TL;DR (Too Long; Didn’t Read — for the lazy)
First in a series of articles. In this article, I write about the unacceptable rate of failure. If you have a solid invention that you worked hard to pitch — your chances of getting it funded are 1 in 30; chances of not failing: 1 in 400; chances of moderate success 1 in 1000. Investors have a 92% chance of losing their investment; their chances of making a return that justifies this risk…none. The numbers are bad, and they have nothing to do with the actual invention, the market, or the selection process. It’s avoidable. We can do better.
We’re on a road to nowhere.
I’m having a bad day.
I mean, I spent the better part of the past 20 years as an innovation professional, working with some of the world’s biggest and most successful brands, as well as with hundreds of cool tech startups. I set up my own startup, set on countless advisory boards, judged at competitions, gave hundreds of talks, and wrote God-knows how many papers on innovation. And yet, I, the Innovation Ecosystem proverbial poster-boy, am standing here before you and saying it out loud — the innovation ecosystem sucks!
I understand that I am rapidly losing readers. It’s not a very popular position to have. So, this is for you — the brave-enough-to-hear-me-out-and-consider-my-case. Also, know this, I have not given up. I’m an optimist and I have ideas of how to fix things. However, if things stay as they are today, we’re, as David Byrne once wrote, “on a road to nowhere”.
The Uncomfortable Secret
Here are the facts (see references at the end [1,2,3,4]):
- Only 3% of startup pitches result in funding.
- 1 in 400 ventures or 8% of funded startups will make a return higher than zero.
- How many get rich? Well, around two-thirds of exits don’t make it to Round-C and 83% do not make it to round-D with their respective valuations not even close to justifying the investors’ risk, nor the founders’ sacrifices.
But wait, it’s not really 1 in 400. Right? I mean, some inventions are simply bad, and maybe eliminating them is good.
I don’t think so.
Most seed/pre-seed pitches are based on solid inventions!
Anyone who’s ever asked to set-up a meeting with an investor knows, they are busy people. They ask for a deck/one-pager in advance. They routinely do basic sanity-checks beforehand to see if there’s potential. And the people pitching — the innovators — most of them invest hundreds and thousands of hours before pitching. Months of work on the technology, the story, the strategy, and business model, etc. The reality is that most of the people pitching to investors are not clueless, and they have checked enough to know that their invention solves a problem, better than what already exists and that there’s a good reason to think that it is viable from both the technical and commercial perspective. I have spent the past 10 years working on these exact issues with hundreds of early-stage innovators.
Buy junk online — no problem…but startup innovation? Never!
It doesn’t matter if it’s B2B or B2C. People make adoption decisions in very similar ways (even if you are sure that’s not true — it is. Maybe I’ll publish something to support that later). And these decisions sometimes mean that we buy stuff that is…well…subpar. We do it because great salespeople and marketers do amazing work because well-oiled logistical chains make it commercially viable. And yet, when startups fail — the same startups that went through due diligence before being funded; that studied the market and exposed the need, the competition, and the commercial niche — we have no problem saying: “well, innovation…it’s a risky business”. What does that mean?
Maybe investors are just bad at picking the right innovations
I used to say that. And I still think there are better more imaginative people that I would put in charge of selecting which innovation to support, but that’s not the point. If you agree with the point I made above, you’ll understand that with a professional commercial development pipeline you don’t need to have that special “magical” idea/invention. You can commercialize average ideas successfully. If you weed out pitches that are disconnected from reality, and you apply best practices to all the rest, most of them should definitely not lose money (you see — this is the benchmark we got used to…), and who knows maybe most of them will actually make money. It doesn’t have to be a billion-dollar — but if someone promised me that I would invest 1 million dollars and in 2–3 years there’s a 90% chance my investment will yield a company that is worth 50 million, I, and all other sane investors would fight for the opportunity to invest.
Here are the points I am making:
- Most early-stage pre-funding startups are actually solid ideas that have a very good chance of succeeding — if one is willing to accept that a 50–100-million-dollar company is a success.
- Startups are bad at developing and commercializing innovation — and that is even clearer when we see how established companies do that so much better
- It’s not about selecting that magical idea — it’s about making sure that it’s good enough and then doing proper work
In short, the reason only 1 in 1000 startups end up creating enough value to justify the effort has almost nothing to do with the content of the pitch, the invention itself, or the market.
Investors are right to reject 97% of pitches.
Rejecting 97% of pitches is not the reason for startup failure — it is the result. With the odds stacked so severely against their investment, investors are right to be cautious. I personally think that they could just as well flip a coin. But I understand why they are worried. Investors know the odds. They know that once they invest there’s a ~90% chance of them losing the investment and only a 1–3% chance they will make a significant return. That’s a tough bet — it would make anyone think twice. That’s also why they keep dropping the bottom performers during the investment rounds. At this point, they are too deep in and they need a big-ticket exit to make up for these terrible odds. That makes sense. And yes, most startups underdeliver. They burn money too fast, they make avoidable mistakes, they are late to their milestones, sluggish to adapt or pivot and they are notoriously difficult to control.
It ain’t good
Now you see that arguing about the numbers doesn’t really matter. Even if you challenge the odds I stated, and you can, there are many arguments to be made, the result is bad. If we say 1 in 200 instead of 1 in 400. It’s still horrible. People spend months of their lives, developing a new venture, investing their own money, debt, and alternative income, investors risk capital, all for a 1 in 200 chance…not to get rich — to not lose all of it…If making a big-ticket Exit is what they want, they are looking at ~1 in 1000 (or 1 in 2000).
Why are things so bad?
I hinted…but I am out of time. Tmrw
As I said…this is the first in a series of articles. I have said things here that are debatable. I have not shared all of my research or supporting evidence — because it is a bit overwhelming. So, I expect that some people will have things to say and try to challenge some of the ideas I present. I say — have at it — I’m ready and I want to have the opportunity to have a discussion about it. Prove me, wrong people — let’s dance.
Also, I too am in need of attention and it would go a long way if you share, like, retweet, copy, steal, etc…. don't be selfish ;)
 According to a paper from 2011, “The Consequences of Entrepreneurial Finance: Evidence from Angel Financings”, by William R. Kerr and Josh Lerner from Harvard, and Antoinette Schoar from MIT, Angel invest in little under 3% of the startups they meet (there is a reasonable assumption that access is not a serious problem). There’s little reason to think that things changed dramatically in the past 10 years. There’s also good reason to think that VCs tend to be more selective and will therefore invest in fewer of the startups they see.
 VCs are a lot more selective. According to the Entrepreneur (that cites the following sources: Center for Venture Research, US Small Business Administration, Angel Resource Institution and Angel Capital Education Foundation), Angles invest 16 times more than VCs. Therefore, adding the VCs to the mix has a marginal effect on the numbers.
 Let’s assume a cohort of 10,000 startup pitches (This only includes the ones that passed a basic sanity check and were able to present to investors) this is how many of them get funding and/or exit.
· Seed/pre-seed Funding: ~3% (=300).
· Series A: ~20% of them (=62) / ~3% (=9) exit.
· Series B: ~50% of them (=31) / ~11% (=7) exit.
· Series C: ~44% of them (=13.5) / ~16% (=5) exit.
· Series D: ~38% of them (=5.2) / ~19% (=2.6) exit.
· Series E: ~33.5% of them (=1.7) / ~22% (=1.1) exit.
· Series F: ~31% of them (=0.53) / ~22% (=0.45) exit.
· Series G: ~25% of them (=0.13) / ~22% (=0.14) exit.
· Series H: ~17.5% of them (=0.02) / ~22% (=0.04) exit.