In 2020, the failure rate of startups was around 90%. Research showed that 21.5% of startups failed in the first year, 30% in the second year, 50% in the fifth year, and 70% in their 10th year. Stats like these can make a startup founder or a venture capital investor feel like things are a bit bleak, but perhaps there is a better way.
There are ways to avoid failing like setting goals, doing accurate research, loving the work you do and not quitting at the first sign of challenges. These all sound easier said then done, but the recipe for success can be just that simple. Let’s dive into some of the main reasons startups fail.
Here are the Top 20 Reasons Most Startups Fail…any sound familiar?
Another common problem among new companies is poor performance capital. Lack of money is a convenient scapegoat for many startups, but you must ask yourself if being low on cash is really the biggest thing holding your company back? Sometimes, money just hides the real problems.
At a minimum, don’t expect an infusion of cash to make running the business any easier, especially if you’re not ready to live under the microscope. Getting your operations in order before talking to VC’s will also make them more receptive. Stephen Furnari, a well-respected New York City attorney who advises startups says, “If your business is being run sloppily–and you don’t have a handle on the staff you’re managing or are not collecting your accounts receivable–outside investors will be reluctant to put money in.” I couldn’t agree more.
The one challenge most entrepreneurs never see coming, is the one that isn’t easy to address in real-time: working capital management. It’s a problem that only gets more acute the faster you grow. Scaling requires more resources, be it staff, inventory, servers, etc. which all cost you money now. Customer contracts, with 30- or 60-day payment terms, can mean that your cash receipts may lag your expense growth by a few months or more. The difference between your cash to be collected and what you are paying now is working capital. An oft-cited US Bank study suggests that up to 82 percent of businesses fail due to cash flow mismanagement.
It is time for a change in the VC market. We can no longer do the same thing and expect different results. We must change from the traditional VC model to venture building.
Currently, the top 20% VC’s are outperforming everyone. With the venture building model this can change. Founders are not spending their time raising capital but they are focused on their business. A venture building program lays out multiple steps for the startup in the funding process. The startup must reach certain KPIs to advance to the next phase. It prevents a startup from getting too much cash early and burning through it, and from wasting too much time on fundraising and management. The venture building model helps founders focus on the most essential and crucial parts in the business. It is all about focus.
This model allows founders to prove themselves and show that they are able to execute. From there, investors keep investing based on real progress so founders can focus on finding a product / market fit. In addition, they can earn themselves shares in the venture based on real time progress, while creating better multiples for investors. This is what forward thinking venture studios like Venture Rock and my company InStudio Ventures are doing: disrupting the standard VC world and offering a new pathway for founders.
The VC world needs to make a commitment to change the success rate of the ventures they are creating. Their must be a push for making a significant impact on a global scale. We as a community must create solutions that will add immense value to the industries that run our economies and that change lives for the better and help achieve people’s dreams – be it for athletes, entrepreneurs, and the future of our children.
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