As with any great venture, new founders often enter the playing field with wide, optimistic eyes, and a singular goal to change their industry. However, eventually, reality begins to set in, (as it always does), and suddenly the landscape of opportunity feels much smaller than it once did. The reason why 92 percent of startups fail before three years is not because of lack of motivation or persistence -- or even for a lack of hard work, it's because eventually, the unrealistic expectations can start to destroy companies -- whether it's funding woes based on limited perceived options, overestimating the market size, or that dreaded -- and very lethal -- premature scaling trap. In order for a company to survive, they first must make all approaches cautiously, think objectively about their goals, and consider the odds. A lot of heartbreak can be avoided by keeping these four expectations in check.
Venture capital is not the only way to make money
It has become a common expectation that once a startup begins to gain traction, it has been able to put out a solid product, has found a large audience, or has otherwise proven that they have potential, and they should begin to aggressively look for venture capital. This misconception is so widespread that many new entrepreneurs believe that this is the only way to make it big as a startup. However, what is rarely talked about is that VC's only invest about 1-2 percent of the businesses they see; and 97 percent of the ventures they back are already in late stage. In this hugely competitive market, many new companies cannot afford to waste time and money going to expensive tech and VC conferences with nothing but the sliver of hope that an investor might contribute to their cause. There are many other available, more reliable funding options - some which don't involve giving up significant amounts of control of the company. Depending on the type of startup that is trying to get money beyond seed funding, there are government grants, crowdfunding, bootstrapping (the least expensive route), and other types of private equity.
It will take years to get funded
If a startup has weighed their options and has decided that VC is the best way forward, what often happens is that they underestimate the amount of time it takes to secure funding. Typically, a venture capitalist invests in later stages of a company. There are major milestones to be considered which the company has to prove to the venture capitalist before they invest. The company demonstrates that they've gathered a good team, they have developed at least a working prototype, have collected a solid base of users and clients, and that there is a market for the company's product or service. However, getting to these milestones takes time and money -- and sometimes it takes years to get to Series A. A company won't likely get a large sum right off the bat, and then with each milestone, they may have to keep going after funding. All in all, the process of securing money is often very long, and very time consuming (unless your company's name is Instagram.)
Avoid going too big too fast
Just as in life, there are moments when an entrepreneur has hit a milestone and finds themselves funded. The entrepreneur gets very excited, decides to accelerate, and believes that the reasonable next step is to scale up. This is a trap that befalls 70 percent of companies, and is responsible for 74 percent of tech startup failures -- often because they don't realize the problem before it's too late. There's nothing wrong with hiring, or putting some extra cash into marketing, but these expenditures can snowball into an unmanageable situation -- like having too many employees, (which is like dousing gasoline over your burn rate), or it's like throwing a ton of money into user acquisition without a working product. In fact, the Startup Genome Report reveals that 90 percent of startups fail due to "self-destruction rather than competition." One way to avoid this pitfall is by ignoring early adopters and scaling, and focus on the customer and the market that the company is after. The company will then make major or minor adjustments to suit the market, based on customer feedback, market shifts, and technological innovations. In fact, the Startup Genome Report study showed that companies that pivot once or twice in their early stages raise 2.5 times more money, and experience 3.6 times better user growth.
Keep market size in check
As the leader of a new company, it's very easy and simple to get swept away by dreams of the possibility of your company. Often, investors and mentors will hear pitches from entrepreneurs, promising that their market includes anyone who has a computer, or a mobile phone, or shares a particular hobby. Of course, it is easily understandable why a founder believes that her product is going to revolutionize/disrupt their industry. As a result, founders overestimate the products' market value all the time. However, all too often, this optimism turns into wild naivety, and an indication that not enough research and realistic thought has been put into their valuation. Before trying to calculate possible revenue and market value, it's important to get at least an idea of something called, TAM SAM SOM: Total Available Market (the money generated by the segment of the market you wish to occupy); Serviceable Available Market (your value within that market); and Serviceable Obtainable Market (the portion of SAM that you can realistically capture). Not only will investors be able to assess the market with better accuracy, you will find a realistic goal to meet.