Business | Aug 21, 2019

70% of upstart tech companies fail around 20 months after first raising financing, here is why

CBINSHIGHTS presented a very interesting report on why startups fail. The report is based on 323 Startup Failure Post Mortems. The result? Lack of Focus, of business oriented management and of simplicity are among the main causes why they fail.

“Focus and simplicity are often more difficult to achieve than building features on top of features on top of features. As a result, too many startups are unfocused. The time required to trim back an idea is not insignificant” — said best by Mark Twain: “If I had more time, I would have written a shorter letter.”

Another variable we’ve mentioned is Business Orientation. Here we have to make a difference between project and business entrepreneur. Most founders get into the entrepreneurship world as product entrepreneurs.

They have an in depth knowledge of an industry, or identify a problem to solve or a need to satisfy and then they work hard to develop the best product they can. Having the best product you can is normally a never ending story.

The product is never perfect for an entrepreneur, as a paint or sculpture are never finished for the artist. So instead of focusing on business, entrepreneurs nickel and dimed them to death to have the product that everybody will beg to buy. That never happens in real life, so the company lasts as much as the investment they received can pay for more and more features. Having people paying for your product is hard, really hard. As another entrepreneur (Sergio Schuler from Teamometer) from the CBINSIGHT post mortem report said: “(Don’t) multiply big numbers. Multiply $30 times 1.000 clients times 24 months. WOW, we will be rich!  Oh, silly you, you have no idea how hard it is to get 1.000 clients paying anything monthly for 24 months. Here is my advice: get your first client. Then get your first 10. Then get more and more.  Until you have your first 10 clients, you have proved nothing, only that you can multiply numbers.”

Unless you become a business entrepreneur, you will be dealing with money problems, always two months away from bankruptcy. We are not saying companies have to be break even from day one, because that’s could be not even the recommendation in some cases, what we are trying to point out is the importance of generating present and/or future value.

How you create value? You either have incremental clients paying for your services (EBITDA + Growing vector), or you have more people that are willing to purchase your product (Purchase intention). Those are the three main metrics that show that companies are generating value. If you have a company with good values in those three, whether your company is losing money or not, you will find investors willing to jump in.

The reason why for some startups is so hard to get investment is not because of the solution, the brand, the market, the “Elevator pitch”, but instead is because in much cases the entrepreneur promises (which in some cases are very passionate and contagious) are just not based on real facts. If you have a good business, everybody wants to be part of it. Entrepreneurs can always get money being a product entrepreneurs, lot of money. The problem with that is not on the investor side, but on the entrepreneur’s that will be investing big part of her/his life on it. For the investor the entrepreneur could be one of the 70 or 90% that fails and that’s ok, for the entrepreneur is 100% failure.

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