Why Most Tech Startups Fail

Silicon Valley columnist Tom Foremski makes a good point:  Steve Jobs would probably not get funded today because angels and VCs prefer to invest in engineers. http://www.zdnet.com/blog/foremski/if-steve-jobs-were-starting-out-today-he-would-struggle-to-get-funding-hes-a-marketeer-not-an-engineer/2010

The irony is that 80% to 90% of VC-funded startups usually fail, while demand-driven startups like Dell and AOL tend to have a much higher survival rate often approaching 70% to 80% because they actually have customers.   If that’s the case, why do Silicon Valley investors persist in investing in engineer-led startups?   Here are some reasons that I’ve noticed having worked in Silicon Valley over the past few decades as a market researcher, corporate strategist, and serial entrepreneur with 7 startups under my belt:

– Many angels and VCs are successful engineers and programmers so they naturally prefer to fund people like themselves.  They tend to see marketing as all “smoke and mirrors” without any substance.  The problem with this tech-push approach is that their startups often end up developing cool “technologies in search of a solution.”  They run out of money because the engineers want to develop the latest and greatest technologies — basically get funded to run a lab — not create something useful for customers or a real business with paying customers.

– VCs and lawyers insist on patentable intellectual property (IP), which is usually software, circuit logic, network architecture or a device, so they can sleep soundly at night.  The problem is that most startups can’t fight the long legal battles against large corporations that violate their patents.  Even if they try, the lawsuit puts a cloud over the startup, scaring away other investors.  Thus, the only real solution is to move and innovate faster than larger competitors, even if you file a patent.  Or, better yet, invest in market-driven startups.

– It’s easier to estimate comparable valuations for startups with tangible patents than those with intangible marketing, sales and business development genius, even if a startup has a Steve Jobs.  The only way to value marketing genius is sales, but that’s after the fact.  Most sales projections are overly optimistic and worthless, thus the reliance on patents, costs and other more measurable indicators.

So, to sleep well at night, investors and engineers continue to discount the Steve Jobs of the world, which accounts for the high failure rate in Silicon Valley.  It’s rather absurd, like asking Toyota engineers to market their cars globally when they have no clue about marketing and sales.  That’s what really puzzles me about Silicon Valley.  Why do really smart people continue to do really dumb things?  VCs say they spread the risk by betting on many startups, knowing only 10% will profit, but that’s like saying a Toyota engineer starting and marketing a company has a 10% chance of selling his/her cars worldwide. The basic business model is faulty.

Hopefully, the social media startups will fare better, using less money and relying more on customer needs, business development, marketing and sales strategies than just cool technologies.  But their problem is too many copycats doing the same thing.  They need to innovate more in their marketing and sales strategies, not just follow the leaders like Facebook, Groupon or Zynga.

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One thought on “Why Most Tech Startups Fail

  1. Pingback: Fears and anxieties about the journey ahead

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