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Why Do Startups Think Fundraising Equals Success?

Why Do Startups Think Fundraising Equals Success?

Posted on 13 October 2016

The answer may be that almost no scalable startups are actually successful, so people depend on proxies to “grade” themselves.

The best research I’m familiar with looked at 18 million startup companies (including 14 million that have been around for at least six years) and asked the question: how many are successful by Silicon Valley Standards? They defined success as an IPO or acquisition of over $10 Million. Answer: a bit over 5,000, or roughly one in 3,500.

But wait, most new companies are mom and pop stores, the kind of enterprise that never aspires in a Silicon Valley direction. How many of the ones that actually try for that sort of success achieve it?

This is tougher to answer, because you can’t know what’s in an entrepreneur’s mind, and because some companies (e.g. Ben and Jerry’s) that didn’t start out in that direction get there anyway. The authors looked for indicators of companies that were trying to achieve this sort of success, and found 10 that had some correlation - incorporated as a C Corp, founder’s name not in the title, and so on. These things are debatable, but the general conclusion was that about 1.5% of the ones that aspire to Google, Facebook, Microsoft status, actually get any success.

So when you go to an accelerator, or a demo day, or just sit at a Starbucks, and talk to someone about their great disruptive startup, at least 98.5 out of 100 of those people are shortly going to fail.

But meanwhile, they’re living the startup lifestyle._ They’re agilely programming and lean startuping and getting out of the building and so on. How do they do it?

Funding! When a company is a real company, it has a reciprocal relationship with customers. There are people who buy their products to go about their lives, in the same way that they walk through doors to go into buildings. The people in the company spend their days making the products available to these folks, and receive money for it. The reciprocal relationship is self perpetuating, and enables the company to exist. In other words, real companies are part of the economic ecosystem. Startups don’t have real customers. The people they’re pleased to call “customers” have never heard of them and wouldn’t care if they did. Maybe they clicked on something, or expressed excitement over coffee, that’s about it.

But startups do have their own ecosystem. It includes more than accelerators and incubators. It also includes professional money managers who have been hired for the job of deploying their limited’s capital, and “angel” investors who have extra money and some reason to want to be along on the ride. When startups can’t get access to money from those sources, they at least have their parents, their savings, or their credit cards to fall back on. So money gets injected into the startup ecosystem in the form of investment.

The result is that startups get to dress up and look like companies - with offices and people and laptops and telephones ringing and TechCrunch. They’re actually toy companies, like puppets being manipulated on investor strings. Sometimes it’s easy to suspend disbelief and imagine the puppet is alive. That’s success in the startup world, and that’s where the idea that startup success equals fundraising comes from.

Once in a while these toy startups (maybe about 1.5% of them) evolve like Cabrian fish making there way onto land, and join the real economic ecosystem.

Many of those lucky few then look around and say “Damn, I shouldn’t have sold off all my equity back in toy land.” But that’s the way it goes.