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Only one in ten startups will succeed. The other nine companies will fail, close, or continue to shuffle with no future. Entrepreneurs and employees will have to fold the dream, swallow the disappointment and start over. Can successful startups be built with much higher success rates?
Why do most startups fail? There are many, but interesting, reasons for the way venture capital funds (Venture Capital VC for short) work. A venture capital fund raises money from investors, usually large institutions such as pension funds, insurance companies, etc., with the promise that they will return the investment to them within seven to ten years, at a profit of over 10% per year, ie about 2 to 3 times the investment value. If a venture capital fund has raised $ 1 billion from investors, within 7 to 10 years they must pay investors $ 2 to $ 3 billion.
Note that this is a refund, real money, and nothing else like shares in private non-trading companies. This is why venture capital funds require their companies to grow at breakneck speed, and get from an initial idea to an exit within a set and fairly short period of time. Venture capital funds usually invest in new companies only in the first two to three years of establishing the fund, so the time between the initial investment and watching the exit is shortened to an average of six years.
There are two types of exit, going public or selling the company to another entity in exchange for cash or traded shares. In order for a company to be listed on one of the leading capital markets (NASDAQ, NYSE), it must meet a number of criteria – annual sales volume of $ 100 million and more, rapid growth of 50% per year over the past three years, expected significant market size and continued growth. Harmful, and in recent years investors have not insisted on this clause. Therefore, venture capital funds are only looking for meteors that flash out of nowhere and reach the stock market in a small number of years, like a meteor. These success stories are well
known In about six years, when they start from a virgin idea? There is an answer, one in ten companies will succeed.
The need for accelerated growth in a short time creates very severe pressures on the company to perform an almost impossible task. To meet the task, the companies raise tens of millions of dollars, like fuel on the fire, which in most cases, will not guarantee a faster exit to the exit. It’s like giving entrepreneurs a new race car and demanding that they get from Jerusalem to Tel Aviv in 15 minutes. There is a high chance that they will crash or collide in one of the rounds. This is one of the main reasons for the failure of 9 out of 10 start-ups.
For investors, a failed portfolio company is an unfortunate but expected mishap. For developers this is not a statistical matter. They only have one company, they have spent years building it, recruiting employees with whom they spend much more hours than with family, and when that fails it is personal, and painful.
It does not have to be this way. Because if we change the company’s goals a little and how it is measured, we can increase the success rates significantly. The main idea is to focus on getting to profitability quickly instead of insisting on increasing sales at any cost. When a company starts making money instead of burning money, it naturally moves from childhood to adulthood. It proves that the product or service it sells is worth more than the cost involved in its manufacture and marketing, that there are enough customers who are willing to pay the full value. The company has learned to manufacture, market, sell and support the product and customers efficiently and profitably. This is now the company’s DNA so it will continue to grow rapidly and produce more and more cash.
A profitable company no longer needs constant breastfeeding, so it is independent and its management can turn its full attention to the market, customers, their needs and new opportunities, instead of spending time in presentations to potential investors. In other words, a profitable company means managerial freedom.
In the following posts we will see what the principles and steps are for building a profitable company and how this can be done step by step with a relatively small investment, what is today called seed financing. In my experience it is possible to build a profitable company that grows quickly within three to four years and with an investment of three to five million dollars.