Why Venture Funded Startups Fail

Even if you have venture capital backing it doesn't guarantee success


Most of the time, when we read news related to the startup community, articles rave about the success stories that inspire us, that give us hope that our ideas will work out just as well as someone else's. In reality, almost 90% of startups fail miserably. We still only have just over 100 startups with unicorn status in the world. Statistically, there is only a 1.28% chance that a new enterprise will ever become one of them.

Obviously, becoming a unicorn is almost as unachievable as meeting an actual mythical creature. Most young entrepreneurs would be happy just to get through the pitching stage with potential investors, but even this is not necessarily a guarantee of success.

Successfully passing the fundraising stage is when entrepreneurs should start worrying and doing their best to get their strategy right. You may have a brilliant product or service, but if you are unaware of how to deliver it to your customers, nothing is going to work.

One day, it may be that one of your investors will tap you on the shoulder and say that, despite your hard work, let’s face it, you're not going to get a return on the capital. When asking why failure happens to venture-backed companies, you should understand that there are many ingredients in a failure recipe, and each depends on the individual case.

One example of a moment of glory turning into a nightmare is a company called Canvas. A team of young entrepreneurs had a big success after launching their iPhone app DrawQuest. The app had managed to gain three-quarters of a million downloads and the revenue was growing. However, it wasn't growing fast enough. In a matter of weeks, the company has announced that Canvas was shutting down, despite having 1.4 million users. Here is a lesson to learn, with the brilliant product on hand, Canvas’s team was simply not experienced enough to make the business side of things work. Business strategy is not rocket science, though, but it is something that you have to think about very carefully. ‘If the odds are stacked against you in any venture-backed company, the odds are extra stacked against you, if you pivot, especially as late as we did,’ says Chris Poole, the Head of Canvas.

Startup culture is famous for glorifying failure. However, it's controversial whether praising a failure will make much sense after a disastrous financial loss with team members and investors leaving you.

What’s important is what happens next. After accepting the failure, it's time to face consequences and figure out what is going to happen with the money the startup never managed to return. Dealing with venture capitals is a complicated procedure, so investors consider each move with extra care, making sure there is a minimal risk of losing money. Potential companies are vetted thoroughly before they commit to taking a risk, and big investors are usually mature and have a good business portfolio, but there are no guarantees. That is why, even if the startup company is backed by venture capital, it doesn't mean it will achieve instant success.

Usually, there is a 10-year plan for investments to see a return. It doesn't mean that the full amount of money will be invested in one go. First of all, there is an initial investment that is often made within first three years after the company is established. After that, a venture firm will make follow-on investments over the remaining years of the fund's cycle.

From the startup’s perspective, it's important to estimate exactly how much money is needed to keep you going. Raising too much will cause complications and extra responsibility which a young company wouldn't be ready to handle. Thus, a carefully thought out strategy is needed to deliver the best performance of your product and enjoy your triumph.

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