to be okay? Well, no, it’s really not.)
There are tons of companies that look great on the outside while actually being finished on the inside. This is the fragility of startups: one bad judgment call or the loss of a single person can end things just like that. Generally, though, a company that has already closed a funding round in the hundreds of millions of yen won’t die that easily within a year unless it really screws up. Especially in Japan, where personnel costs aren’t as inflated as elsewhere.
In other words, the company dies 1 or 2 years after the information first started circulating.
But what’s interesting at the same time is that none of this information-sharing has any gossipy vibe to it at all. Everyone handles the information seriously and courteously. There’s a stance of tending to your own footing first rather than getting excited over 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, too, feels like a uniquely startup kind of “strange feeling,” in a way.
Originally published in Japanese at https://clazytech.com/2020/02/346/. Translated with LLM assistance and reviewed before publication.