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Diamond (losses) are forever

October 10, 2011

It seems that companies that are desperately trying to find new ways to lose money look to the old tried-and-true method of venture capital.

DeBeers is apparently opening a new Silicon Valley VC firm, ostensibly to invest in companies that will spur demand for their synthetic diamonds. I hope for all involved there is more to the strategy than that.

Investing in demand is rarely a good idea because when that demand inevitably fails to materialize:

1) You lose out on revenues
2) You lose out on your investment
3) You kill off a promising company that may not have wanted to use your product, but was bound to as a condition of investment.

And besides, even if you are successful in seeding a couple of companies that will use or “evangelize” your product (synthetic diamonds or any other widget), you gotta wonder if it is worth the time, trouble and risk?

Most VC backed companies fail on their own, but if DeBeers happens to invest in a couple that succeed, will the resulting demand/revenues be really worth all the time and trouble? Would the money put into VC have yielded the same demand verses say an equal amount of money put into marketing?

Again, I’m only running what is in the story so there may be a lot of details in the DeBeers strategy that I’m not considering. But as a general rule, I get pretty leery when I hear someone is using VC to spur demand.

DeBeers Element Six Diamond Venture Capital
http://gigaom.com/2011/10/10/de-beers-element-six-diamond-venture-capital/

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