Most of you who have read my previous posts on building startups know that I'm a big fan of avoiding outside funding, and especially venture capital funding for as long as possible. In particular, I've said that if your goal is to build a sustainable business with measureable value, you should bootstrap your startup. On the other hand, I've also said that if your goal is to get rich quick, you might consider building a prototype, getting funding, and swinging for the fences.
I've suggested that with this latter strategy, you have a high chance of failure, but that if you win, you win big. It appears I was wrong. Worse, I suggested that you can pursue this strategy as long as you're prepared to dust yourself off and try again and again until you succeed. I may have been wrong there too.
I recently ran across an article in Business Insider called Why it's Better to sell a Startup for $20 Million instead of $200 Million. The article gives several excellent examples of multi-hundred million dollar company sales that netted their VC-backed founders less than sales of much smaller companies with non-VC-backed founders. It also gives some examples of how VC liquidation preferences (what I have previously called 'the double dips'), have resulted in sales of businesses where the investors received good returns, but the founders received little or nothing. And, it made the claim that most entrepreneurs who fail, don't succeed in their next attempts.
That last statement shocked me. Like every other entrepreneur I know, we believe that we learn from our failures and do better the next time. I decided to do some more research. If what this article says is true, then the chances of finding success in going the VC route is even lower than I thought.
Not surprisingly, my research confirmed what most of us have heard: 50% of all businesses fail within the first year and 80+% fail within the first five years. The scarier number is that whether from discouragement, loss of credibility, lack of financial wherewithal, or other reasons, a HUGE 71% of entrepreneurs who fail never try to start another business. And worse, of those that do try again, the failure rates are identical. That means that contrary to popular myth, failure does not lead to success for most of us. Yes, a small percentage of us (4-5%) learn enough from a failure to do better the second time, but for most of us, we'd be better off seeking full time employment, not attempting to create another startup.
Given these discouraging numbers, I wondered if VC backed numbers were any better. I found Harvard and European Union studies of several thousand venture backed businesses and discovered that in both studies, the VC numbers for people who failed and tried again were identical to those above. On the other hand, those who succeed in a VC-backed company had a 50% greater chance of succeeding again.
Of course, according to the Small Business Administration, nearly 600,000 businesses are started annually and of these, only 300 or so are VC-backed at startup. Even if you want to join the rarified group of VC-backed entrepreneurs that have a chance at repeat successes, you're going to need to bootstrap your first business and seek VC-monies at a later stage.
Bottom line: if you have a 71% chance that this startup is going to be your one and only, and you're likely to make more money in less time if you bootstrap a sustainable business, why bother with VC money if you can avoid it? You conceive your business, you take the risk, you work to create a success, so you and your team deserve the rewards, not the VCs.
I've suggested that with this latter strategy, you have a high chance of failure, but that if you win, you win big. It appears I was wrong. Worse, I suggested that you can pursue this strategy as long as you're prepared to dust yourself off and try again and again until you succeed. I may have been wrong there too.
I recently ran across an article in Business Insider called Why it's Better to sell a Startup for $20 Million instead of $200 Million. The article gives several excellent examples of multi-hundred million dollar company sales that netted their VC-backed founders less than sales of much smaller companies with non-VC-backed founders. It also gives some examples of how VC liquidation preferences (what I have previously called 'the double dips'), have resulted in sales of businesses where the investors received good returns, but the founders received little or nothing. And, it made the claim that most entrepreneurs who fail, don't succeed in their next attempts.
That last statement shocked me. Like every other entrepreneur I know, we believe that we learn from our failures and do better the next time. I decided to do some more research. If what this article says is true, then the chances of finding success in going the VC route is even lower than I thought.
Not surprisingly, my research confirmed what most of us have heard: 50% of all businesses fail within the first year and 80+% fail within the first five years. The scarier number is that whether from discouragement, loss of credibility, lack of financial wherewithal, or other reasons, a HUGE 71% of entrepreneurs who fail never try to start another business. And worse, of those that do try again, the failure rates are identical. That means that contrary to popular myth, failure does not lead to success for most of us. Yes, a small percentage of us (4-5%) learn enough from a failure to do better the second time, but for most of us, we'd be better off seeking full time employment, not attempting to create another startup.
Given these discouraging numbers, I wondered if VC backed numbers were any better. I found Harvard and European Union studies of several thousand venture backed businesses and discovered that in both studies, the VC numbers for people who failed and tried again were identical to those above. On the other hand, those who succeed in a VC-backed company had a 50% greater chance of succeeding again.
Of course, according to the Small Business Administration, nearly 600,000 businesses are started annually and of these, only 300 or so are VC-backed at startup. Even if you want to join the rarified group of VC-backed entrepreneurs that have a chance at repeat successes, you're going to need to bootstrap your first business and seek VC-monies at a later stage.
Bottom line: if you have a 71% chance that this startup is going to be your one and only, and you're likely to make more money in less time if you bootstrap a sustainable business, why bother with VC money if you can avoid it? You conceive your business, you take the risk, you work to create a success, so you and your team deserve the rewards, not the VCs.
RSS Feed