I was having a hard time understanding why startups fail despite the fact that they have all the funds in the world to ‘make it happen.’ The thing is, the explanation is a bit ambiguous.
In this post, I tried to draw conclusions from all the startup content that I consumed, as well as from my personal observation on the startup founders I know – on this very question: Why do well-funded startups fail?
1. Missed the timing
Timing is everything. Launching your product too early or too late will blow your product/market fit out of proportion.
We need to remind ourselves that the market is not constant. It keeps changing, expanding and contracting like it doesn’t care about you at all.
The truth is, the market doesn’t care.
That’s why fad-based startups are growing fast and fail fast. They will get funding, create revenue, etc. early on and will suddenly lose everything when the window of opportunity has passed.
Niches like coupons/deals, fro-yo, and many others were popular niches that went cold quickly. I saw too many of such startups fail after just one or two years, maybe more, even though they’re gaining considerable revenues early on.
2. Over-confident financial projections
The thing with startups is that they are rolling based on projections, especially the cutting edge ones. They are pioneers and trendsetters, hoping to disrupt the industry in a big way. Unfortunately, only a few who can actually do so.
It’s a dilemma, really: Financial projections that show promise is required to secure startup funding. No investors want to be pitched with startups with a bleak outlook. Everyone – founders and investors – want for the best to happen.
Unfortunately, the statistics say that startups’ survival rate is just 10 percent. Investors know this, and they understand that their investments are pretty much like gambling.
Confidence is important, but overconfidence causes a pain in the *ss.
3. Procrastinating founders
Paul Smith, Head of Program at Dubai Future Accelerators, made a good point, explaining that the problem with well-funded but failing startups is mainly the founders. He mentioned that three-quarters of startups are self-destructing themselves immediately after they raised a seed round: They suddenly started to work fewer hours, go on holidays, rent/buy fancier apartments and other ‘doodads.’
For some reasons, many founders seem to forget that they are procrastinating at the expense of investors money.
4. Founders takes failures too lightly
I observed the startup culture, and I discover how startup founders take failures too lightly, using ‘failed, but getting experience’ as an excuse. It’s true that we should learn from our failures, but starting out a business, burning investors money, and fail because we’re running out of cash is not a good habit.
Yes, it’s not their money, but founders need to understand that failures are failures. It’s not cool to fail too much; it doesn’t look good in your rapport, regardless of how much ‘experience from failure’ you’re getting.
5. Startups focus on growth and ‘forgot’ to make money
Gary Vaynerchuk rants quite often about how raising money is celebrated more than actually making money.
‘Growth’ seems to be the only thing that matters. We celebrate fast growth. We celebrate funding round after funding round. But for some reasons, many of founders don’t seem to care too much about actually making money from their startups. What they care is to up the growth and valuation, hoping for some investors to eventually acquire the startups.
Startups are businesses, and businesses exist to make money. While it’s true that focusing on growth is important, but burning investors’ money to boost growth and go bankrupt when there’s no more cash to burn doesn’t seem like a good idea. Not only to the investors, but also to customers/user base.
6. Lackluster team dynamics and hiring
This is quite common, especially when a startup is growing rapidly. Hiring many employees and opening new offices quickly will put company culture in jeopardy. Even worse, what comes after is usually layoffs (December is the season for startup layoffs, by the way,) and laying off too many employees too often will impact the culture negatively.
We can see from just 6 reasons above that the focus is on the startup founders. You might argue that, other than personal matters (i.e. Go skiing, ‘funded’ with investors money) the market is beyond the founders’ control. Sure, the market does change, but it’s the founders’ responsibility to direct their startup to the right direction.
It’s a consensus, really. Jason Calacanis, Gary Vaynerchuk, and other startup investors are betting on the jockey, not the horse. The founders hold the key to success for their startups. This is what makes unicorns like Uber so special and thrive, despite the roadblocks.
So, here’s your takeaway: Respect the opportunity and respect your investors’ money. Focus on achieving self-funding (fund your startup’s operations with revenues) and avoid becoming a statistic.