Why do venture-backed startups fail?

There are plenty of reasons why a well-backed startup can fail. Backing or not, it is easy to fail and not easy to succeed.

Now, having investor backing is good but having money in the bank also helps to make mistakes. Overpaying tools, people, etc.

Also, bad management/governance. We have seen quite a few examples of startup founders burning cash on parties, retreats, perks and else. Meanwhile, with little or no growth and revenue, the pot of gold often drains a lot quicker than you’d think.

When a startup is backed by investors, you have to consider that they either have a compelling offer (even if no product/sales/revenue yet) or actual results.

Money, people, then what?

In the latter case, one can think that the management of the startup has been good so far. But a sudden injection of cash – and the sudden feeling that things may finally be under control – could send the company off track. As previously mentioned, cash binge, too many hires, etc.

In the same context, scaling up is usually a big hurdle for startups. Scaling requires more than money. It requires skills, organisation (and processes) and often puts the culture at risk. A startup culture is easy to keep until you reach about 20 people. Beyond that, the more people come onboard, the harder it is to assess new hires and keep the culture going. Such things can actually damage a startup and kill it, regardless of how well backed it is.

In the case of a company getting backing prior to getting to market (see Magic Leap for instance but also medtech, etc.), the backing may help – or actually be necessary to progress – but it offers no guarantees of good management, of delivery and of sales (and revenue by extent).

A good example lies in some Kickstarter campaigns. Even very well backed (oversubscribed) products end up not being delivered. The problem is not the backing. It is about translating a project or prototype into a real business and product. Founders often fail at it because it is the step where things become a real business.

In the end, being well-backed means not only having money but also the resources needed to succeed or keep succeeding (do not become the Go Pro for instance where innovation catches up and makes you obsolete).

Resources can come in various forms, the tools, the networks and, more importantly, the experience of investors or advisors to help build a sustainable business. Hence, when looking for investment, look at the level of commitment – and expertise – of your investors. Getting a check with enough digits on it is, actually, not enough.

I initially wrote this post as an answer on Quora.

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