More than 95% of all startups do not last beyond the 1st few years. Nearly everybody who contemplates starting a venture gets to know of this statistic – through research or through well-wishers.
Given that there usually are well-established players in the market & there is so much chaos in the marketplace, creating sharp cause-effect correlations on success is difficult. The financing available to startups is typically from angel investors, early stage funds & VCs. These investors are also looking to invest in ventures that have exponential returns due to the class of capital they manage. (7-10 years horizon, 25% IRR, 10X returns etc).
So, the structure of the new venture ecosystem forces startups to play on the fringes and try out new models, new products/services for new markets. Failure is intrinsic to this high-risk, high-reward system.
But everybody feels that this statistic does not apply to them, their venture, their product!
The structure, the statistic – and the consequent reality - though does not change just because folks ignore the data.
In the startup scenario, entrepreneurs fail when they give up. Businesses shut down when they run out of cash and the promoters decide to quit.
Theoretically, businesses should shut down because their product/ service does not fit with the market needs.
Some of the failures we see are because of a different reason. Some ventures were started with a “we will change the world overnight” view – and when things take longer or get tougher, many entrepreneurs and investors decide to pull the plug. Phrases like “opportunity cost”, “do not put good money after bad money”, “start another venture if this one does not work out” are heard frequently. In my view, this is a reflection of the entrepreneur’s – and the investor’s – state of mind, timelines they had set for themselves, the amount of pain they were willing to take to make it a success etc. Not a reflection on the inherent viability of the business itself. Many of these businesses shut down because the entrepreneur and the investors were not willing to give it the time required to scale.
Businesses in the Indian market take 10-12 years to establish themselves. Not 3-5 years that is the typical horizon most investors will give an entrepreneur. And due to this structural mis-match, we see businesses being forced to shut down, sell, go for an IPO etc. Running a small – but profitable - business is seen as a failure. Growth is seen as the only panacea.
Many of these are US Silicon Valley, high-technology market-based models that are being forced onto Indian markets – and onto businesses that are anything but high-tech.
The emotional and financial pain that entrepreneurs face due to this can be reduced if the structure of the early-stage ecosystem adapts to the reality of the Indian market i.e. businesses take 10-12 years to mature. There should be 15 year funds if not, ideally, open-ended funds. Not 7-10 year horizons.
In my view, the best way to deal with this is to ensure that as an entrepreneur, you have an open-ended time horizon for the venture. Because good things do take time to make.
Our education system does not prepare us well for handling failure – and there is a tendency in society to confuse “My venture failed” with “I am a failure”. The entrepreneur needs to be clear about the difference and if the immediate friends/family circle reinforces the difference, it definitely helps.
Investors should reset their LP expectations for the longer timelines – and structure their fund tenures and expectations accordingly. The fund management should also understand the time, effort and inherent chaos involved in building a business. We were fortunate to have SeedFund as an early supporter.
The class of capital you choose should be as per the stage of your business. If you are in the exploratory stage, either don’t raise funds – or raise small amounts from friends and family. Once you have identified the space, got an early pilot done – and the model is proven, only then should you involve VCs. Till then, just keep tinkering with the business model, the product lines, service options till you crack the code.
Enjoy the ride!
Given that there usually are well-established players in the market & there is so much chaos in the marketplace, creating sharp cause-effect correlations on success is difficult. The financing available to startups is typically from angel investors, early stage funds & VCs. These investors are also looking to invest in ventures that have exponential returns due to the class of capital they manage. (7-10 years horizon, 25% IRR, 10X returns etc).
So, the structure of the new venture ecosystem forces startups to play on the fringes and try out new models, new products/services for new markets. Failure is intrinsic to this high-risk, high-reward system.
But everybody feels that this statistic does not apply to them, their venture, their product!
The structure, the statistic – and the consequent reality - though does not change just because folks ignore the data.
In the startup scenario, entrepreneurs fail when they give up. Businesses shut down when they run out of cash and the promoters decide to quit.
Theoretically, businesses should shut down because their product/ service does not fit with the market needs.
Some of the failures we see are because of a different reason. Some ventures were started with a “we will change the world overnight” view – and when things take longer or get tougher, many entrepreneurs and investors decide to pull the plug. Phrases like “opportunity cost”, “do not put good money after bad money”, “start another venture if this one does not work out” are heard frequently. In my view, this is a reflection of the entrepreneur’s – and the investor’s – state of mind, timelines they had set for themselves, the amount of pain they were willing to take to make it a success etc. Not a reflection on the inherent viability of the business itself. Many of these businesses shut down because the entrepreneur and the investors were not willing to give it the time required to scale.
Businesses in the Indian market take 10-12 years to establish themselves. Not 3-5 years that is the typical horizon most investors will give an entrepreneur. And due to this structural mis-match, we see businesses being forced to shut down, sell, go for an IPO etc. Running a small – but profitable - business is seen as a failure. Growth is seen as the only panacea.
Many of these are US Silicon Valley, high-technology market-based models that are being forced onto Indian markets – and onto businesses that are anything but high-tech.
The emotional and financial pain that entrepreneurs face due to this can be reduced if the structure of the early-stage ecosystem adapts to the reality of the Indian market i.e. businesses take 10-12 years to mature. There should be 15 year funds if not, ideally, open-ended funds. Not 7-10 year horizons.
In my view, the best way to deal with this is to ensure that as an entrepreneur, you have an open-ended time horizon for the venture. Because good things do take time to make.
Our education system does not prepare us well for handling failure – and there is a tendency in society to confuse “My venture failed” with “I am a failure”. The entrepreneur needs to be clear about the difference and if the immediate friends/family circle reinforces the difference, it definitely helps.
Investors should reset their LP expectations for the longer timelines – and structure their fund tenures and expectations accordingly. The fund management should also understand the time, effort and inherent chaos involved in building a business. We were fortunate to have SeedFund as an early supporter.
The class of capital you choose should be as per the stage of your business. If you are in the exploratory stage, either don’t raise funds – or raise small amounts from friends and family. Once you have identified the space, got an early pilot done – and the model is proven, only then should you involve VCs. Till then, just keep tinkering with the business model, the product lines, service options till you crack the code.
Enjoy the ride!
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