Working directly with VCs and venture backed startups, I’m keen on what generally causes startups to fail, and succeed.
The actual failure rate is hotly debated:
Harvard Business School reported the failure rate as high as 90% to 95%.
Inc. reported that as much as 75% of venture backed startups fail.
And more recently, CB Insights tracked over a thousand seed companies and found that roughly 70% fail.
If you research further, there are many definitions of failure. So to help put an end to the debate, I reached out to Matt Murphy, Managing Director at Menlo Ventures:
“Approximately 70% of startups fail. Of the remaining 30%, some will deliver a 3–5x returns, which is considered a very good return. But the VC still needs roughly 5% of their companies to deliver 10 to 100x returns to balance out the losses, and drive significant returns.”
No matter how you slice it, the failure rate is high.
In my experience, venture backed startups typically stumble in two areas:
- Product / Market Fit:
I’m not an expert in this area, and plenty has been written about it. But to help those that need a lesson from one of the best, I interviewed Jim Semick. Jim is the Founder and Chief Strategist at ProductPlan. And one of the best in the game at Product/Market fit.
Jim defines Product/Market Fit as:
“Solving a problem for a set of customers, or a market, in a repeatable way.”
Click HERE to listen to Jim’s interview.
2. Marketing (aka The Growth Engine)
Much of a portfolio company’s early venture capital is spent on building the product, as it should be. However, when it comes time to acquire paying customers, or to scale an existing marketing campaign, they stumble.
Instead of overspending on marketing talent early, they typically hire a very junior marketer, jack-of-all-trades type. They know a little SEM, a little CSS, a little Social, a little WordPress, a little Photoshop…..
They basically execute at the will of the Founders, who also have no idea how to market.
It’s not uncommon to learn that much of their early sales come as the result of their Board, SEM and hand to hand combat in LinkedIN.
But alas! It doesn’t scale. That’s when the marketing alarm goes off.
Now, faced with high growth expectations from the Board, they have no visibility into how they are going to achieve their goals.
The first step is to review their existing systems and analytics. It’s typically a hodgepodge of hacked together tools, but don’t minimize it. It’s what got them on the map in the first place. And in most cases, you can learn a thing or two.
Next, use a third party to conduct a website audit to improve SEO, and a competitive audit for Earned (PR or Branding), Owned (Website, Mobile, Blog), Social, Paid and Search data.
The purpose of the competitive audit is to get a sense of where and how the competitors are investing their marketing dollars, and how their company ranks in comparison. That information can help inform goal setting, future content plans, channels to avoid, etc.
Marry this with internal performance data to make sure they aren’t just making noise; they are turning marketing investment into revenue.
Lastly, make absolutely certain they have kick ass creative. Don’t just hack up some lackluster copy with stock photography and call it a landing page. Make it amazing.
I went on to ask Matt Murphy his opinion about what it takes to be in the top 30%:
“To be in the top 30% requires picking the right market, having the right product, and building a team that can execute and improve itself along the way. A company can fail even if they hit some of those attributes. For example, sometimes a market never develops; sometimes competition kills a market. A product might not work, or not be as differentiated as expected, or not command a high enough price. And finally, some teams just execute better than others. Some teams continue to adjust and add the right members as they go and some don’t. All these things impact being part of the 30%.”
Matt reminded me of something I was taking for granted. Great teams and their ability to execute.
Great teams will chew through concrete to make their company successful. They will adapt, evolve, and pivot fast. Great teams tend to attract great people. So in addition to my top two, I’m adding a third, which is Talent. I touch on it a bit when I reference hiring the best marketer you can find, but it extends well beyond that.
Great talent also comes in all shapes and sizes. Females and males, various ethnicities and geographies, ages, experience and so on. Don’t fall into the the trap that they have to look and sound like Zuckerberg. And don’t be afraid to look outside the Bay Area and New York to find it.
Lastly, don’t just read this article and move on. You can’t optimize or growth hack your way to success. Do the hard work, it will pay off.
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Have questions or comments? Hit me up on Twitter @davidbaeza