Why Most Venture-Backed Startups Fail

The first statistic you need to learn as an entrepreneur is that 90 percent of startups fail.

Ninety percent. 

Eighty percent fail within the first 18 months.

These facts are sort of a badge of pride for many entrepreneurs who are proud of the risk associated with their endeavors. It’s also a way to hedge the emotional risk you're about to take when you start your company. If you make it past the first 18 months, you're meant to feel like you're special or you're doing a good job. And if you fail, you're meant to feel as though that's normal—that it wasn’t you, so much as it was the expected outcome. 

So many founders, including yours truly, are constantly feeling like they’re drowning or trying to gasp for air as they work, especially during those first 18 months. They’re looking for something to rescue them. They believe that getting money is not only validation — because a venture capitalist has anointed you and said that you're on the right path — but it also feels like relief. They believe that an infusion of cash will be their saving grace, and that they will be safe. But that is simply not the case. 

In fact, a lot of times taking on money before you're ready is a way to kill yourself faster than you would if you were tried to for your own profitability very slowly.

While I believe the answer is actually in the middle, if I had to pick an extreme as to whether venture capital is all good or all bad, I'd say it's closer to the “all bad” end of the spectrum. Most of venture capital is highly speculative, and most venture capitalists work by making 60 investments out of a fund. Their plan is for one to three of those investments to return the entire fund while the other invested companies will die. This isn’t just their expectation — this is how they manufacture things. They might oblige you to start a board, and they push companies to grow faster than humanly possible in order to achieve what's called escape velocity. Basically, they want the companies they invest in to try to go to the moon, but when you push something that hard and that fast, most things die in a fiery mess. 

I also think there is an immense amount of pressure that VCs put on companies after they get the money to grow at 25 percent, month over month, and to double their growth every three months. All of this is more harmful than not, and no amount of funding rounds can save the trauma that this causes even the most resilient companies.

Startups that take on too much money too soon fail because they haven't fully worked out the kinks of their business yet. Any little mistake can be quite tremendous, because money magnifies the consequences of those mistakes. It’s like playing golf with a driver when you should focus on using a putter and tapping the ball more closely toward your goal. If you are a couple of degrees off with a driver, which hits the ball with so much force, you can end up hundreds of yards in the wrong direction, and even in the woods or in poison ivy. 

Taking on money is sort of like having a driver in your hands while you're still not very good at golf. You will suddenly find yourself with a lot of power — instead of spending $500 a month on Facebook ads, it's $10,000. Instead of hiring one person who's working below market rate and for equity because they believe in your mission, you're going to hire six people at market rate. Any decision you make, you will make with a lot more confidence and with a lot more power. That might very well be your undoing.

I understand why founders focus so much on sourcing money. Aside from the power and opportunity that so much cash offers, there's a lot of pressure that you get from almost everyone. When I first started The Hub, my family and friends would ask what was going on with the company, and I often felt obliged to have an update that wasn’t static — that we had so many employees, or that we got into an incubator or signed this big client. Those are the headlines that you think people want to hear.

Instead, however, I urge entrepreneurs to focus on functional strength, which is to say business fundamentals. These are certainly less sexy than the headlines, but they are laying a very important foundation for later. You need to find joy and beauty in doing things slowly and doing them the right way. Focusing on lifetime value, or on your email sequences that you send to customers, or getting the copy just right so that your open rates improve won't have any splashy result other than building a really impressive and solid foundation on top of what you can build your kingdom. 

Ideally you just stop caring what other people think and you build your company the way it's meant to be built. But if you can’t turn off the need to impress other people, I’d recommend you think about how big and impressive your company will be in five years if you do the work now. Gary Vaynerchuk says, “he who holds his breath the longest wins.” How can you stay underwater longer and longer and delay the gratification that you so desire and learn to sort of subdue the need for validation? Sit in the uncomfortability, and keep the eventual success in your sight.

Unless you have zero dollars in the bank, and you’re on the brink of failure, money will not solve your problems. It’s worth asking yourself if your issues stem from your id, which is to say that you think your product is perfect and your only problem is people don't know about it. Money might fund advertising or a sales team, but that will not fix your product, which is more than likely the root of your problem.

It's really uncomfortable to have to admit to yourself that your product isn't quite as good as you thought, or that you're not targeting the right customer or that your team isn't the right team. These are really humbling, frustrating things that you have to toil with. It's a lot easier just to be like, “We’re not blowing up yet because I don't have money.” It’s just not statistically the case. No amount of funding can help you build a better team, or perfect your day-to-day strategy. You need to do that work yourself, and because your company is your own, you are the most well-suited to find the solutions to those problems.

So, are you going to find a solution, or are you going to aim for the easy way out?