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?