9 out of 10 startups fail
Investors rely on this statement in their pursue for returns, anticipating that for every 10 startups they invest in, only one will be a huge success and bring in mountains of cash.
Regardless of the origin of the statement; which is believed to be a decades old study for Brun & Bradstreet on new businesses; it has some truth to it. Majority of startups do fail.
A lot of research has been done on the reasons behind these failures. These researches mostly highlight similar results; some of the top results include: “no market need”, “ran out of cash”, “business model not viable”, “not enough traction”, and the list goes on.
Let us try to briefly examine these top reasons:
- So ‘No market need’ and ‘Not enough traction’ probably means that the entrepreneur thought that their service/product is highly needed, but once launched, it did not achieve the anticipated success. People were simply not interested! A reality check.
- ‘Business model not viable’ – Viable is doable, workable, practical, or feasible. So this actually means that the founders’ ideas and plans looked great on paper, but not in the real world. Again, reality check!
- In understanding ‘Ran out of cash’, I will quote David Skok in his article 5 Reasons Why Startups Fail ‘What frequently goes wrong, and leads to a company running out of cash, and unable to raise more, is that management failed to achieve the next milestone before cash ran out. Many times it is still possible to raise cash, but the valuation will be significantly lower’. This can also be combined with another common reason for failure which is ‘Lack of funding’.
Thus, these entrepreneurs were not only failing at their startups but also were losing their credibility in the capital venture community. And this is not uncommon!
I think it is safe to conclude, that significant percentage of failed startups were just not ready; and not necessarily failures.
I am a big supporter of Eric Ries’s The Lean Startup and the minimum viable product methodology (MVP). Many of these failures are preventable. Only if founders give themselves more time to study and test their ideas and plans before rushing into funding.
In this research it is stated ‘funded startups were the ones who were running out of money’. And it continues ‘among bootstrapped startups, running out of money was fairly low on the list, coming in as the 10th-most common reason’.
One would argue that getting funding at an early stage actually prevents being ‘outcompeted’. This is only true in specific situations. That is when you already have a big competition, which has an almost identical business model and is in the same market. Add to that another surprising fact from the same piece; a good 19% of startups that were funded by at least eight figures failed because they were actually ‘Outcompeted’!
We all know that Plan A almost never works. Try to test your idea and sculpt your product/service into its best shape before you have to report and prove traction and results to anyone else.
Moreover, Mr. Fred Wilson, a venture capital investor at the Union Square Ventures states “The amount of money startups raise in their Seed and Series A rounds is inversely correlated with success. Yes, I mean that. Less money leads to more success. That is the data I stare at all the time” as mentioned in John Mullins book The Customer-Funded Businesses.
If you are an entrepreneur, I highly recommend you read the articles and book about the Customer-Funded Businesses by Dr. Mullins, as they might save you from ever needing funding! I will make sure I write a specific piece on this subject.
In conclusion, this article is addressing all entrepreneurs with great ideas and ambitions, please time your pursue for funding. Timing is vital for the survival and continuity of your dream.
Do not feel pressured into raising funds and winning competitions early on, even if many others are doing so.
Know that once you have compelling numbers, investors will follow.
Bootstrap extensively and/or adjust your model to customer-funding. This way when you ask for cash you do it like a boss!
- Top 20 Reasons Why Startups Fail [Infographic], Forbes, MySay (https://www.forbes.com/sites/groupthink/2016/03/02/top-20-reasons-why-startups-fail-infographic/#7d6d834f3911)
5 Reasons Startups Fail, for Entrepreneurs from David Skok (http://www.forentrepreneurs.com/why-startups-fail/)
- Startup Failure Rates, Small Business Trends, Scott Shane (https://smallbiztrends.com/2008/04/startup-failure-rates.html)