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The Mystery of Good Money Chasing Bad Startups

Color comWhen Color.com announced it has raised $41-million in venture capital a few months ago BEFORE it had any users, let’s just say I was extremely skeptical.

It was a serious, holy f@#k money for a startup moving into the extremely competitive mobile photo-sharing market, even if Color.com did have some interesting technology and a founder, Bill Nyguen, with a track record of success. But at a time when Silicon Valley’s lustre is as shiny as ever, there was a feeling the VCs behind Color knew something the rest of us were missing.

Now, according to the New York Times, Color is “overhauling” its app, which was buggy when it debuted and has subsequently garnered little traction at a time when rivals such as Instagram have captured millions of users.

Is Color.com a sign of another dot-com bubble or a dumb investment by established investors who should know better? It’s probably a combination of the both factors, which is hardly cause for confidence.

As someone who reported on the original dot-com boom (and who left journalism at the peak to join a startup), the current investment frenzy smells a lot like a bubble. It’s one thing to have startups with a good idea raise seed capital, or companies with traction attract a solid round but when startups with no revenue or business models raise serious money, the alarm bells should go off. The same goes for well-known brands raising significant amounts of money just because they can – e.g. Coupons.com raising $200-million in private equity and Pandora.com doing an $80-million IPO.

Who knows why we seem to be in the midst of an investment frenzy. The U.S. economy is volatile and the recovery is, at best, fragile. Yet, investors are acting like it’s 1999.

Don’t get me wrong, there are lots of good startups raising the capital they need to grow from investors who decided to accept some risk. At the same time, however, there appears to be way too much enthusiastic money (including retail investors into high-tech IPOs) gushing into startups that don’t deserve or need it.

You would have thought investors would have learned their lesson 10 years ago but the passage of time has a way of making people forget so they end up making the same mistakes all over again.

About Mark Evans

I'm the principle with ME Consulting, which provides strategic and marketing services to startups and entrepreneurs. This includes strategic and tactics plans, core messaging, brand positioning and content planning and creation.
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