You’ve had a great idea, you believe in it 100%, and you’ve successfully completed your first capital raise – it’ll be plain sailing now, right?
Wrong. Unfortunately, statistics show just the opposite. The failure rate for startup companies is around 90% (reference and link to Startup Genome) and of those, two out of 10 will fail within their first year of operation.
Things picture isn’t much brighter for those companies who have successfully raised capital, with 75% of venture-backed startups sinking. However, despite this uninviting panorama, the number of new ventures keeps rising globally
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Below are the five most common reasons we at Seed Space Venture Capital Venture Capital see startups fail after raising capital. By avoiding these pitfalls, founders can steer away from that distressing 90% failure rate.
Why venture-backed startups fail
1. Lack of alignment between VC and investee
Given those huge failure rates, what makes investing in startups profitable for VCs?
Simply, successful startups make up for those that fail along the way, with investors always looking eagerly to find the next unicorn. However, when a startup fails, it is never an enjoyable experience for either party involved.
To make the most of the VC relationship, it’s important to clearly state from the outset how we are going to work together as a team to reach our financial goals. VCs typically work with their investees – taking advantage of the experience within the VC team and the opportunity to learn from others’ mistakes can be the difference between success and failure. Too often, we have seen founders rush to launch their product/service prematurely. Often this means a time-consuming (and embarassing) return to the drawing board, if not out-and-out failure.
Aligning founders and their VCs on their visions of what needs to be done to reach profitability milestones is an excellent first step in building a successful business.
2. Not having a minimum viable product
Building a new business from scratch is an immense amount of work, especially if the product or service is a complex one. Figuring out how to pitch investors without having developed the business to a point where its can be launched is a conundrum for all founders. The answer is with a Minimum Viable Product (MVP).
With an MVP, you can demonstrate a version of the final product with the minimum number of features to be usable for early adopters. These foundation users will give the necessary feedback needed to develop the final product. Even though this may seem obvious, raising funds without developing and testing an MVP is not only the most common, but also the most costly pitfall for early-stage startups.
By having an MVP, you enable investors to see the product's basic functionalities, its potential, and how it fills a gap in the market.
3. A faulty business model
It’s not sexy, but one of the most important things that can be done to prevent startup failure is to have a solid business plan.,
It’s all to common to see overly confident founders relying too much on their product/service to engage potential customers. Let’s be very clear – having a good product is not enough to attract customers and turn them into loyal clients.
As an early-stage founder, you must be able to reduce your customer acquisition costs (CAC) and lead to an increased customer lifetime value (CLV). Many if not most business models overlook this aspect, and the result is that CAC is higher than CLV, which sooner or later will sink the ship.
Writing this into the business plan is key to figuring out a scalable way to minimise a company's customer acquisition costs and monetise its customers.
3. Founder’s lack of management experience
Poor management is a very common reason for failure. This is mainly because founders are focused on their groundbreaking product idea, but don't have the experience to run a business. When a founder has never been in a leadership position before, or never managed a team, it’s difficult to gain those skills while also building that fantastic new product idea. Make no mistake – building products and managing people are two completely different skillsets.
A top-performing manager is a good leader who fosters productivity, maximises what can be done with the resources available, and can think flexibly to solve human resource problems on the go. Any founder who isn’t capable of this (and the majority won’t be) needs to hire a good senior manager early on to ensure the team can work well together and drive the business forward.
4. The final nail in the coffin: refusing to pivot
How many times have you heard a successful founder talk about starting their business – with a completely different idea than the one that proved successful? It’s a common story. And for good reason.
It’s very common to find out at the MVP stage that your idea doesn’t quite fit, or could be more useful to your target market in a different form. By pivoting, businesses can extract value from industry changes, previously unidentified consumer preferences, and new opportunities. A myopic focus on the original idea, even when it isn’t working, can only lead to failure.
The core of a true entrepreneur is resilience, flexibility, and, above everything else, a forward-thinking mindset. Changing the plan on the go is not a sign of failure – but failure to do so will lead to it.
Innovation always comes with risk, but recognising the most common pitfalls can help to minimise their impact on a startup’s growth.