The Startup Death: The Reason Startups Are So Hard to Well... Start
Many venture companies fail. Perhaps we could argue that this is because they’re started by people who aren’t yet experienced in the business world, but with a mere 6% of venture companies producing over 60% of venture capital, it’s actually likely that even seasoned business people struggle with their startups. The reason for this, it seems, is that the very nature of venture capital is, at the very least, tumultuous for the first 2-3 years of a company’s life.
What is a startup?
Oftentimes when we think of startups, we think of companies that are started by young, inexperienced people who are fresh out of college or university. In reality, though, the only requirements there are for something to be considered a “startup” are a problem without an obvious solution and no actual guarantee of success.
More recently, many people have begun to equate startups with tech companies, but while there is adequate evidence to agree with this assumption, it’s not strictly true. For the most part, startups just hope to be able to make an impact on the world. They can be tech, companies, yes, such as apps that allow you to learn hundreds of languages with the help of a murderous green owl, but they can also be things like a company that ships barbeque sauce out a Kansas City.
Most startups begin on a piece of paper and build their revenue from there--and they do this, at first, with the help of investors. Investors give startups the funds to produce their services so that they can then be presented to the general public and hopefully be accepted as something that can positively impact customers’ lives. As their brands grow and the services they provide become more and more available, they are then able to start making their own revenue--which goes back into investors’ pockets.
The longevity of startups is probably the most widely debated thing about their existence. Some say that a startup can only be a startup for the first 2-3 years, but others say that a startup is a startup for as long as it takes for them to finish their first major growth spurt. Because startups are all about growth, they really can’t exit those puberty years of their existence until they’ve managed a successful growth curve in their revenue.
What Venture Capital Is
Venture capital is, at its core, simply the revenue that startup company makes over time. That being said, venture capital isn’t made up of a simple formula. In most cases, there are specific stages that every startup company’s venture capital will go through, but the pace at which the capital grows, as well as how long it takes for that capital to grow cannot be predicted.
The earliest stage of venture capital is usually referred to as the “seed stage.” In this stage, investors give money to a startup in the hopes of helping to get it off the ground. Startups usually use this money to build prototypes that they can then test on people to assess how successful their product or service is actually going to be when it’s put out into the real world. If their prototype is successful, they can usually move into the second stage of venture capital.
The second stage is typically called the “early stage.” During the early stage, a startup has more than likely already proven that its idea can be successful, if nurtured properly. This usually brings in more investors, which then help them to work on marketing their product or service to a wider audience and boost their sales.
The third and final stage is known as the “growth stage.” If a company makes it to the growth stage, it usually means that they have been pretty successful in their marketing campaign and are now doing exactly what they need to be doing to make it out of the startup phase of their business. Their business should be thriving at this point--a hot commodity for anyone who comes across it.
What Makes Venture Capital Difficult to Implement
In most cases, venture capital is going to be the most effective way for a startup to grow with the least amount of, well, growing pains. Finding the venture capital financing your startup needs, however, is still much easier said than done, and it will likely be much more time consuming that you might have originally anticipated.
The Elevator Pitch
In order to get investors to really look at what your startup can offer, you’re going to have to perfect the elevator pitch. If an investor is going to give you money, they’re going to want to know what exactly it is that they’re investing in--and you’re going to have to convince them pretty quickly. The elevator pitch, typically something around 30 seconds that you would be able to pitch over the course of an elevator ride, is the best way to reach them.
The Term Sheet
Anytime you take up business with someone who’s going to help finance the very basis of your revenue growth, there’s going to be a lot of paperwork involved. The first of this is going to be a term sheet, and it’s probably going to be the most time-consuming part of making sure you get the financing you need for a successful company.
The term sheet will be drafted by venture capital firm that will be aiding you in your business endeavors. It will cover all of the important things you’ll need to know about how the financing of your venture capital is going to take place, such as the kinds of economic factors that will affect the value of the company, control of the investors, and the post-closing rights of investors.
The term sheet will also usually tell you that it isn’t actually binding. It’s kind of like a pre-contract, something that you’ll be able to negotiate the terms of based on how beneficial the terms the firm has laid out will be for your company in the long-run. Only once you’ve negotiated all of the terms can you move onto drafting a contract and signing it.
The Math of Venture Capital
Success is the main goal of any startup, but successful venture capital is difficult to come by--which can in turn make the success of the companies more difficult. According to some data that was collected on startups in 2018, with the acception of those investments that yielded a failed startup, most startup investments come back with a fairly equal mix of both failed and moderately successful returns. The startups with the greatest funds, however, yield around 90% of the total returns.
The J-Curve is essentially the basic pattern by which most startups can expect to go through financially when they begin using venture capital as a means of financing their business. Funnily, the J doesn’t actually represent anything other than the vaguely J-shape of the performance curve that startups should see over the course of their businesses.
The curve starts at zero. In most cases, a startup will actually see a loss in their investment returns for the first few years that the business is up and running. This loss can be attributed to something along the lines of startups being like an “early spring.”
If spring comes early, the strawberries out in a farmer’s field are going to be ripe earlier than normal. If the strawberries are ripe too early, no one will actually be interested in picking them until they’ve already begun to rot for the year. No one’s ready to pick strawberries that early in the year, so they simply don’t.
A startup works in a similar way. Startups are, at their core, all about innovation. But that means that they’re generally something that has never been done before--and people are far less likely to jump on board with something that’s never been done before, especially when there’s no guarantee that it will eventually work out in their favor.
So, startup companies’ finances turn up losses for the first few years. Afterwards, though, when spring has continuously come early for a few years and people are beginning to catch on that this might be the way things will be for the foreseeable future, returns will start to rise. And when they start rising, they rise substantially.
The main reason some startups fail is because the people who start them underestimate just how much time and effort they will have to put in before they really start to see the money they need. A successful startup is all about smooth talking and perseverance.