Background
In early 2015, Neil Patel wrote an article in Forbes titled “90% Of Startups Fail: Here’s What You Need To Know About The 10%“. The article was very eye catching and highlighted many issues that contributed to the failure, including challenges with founders, teams, scalability, customer problems, product issues and so on. Thereafter many brave founders, investors, management gurus have penned their opinions and experiences via thousands of books and articles on this subject matter. A recent article by Tom Eisenmann in Harvard Business Review (HBR) titled “Why Start-ups Fail“ tried to tackle the challenge of addressing the reasons for this failure! Again the same usual suspects pop up; an idea that was not ready, founder who didn’t validate the product, a team that couldn’t scale or wasn’t technical enough and so on. Rarely do any of the articles discuss the ecosystem that seems to be encouraging 90% failure rate nor providing insights as to how the situation can be improved. In this article, we try to discover together what is really going on behind the scenes of this stranger than fiction Start-up ecosystem and why it could be the real reason for many of the failures.
Why do people get into a Start-up?
Having been an Angel investor and also a founder of a tech consulting company, the ecosystem of Startups has been an intriguing world for many years. Why does one truly jump into becoming a founder or investor for a Start-up in the first place? Here are a few reasons: The rush of seeing a new idea come to life, taking a risk and winning, the ability to raise money to make that idea a reality to solve a real world problem, being one’s own boss and not having to worry about life sucking corporate life, becoming rich & powerful beyond what a career could offer, being famous, being satisfied that one has solved a real world problem and being part of an elite culture of super successful drop-out founders and so on!
At the same time there are many reasons one tends to overlook while jumping into a startup, the major one being not having enough fear of failure. Most founders are eternal optimists who are convinced that they can overcome any problem that may arise. There are some real life scenarios that one has to have the maturity and fortitude to face which most likely have not been described to both investors and founders. Some of those very possible experiences are: No real product after months of waiting, Watching a team fall apart, invested money disappearing in a few months, no real customers using the product, customers not satisfied, investors fighting amongst themselves to control the destiny of the product, investors too blind to realize that they have backed the wrong idea or team, investors trying to figure out a legal recourse to recover their lost money, founders obfuscating the truth from investors, customers and teams (sometimes this is called “Fake it Till you Make it” syndrome).
All though, such challenges are also found in larger corporations, most of those somehow manage to survive and grow (at least longer than a Start-up). So what makes the Start-up any different? Is it just the matter of size and scale or is there something more unique about the Start-up ecosystem?
Who really are the players in a Start-up ?
Before we jump to analyzing the ecosystem, we must familiarize ourselves with few key players in the Start-up word. If I can gamify this a bit, almost every Start-up has the same type of players. They may have fancy titles but what they really do is quite different.
- Founder: Has many ideas but not much money but has the innocence and guts to start something, takes rejection very well, convinces a few trusting others to join but wants to remain their boss
- Founding team: A group of people who put their own time and money to make the idea into reality, not necessarily having complementary skills as a team, naively hope that the founder doesn’t screw them off their share when they make it big
- Angel Investor: Has decent savings but always looking to bet it on others’ ideas, becomes like a parental figure to the team, often funding their failures, also convinces others to risk their money
- Venture Capitalist: Has lots of money, wants more money but has hardly any ideas how to, highly temperamental, short term player
- Seed X funders: Ponzy scheme believers who payoff or buy some portion of the VC’s from Seed (X-1) round but at a higher price, awaits IPO round to cash in on the dream
- Corporate investor: Usually a company that has been unable to produce or develop the idea in spite of all the money. Wants to take control of the Start-up to kill the idea or absorb parts of the idea, or steal the team
- Retail investor: Has no ideas, hardly has some savings, does little or no research, highly gullible to marketing promises, wants to become rich by buying a risky IPO than buying a well established stock, has a boring job but cannot quit the job but likes to take small risks (like IPO investment)
- IPO investors: Mostly retail investors (see above), who help VC’s achieve their risk profiteering goals, while absorb all the unmentioned risks of the company thus socialize company losses to themselves
- Stock exchange agent: Commission earner who provides a platform that allows all these actors to play the game
- Auditor: Provider of legal cover for allowing the game to happen
Now that you are familiar with the players, we can look at the Eco-system a bit
What does the ecosystem of Start-ups look like?
In the next part of this blog, we will jump right into the under belly of the chaotic ecosystem of the the Start-up world! Hang in there.
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