This week I met an entrepreneur who was at a critical point in her journey. I use the word critical on purpose. Her company was about to live or die. Either she will raise more cash (or be acquired) in the next few weeks or she will pack it all in after 3 years of toil with nothing to show for her effort except some wisdom and battle scars.
She's got a great product, the future could be very bright. She's an amazing positive force despite the obvious stress. Circumstances have simply dealt her a bad hand in the last few months and she now needs a little light from lady luck. I will cheer loud and proud if she makes it.
Recently CB Insights published a report entitled "Startup death trends". The headline; "Companies typically die around ~20 months after their last financing round and after having raised $1.3 million". The median time is 16.5 months.
That makes sense. Most investors will put enough money to buy a company enough runway for a year to two years. Enough time to make a step change but not too much to over-invest. After 16 months you're either ruling the world with profits to live on (unlikely) or needing more money (more likely). If you have good indicators that your business model can and will deliver profitability, you have more chance of getting additional funding. If you don't, death looms.
The article is well worth reading if you are thinking of starting a business, investing in or joining a startup.
Startups are massively risky. When I interview someone to join a startup I make it clear... this company is a not yet profitable. We've got a great opportunity (share the vision) but if we don't make, none of will have a job. If you want job security, you won't find it here.
As a follow-up, CB INsights also published "51 Startup Failure Post-Mortems".
A quote stands out for me in particular...
Andy Young from GroupSpaces wrote, "…we most definitely committed the all-too-common sin of premature scaling. Driven by the desire to hit significant numbers to prove the road for future fundraising and encouraged by our great initial traction in the student market, we embarked on significant work developing paid marketing channels and distribution channels that we could use to demonstrate scalable customer acquisition. This all fell flat due to our lack of product/market fit in the new markets, distracted significantly from product work to fix the fit (double fail) and cost a whole bunch of our runway."
This I personally believe is the biggest risk to any tech startup. A startup is a quest to find and prove a viable business model. Unless it's profitable, it's not viable. An entrepreneur therefore has to really think hard about whether adding more cost to their business is going to help them uncover that business model sooner rather than later. The aim should be to get to the viable business model with as little cash as possible.
Once a business model is validated, capital invested is then invested as growth capital. That's a whole different challenge in itself. However, taking lots of capital before the business model is validated and then spending hard basically adds more risk, not less.
The earlier you can prove the business model the better. In simple terms that means having something that customers are willing to pay for and to be able to acquire customers in an efficient way.
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