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If the Shoe Fits: How VC Favoritism Can Cripple Your Startup

by Miki Saxon

A Friday series exploring Startups and the people who make them go. Read all If the Shoe Fits posts here

5726760809_bf0bf0f558_mIt’s a know fact that the more you are “teacher’s pet” or a “favored player” the more you will be called on in class and the more playing time you’ll get.

Even in families, the most-favored-child typically succeeds more than their siblings.

So it should come as no great shock that when VCs invest in similar companies, which they often do, they will favor one above the other.

And that favoritism usually results in more money, more introductions, more involvement, in fact, more everything, which results in substantially more innovation.

The data showed that companies tied to a competitor by at least one VC firm in common were indeed less innovative than those unencumbered by such ties; in fact, they were 30 percent less likely to introduce a new product in any given year.

It gets worse.

The UNfavored startups were 55 percent less likely to introduce a product.

Proximity mattered, too; those farther away from a shared investor were 56 percent less likely to introduce a new product.

What if your VC is part of the “golden circle?”

Companies tied to VCs in the top 25 percent of reputation indexes were significantly less likely to introduce new products in any given year.

Oops.

And I’m willing to bet similar stats apply to super angels, regular angels, incubators and the rest of the funding world.

Rory McDonald’s research is just one more reason not to be blinded by the money and to make sure your due diligence is super-diligent when evaluating funding offers.

Image credit: HikingArtist

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