Over 90% of startups across all industries fail. In the first year this is limited to 10%. However, in years 2/4 it is a staggering 70%.
Over 70% do not deliver any positive returns for investors, this is why VCs take multiple stakes at the seed stage. They are investing in people and ideas. Most often there is only just an MVP (minimum viable product), certainly not a sales funnel or current customers.
A seed VC will invest in 20 – 60 companies, depending on the fund size. Obviously, they are aiming for a 100% return on every investment. However, as the statistics show, the reality is that they are gambling on 3 or maybe, 4 of the investments providing the profit and return for all their investments. They are chasing the elusive unicorn but mostly ending up with the dust from their hooves.
Series A investors write much bigger cheques, they are better informed about the company and its prospects. However, over 35% of series A companies still fail before they raise series B.
It is understandable for such a high percentage of the early-stage companies to fail, the product is untested, the founders unprepared and the market unpredictable.
The founder would argue it is the market, the VC would counter that it is the founder, their lack of business acumen, determination, or leadership ability.
This scapegoating and attribution of failure is an overly simplistic view of the situation. A seasoned founder is not necessary for success. Their lack of business acumen can be easily compensated for by a competent senior management team and commercially interested advisors.
There are of course the founders who still think they know best and will not listen to advice; these are very quickly part of the initial failure rate.
Often, series A companies do not secure the full investment that they need, this results in the companies not being able to execute their full plans. Areas of the business are underfunded resulting in unnecessary risk and a higher probability of failure.
The much harder question is why the companies that do raise series A, that do have a viable and potentially profitable business with a sound leadership team and a seasoned entrepreneur still fail.
As one would expect the reasons are complex, but they are also easily related. It is the people who make the mistakes, that might be the leadership team, the advisors or even the investors.
Successful companies invest in people in all divisions of a company – marketing, finance, HR, sales and strategy. They understand the importance of ensuring a 360’ approach to growing a business and they are the ones that end up being the unicorns.