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The Worst Startup in the History of the World

August 5, 2011

There are a lot of ideas out there, some good, many bad.  In smaller numbers, but still pretty abundant, are people with the power and vision to make their ideas into reality — to, as they say, execute. In the startup world, investors look for the marriage of a good idea and good leadership, and then they lay their bets.

In the late 1950s, perhaps the most compelling business idea of the previous century met a leader with the charisma, power, and assets necessary to make it happen on a massive, massive scale.  The leader was Mao Zedong and the idea was the Great Leap Forward.

The Great Leap Forward (GLF) wasn’t exactly a business of course; it was “an economic and social campaign…which aimed to use China’s vast population to rapidly transform the country from an agrarian economy into a modern communist society through the process of rapid industrialization, and collectivization.[1]

Nevertheless, the GLF was a classic example of how startups normally work, at least well-funded startups.  They have a vision, they set goals tied to that vision, they make a plan, they gather the assets needed, and they go to work executing the plan.  In 1958, Mao decided that the countries’ goal should be rapid industrialization and a huge increase in agricultural productivity.  Specifically, he wanted grain and iron production to skyrocket.  Plans taking advantage of the latest theories where designed and rammed through the board (The board in this case was the Politburo, and Mao was Chairman Mao – a chief executive who also controlled the board).  Beta projects were launched (the Henan collectives).  When negative results were reported at the Lushan conference in 1959, the critics (led by the minister of defense) were purged.  Vision, as often happens, biased the assessment of early results.  Also, (predictably) politics complicated a situation where the management team has staked its position on a bold policy.

So in 1959, all assets were thrown into executing the plan, in an all-out effort to reach ambitious goals.   Tens of thousands of “backyard smelters” were set up in villages around the country, and metal objects like pots and pans were requisitioned to be melted down and turned into pig iron.  Private farming was banned and farmers were herded into collectives where they worked on fields arranged according to the best current practices, were fed efficiently at collective kitchens, and were paid in production points instead of money.

The results aren’t that widely known today, but they remain astonishing.  Agricultural and industrial production went up in the first year; but both plunged in the succeeding years, setting the economy back about half a decade.  Losses in agriculture led to perhaps the worst famine in recent human history.  The Great Leap Forward resulted in between 16 and 32 million deaths, mostly by starvation.  To put those numbers in perspective, World War I killed about 16 million people, World War II, about 60 million.

The rule of thumb among venture capitalists is that about one in ten of their new companies succeed. Accordingly, venture is a portfolio game.  Funds invest in potential hits, expecting to lose money on nine and make enough on the tenth to meet their goals.  The high mortality rate is a given, an unfortunate fact of life that investors strategize around.

In 1958, just as the Great Leap Forward was getting started, but in a very different part of the world, Arthur Rock was arranging the first venture capital deal – risk financing for what became Fairchild Semiconductor.  From a wealth creation standpoint, it was the start of something very big.  If you pretend for a moment that these two events were the start of a sort of wealth creation race, Silicon Valley was off to a great start, and China was running full speed backwards.  But China has done some pretty spectacular pivoting since then, major adjustments in their business model and approach.  Venture capital?  Not so much.  For the most part, venture capital firms have not significantly changed the way they direct companies to move forward in nearly half a century.  For too many, the venture investment model still involves looking for great people with great ideas, and placing portfolio bets.  Aggregate returns over the last decade, at least, do not justify this kind of complacency.  Perhaps it’s time for a pivot.

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