Last week I was talking to an entrepreneur that had sold his company and was starting to do some angel investing. I cautioned him that angel investing should be viewed as charity and that the vast majority of angel investors don’t make any money, even if they invest in a reasonably large number of startups (> 20). Angel investing is fun and stimulating, but outside limited markets and exclusive deal flow, isn’t a way to make decent returns, let alone beat the public markets.
After hearing this, he asked why we don’t have more startup success stories. Here are a few thoughts:
- Low Odds – Less than .02% of venture-backed startups ever sell for $100 million or more. This is for startups that raise institutional capital, which has a bar that’s 100x higher than raising angel capital, and even then only 20 in 1,000 sell for a meaningful amount.
- Competitive Markets – Markets are brutally competitive. Every good idea already has 10 competitors easily findable on Google. Pricing, sales cycle, etc. are all impacted by competition.
- Challenging Customer Acquisition – With so many vendors chasing the same number of potential customers, customer acquisition becomes more difficult and costly. The number one reason startups fail is that they run out of money and the second reason is that they can’t sign up customers in a scalable and profitable manner. Customer acquisition is challenging.
What’s the solution to more startup successes? More startups. More tries. More entrepreneurs taking a chance. The goal: more startups with 10 unaffiliated customers. More micro success stories leads to more modest success stories. More modest success stories leads to more major success stories.
To have more startup success stories we need to start with many more startups.
What else? What are some more thoughts are why there aren’t more startup success stories?
5 thoughts on “Why Not More Startup Success Stories”
lacking in good mentor relationships
afraid to seeking help
lack of focus
not thinking big enough
The leaders are too busy traveling and seeking capital vs. building a great business. Our current culture rewards fund raises vs. real growth. Too much focus on flash of the pitch vs. substance of the business.
Finally, one of the biggest reasons is lack of diversity. Culture fit sometimes susses out skilled performers who think differently. Culture is important but only when it is pushing performance
more successful startups will also develop a sense of faith in customers to give chance to upcoming ideas.
David, I’d be curious to hear your thoughts on this potential new twist on Startup Funding / Angel Investing (and the effect it could theoretically have on the availability of startup funding in cities like Atlanta)…
THE “MAGICAL 10% THEORY” – The key premise is that adding an additional 10% on any given round of funding would almost NEVER be a deal-breaker for an investor at ANY funding level. (The difference between investing $100k and $110k? The difference between $2 million and $2.2 million? If you’re comfortable with the investment level of the former (x), then the latter (1.1x) really isn’t likely to change anything.) HOWEVER, the dollars that comprise that “insignificant 10%” will simultaneously (almost “magically”) represent a HUGE (game-changing!) percentage of the PREVIOUS round – as a payback / payout / reward / “thank you” payment to PREVIOUS round investor(s)…
Investing (in Idea Stage and/or Seed Stage startups) would become SIGNIFICANTLY more appealing if investors knew that their investment/risk would be rewarded by receiving that “Magical 10%” from the NEXT round of funding (making them whole or closer to whole, while still maintaining their upside/equity). It would:
– increase the likelihood of an investment “win” (because, in addition to still betting on the ultimate success of the company (a normal investment), they’re now also investing in (betting on) the ability of the startup to simply make it to the next/larger round of funding – a much more frequently attained milestone).
– it would put more money back in the pockets of more seed-stage investors (much sooner), thus making more funding available to additional startups in a given startup community
– and I believe all of that could be accomplished with MINIMAL effect on investors of subsequent rounds – because, as already mentioned, that additional 10% is relatively insignificant at the higher investment level / higher valuation …
…I’m NOT saying it would be easy to start this movement; but if, If, *IF* it could somehow (magically?) become a standard practice (perhaps championed by well-respected members of a given startup community like Atlanta), I really believe this “Magical 10% Movement” could have a magical (game-changing!) ripple effect on Startup Investing across the board!!!
Interested to hear any thoughts/feedback (positive or negative)
– Jeff Goldblatt, http://www.StartupWhatever.com
That’d be great for the reasons you cited especially recycling more capital into the seed stage investors in the ecosystem.