Friday, May 23, 2008

"Why Startups Fail?"... Additional Thoughts

David Feinleib at Mohr Davidow Ventures has a good blog post, "Why Startup Fail?"

Signal & Noice, 37signals' blog, has a response, 'How "Why Startups Fail" Fails' with some good points but seems narrowly focused on software/web2.0 companies. The startup world is far bigger than software.

Here are some additional factors to consider and be aware of:

Breakdown in Team Chemistry. Since the first tech boom, I've seen or heard of many startup failures due to the breakdown of a founding team's chemistry. Ego wars, people not really knowing each other beforehand, greed, and other factors lead to a breakdown in chemistry which leads to a loss of time, resources, and execution ability.

Bad VCs. This happens, but you don't hear about it often since entrepreneurs don't want to burn bridges and venture capitalists hold the upper position. Well, not until The Funded was started and more stories were leaked. Yes, some of those stories are just bitter CEOs that were deservingly ousted or incapable founders that were thrown out, but there are some really useless VCs out there that hinder a startup's growth. Also I am not inferring that the end result always are founders or early employees getting pushed out. Bad VCs can simply lead a company to its death as everyone stays on board.

Don't raise enough capital or lack of capital at the early stage. Paul Graham wrote about this and I followed up on the funding gap that is in the market. After the initial seed capital, some startups really need an additional $300,000 to $2 million to take their company to a tangible level. Not everyone has money from before, a bunch of investment banker friends, or a rich uncle that can pump in a few hundred thousand or a few million to start off a company. I've seen all three of these scenarios happen to start off or save a company, and I run into many companies today that need one of these scenarios.

Also not all startups are software companies. Some are microchip companies, biofuel companies, and hardware component companies. Many of these types of startups take a fair amount of seed capital to just get a prototype created.

Last, some of your competitors have access to a lot of cash and close huge seed rounds (i.e. some startups get seed rounds of $5M+), which can put your company at a disadvantage.

There is no market. This is a reality that some entrepreneurs have to face. There is no market for your product. Just move on and do your next thing.

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