Venture capitalist misses and what they mean for entrepreneurs

I was recently reviewing a list of the startup opportunities which Bessemer, a leading venture capital firm, regrets passing on. The list includes such names as Apple, Google, Intel, and eBay which have each become industry leaders today. How did Bessemer, a highly experienced and successful group of venture capitalists, not see the future of Apple and Google? The answer is simple. There is so much uncertainty around investing in startups that it is very challenging to identify and help build the industry leaders of the future. The challenge is even greater in the technology industry where continuous innovation produces a very rapid pace of change. Winners can become also-rans almost overnight, as examples like Yahoo, Hewlett Packard, and Nokia demonstrate.

As a fact check, I decided to review some of the most successful startups that we passed on at Romulus Capital. Since we invest in startups at an earlier stage than Bessemer, keep in mind that there is more uncertainty around the future of our investments than those made by later stage venture capital funds. While this is a caveat, it’s not an excuse for some of our biggest misses.

Perhaps our biggest missed opportunity is SixthSense. At its core, SixthSense is a wearable device which allows users to use their gestures to augment reality with digital information. Think about Google’s Project Glass without the glasses. Pranav Mistry of the MIT Media Lab showed a demo of SixthSense at a TED conference in 2009 and decided to make its underlying technology available open source following the mass appeal it gained there. We had the opportunity to invest well before the conference, but considered the idea too far fetched.

Another big miss is Sifteo. The company is behind Sifteo cubes, a set of interactive games where the players engage with physical blocks which sense each others’ proximity and relative motion. Think of digital dominoes and Lego blocks. The company is currently building educational games for children and adults, and has received over $10M in funding from the Foundry Group and True Ventures.

The final miss that I’ll address here is PeerTransfer. The company saves significant transaction costs for international students studying abroad as they make money transfers from their home country to pay their university tuition. While the company started with a focus on college payments with the US as a destination, it has the opportunity to cover other types of international transfers across the globe. PeerTransfer received $8.5M in funding from investors including Accel Partners and Spark Capital.

The reason why I’m going to stop here is not because there weren’t other great startups that we passed on but simply because these serve well to demonstrate my point: all venture capital funds forego great investment opportunities. While it’s not always easy to reflect on and disclose one’s misses, this shouldn’t be the case. Although you should probably question the abilities of someone who was presented with the opportunity to invest in but passed on each of Apple, Microsoft, Google, Amazon, and Facebook, most missed opportunities say little about the skill of a venture capitalist. If anything, for an investor to say “no” to a startup, they must first know about it. And if a venture capitalist knows about a company, that suggests that they’re either very good at finding promising startups or that they have a very strong network so that promising startups naturally come to them, or both. That’s a good situation to be in. The reason why even the best investors pass on great startups is simply because it’s very challenging to foresee the future potential of a team with an idea and perhaps some traction. As a result venture capitalists are not always right, and in fact can often be wrong. So if you’re an entrepreneur with an unwavering belief in what you’re doing, the next time that a venture capitalist passes on your startup, simply think how foolish he must be to not recognize the next Google.

Also published on Medium.