Why Many VC-backed Startups Fail

Blighted Returns?

Getting a business started is never easy. Not only do you need to have a viable and potentially profitable idea, but you need to convince potential investors to invest in the venture.

While venture capitalists (VCs) look forward to good returns on their investments, up to 75% of VC-backed startups fail, and investors find themselves chalking up losses. In some industries, the rate of failure can even be as high as 90%. In other words, VC-backed companies are statistically doomed to fail.

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Possible Reasons for Failure

For many startups, VCs bring in the money they need to move their work forward. These investments are all carefully considered before any contracts are signed.

But what eventually causes VC-backed companies to fail? Studies show that it could be anyone – or even more – of the following reasons:

  1. Total Inexperience on the part of the startup: many entrepreneurs claim that they’ve never failed, but this also means that they haven’t succeeded, either. VC-backed companies that do grow are usually headed by founders who already have viable experience under their belts.
  2. Surplus of leadership, lack of direction: a company may have too many people in charge who may have conflicting directions and priorities. It would be better to have just one person in charge with someone else steering the ship.
  3. Nobody likes a know-it-all: VCs sometimes make suggestions that may have potential long-term benefits for a company. However, some leaders have a fixed notion that they know what they’re doing and refuse to listen or consider prudent advice.
  4. Not knowing who – or what – they’re up against: this particular flaw occurs when a company regards another as competition without looking at other potential red flags in the industry. This closed-minded fixation blindsides a company, preventing it from considering contingency measures to avoid or mitigate failure.
  5. Not learning from previous mistakes: VCs and other advisors can only do so much for a company if its leaders never learn from past mistakes. Related to item #3, this stubborn insistence that one is right – despite obvious evidence to the contrary – is a surefire recipe for a fall.
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