Why do startups fail? This question is almost the “tastes great, less filling” conversation of the startup scene. Startups fail. We know this from watching big rounds go nowhere and accelerator graduates never cross the valley of death. (The valley of death is between Seed and Series A. Most people never make it.)
Money is valuable. In the startup world, we almost have a sense of entitlement around raising money. People should lavish us in high valuations and big rounds. The money around startups is starting to tighten. How can startups raise money when the funding market shrinks?
To answer this question, we need to revisit the definition of the word “investment.” VC’s are looking for investments. Investments have a level of risk which defines the potential return. When a VC won’t look at your startup, your problem is the risk to return ratio.
Every pitch deck I’ve seen promises the world for returns. What everyone misses is the risk slide. Most startups forget to show investors how their plan is lowering risk. Changing your valuation for raising funds is about risk reduction, not market size. Show VC’s a low risk. high return idea, and they will come running with term sheets.
How do we cut risk? Risk for a startup investor is failure. How do startups fail? Here is a breakdown of the biggest points, from CB Insights.
Largest single failure at 42%
No market need. Soak that in for a second.
42% of startups convinced themselves and investors to back an idea….. with no market fit? We become so passionate about an idea that is blinds us to reality. Show a VC market need and you cut the big risk right out.
Second largest failure at 29%
Ran out of cash. If I was a VC, I would ask to see the CEO’s checking account and credit card statements. This problem should have obvious warning signs. Ignore at your own risk.
Third largest failure at 23%
Not the right team. This is more art than science. I’ve seen smarter VC’s running team psych profiles as part of diligence. A great team can survive a bad idea. A great idea cannot survive a bad team.
There are other risks but these three cover the major odds for failure. I’m going to set aside #2, running out of cash. Running out of cash is bad planning or bad market fit. How do we address no market need and bad teams?
Prototyping. Prototyping ideas addresses the two main risks to a startup. The first risk is market fit. In building a prototype, we can survey the market. Early stage research keeps startups from building products people won’t pay for. Many startups are cool ideas. The startups that survive are ideas people pay for. When we prototype, we can get feedback and adjust quickly.
Prototyping causes startup teams to work together. A prototype is a shared vision of an idea. I like to envision prototypes as a sketch pad I share with others. If I’m a match with the team, I get the pad back with additions to my notes. If the team is a disaster, I see it in the sketchbook. Building a prototype shows how your team will run in production. If your team can prototype your idea and review with a potential customer, you are close to success. Your idea will change. The goal is for the team dynamic to stay the same.
Eric built his experience working in the tech sector for 20 years. He is CEO of Campus Suite, a content management and communications platform for schools and colleges across the US. Eric is also COO of Soundstr, a Brandery graduate backed by Gracenote, and COO of Craftforce, a skilled trades marketplace. He helps Cincinnati startups as a advisor for Cintrifuse. Eric brings his experiences and methods from running multiple companies to the startup ecosystem. His key skills include team management, platform design and development, process design, and inbound marketing. Connect with Eric on LinkedIn
Feature image credit Michael Caroe Andersen. Image has been cropped.