Fred Wilson, a managing director at New York-based venture capital firm Union Square Ventures, has an insightful post entitled "Why Early Stage Venture Investments Fail." It’s a rare opportunity to get a venture capital investor’s perspective on the reasons startup companies go bust. Fred cites two main reasons:
1) It was a dumb idea and we realized it early on and killed the investment. I’ve only been involved in one investment in this category personally although I’ve lived through a bunch like this over the years in the partnerships I’ve been in.
2) It was a decent idea but directionally incorrect, it was hugely overfunded, the burn rate was taken to levels way beyond reason, and it became impossible to adapt the business in a financially viable manner.
He notes that it’s the second reason — a failure to adapt the business in a way that makes financial sense — that predominates. Fred highlights the danger caused by allowing companies to run with high burn rates, something my own experience teaches is a common affliction of distressed companies, particularly those in the early, developmental stages before they have substantial revenues to offset the burn.
This post followed another in which Fred discussed his overall early stage failure rate. Both make for interesting reading for anyone looking to understand why businesses fail — and how to help them succeed.