I estimate that all but one in five million unfunded startups end up being worth at least $1 billion. For every 1,000 startups that meet with a venture capitalist, only two get funding. And for every funded startup, only one in 10,000 ends up being worth $1 billion.
One thing I learned in researching my book Hungry Start-Up Strategy is that great entrepreneurs are good at identifying and taking steps to minimize risk early. Here are seven common examples of such risks and how great entrepreneurs keep them in check.
That jibes with my experience. The year my first startup was funded by Greylock Management they looked at about 1,000 business plans and funded two companies. Here’s Peter’s 7 reasons with my comments, read the Inc. article for details.
1. FAILURE TO FIND UNSOLVED CUSTOMER PAIN
Too many companies are vitamin pills, nice to have, not pain pills, need to have. Founders often have trouble telling the difference. And just because you find a customer pain point doesn’t mean you have found the solution for it – and can make a profit doing so.
2. RELUCTANCE TO GET FEEDBACK ON PROTOTYPES
I find far too many founders trying to get funding with just a PowerPoint and maybe a demo. They focus way too much on trying to raise capital and not enough on getting to the prototype stage and then getting that prototype in front of customers.
3. NO PASSION FOR THE MARKET
This is part of the entrepreneur wannabe phenomenon: too many people want to be CEOs and founders and not enough people are genuinely passionate about their customers and solving their customers’ problem.
5. IGNORING CASH BURN
Cash is king in startups is a truism and for good reason. Burn rate has to be at the top of every founder’s dashboard. A very cool company called Bridj based in Boston just went under because they ran out of cash – they were depending on raising yet another round to “grow fast” rather than on learning to live on their revenues.
6. INABILITY TO RAISE CAPITAL
This has two dimensions: failure to raise startup capital and failure to raise follow-on rounds, as above. The best way to finance a company is customer revenue. Too many founders I mentor are far more focused on polishing their pitch decks, entering business plan competitions, and trying to raise capital and not focused enough on customer development. Follow on rounds are to drive growth – if you don’t have a sound business plan and customer base you won’t be able to grow and it’s one thing investors are looking for it’s growth.
7. WEAK TEAM, POOR LEADERSHIP
I’m constantly surprised at how opportunistic founders are about building their teams. Too often I see teams made up of people who have met at a business plan competition or some networking event. The founder hasn’t done a national search for world class talent for his startup, he or she has “settled” the worst thing you can do. Virtually every VC I’ve ever met invests in team first, yet too many founders are fixated on product development vs. team development. The most successful teams are built by founders who have known each other a long time and worked together before.
The odds are against you if you are starting a venture. Think long and hard before you do. And realize the difference between three things: a feature, a product, and a company. Which one are you really interested in and capable of building? Investors don’t invest in features or products, they invest in companies.