Startups are Dead, Getting Funding is Not Enough?
Billion Dollar Startups Failed | Clubhouse | Segway | CommonBond | Katerra | Reason
In today’s time, when a startup gets funding from investors, their team celebrates, and due to the funding from a well-known person the name of the company and its value also increases in the eye of the public. You must have also noticed that after they get funding their products start appearing at different places and the startup’s valuation increases.
According to my research, the worst movement after getting funding is partying to enjoy it, which is akin to hell.
Assume
Assume you are a college student who has received a $100,000 loan for your education. My question for you is, should you throw a party to celebrate getting this loan? Yes, you will be happy, but it is not good to celebrate with borrowed money.
Media
We usually see in newspapers, publications, and social media that a startup company has raised funds from a well-known firm. This fund is given on the basis of a trust that you will multiply the money of the investor. After this, with the money startup raised, they hire a bigger team, move to a bigger office and so increase their expenditures on various things.
After spending a lot of money on marketing, production, and processes, the funds raised by the startup run out.
Product Market Fit
Product-market fit means that your startup’s products are widely available for sale in the market, which is a profitable business strategy. The money earned from selling products keeps getting reinvested inside the business. The money is depleted as a result of this reinvestment cycle.
Loop
Due to this endless cycle of reinvestment now founder will need more funds to expand and continue its operation. In this case, the founder will try to get more funds in the second funding round.
It is possible that in the second funding round, the founder may get less or more funding based on the present valuation of the company but this would not change the fact that even after getting the funds in the second round the expenditures which were happing before funding decreased. The chances are higher that the expenditure may increase again.
I am not saying that it is wrong to raise funds. Funds are essential for the rapid expansion and growth of any business. Funding also stabilizes the condition of the business.
Achieved?
But it’s wrong to raise funds when your startup has not achieved anything in the market and your business is not profitable. Even an investor will see the profitability of your business before investing in it. So before raising the funds always make your business as profitable as possible.
Many startups nowadays are constantly raising funds and moving from one fundraising round to the next. Media also reports about those startups, like XYZ firm raised funds in billion of dollars. In the news, we also see that the founder of XYZ firm has become a billionaire in 3 years but despite all of this his/her business is still in a loss and would not become profitable yet. The major reason is the more cash a business burns, the less likely it is to become profitable.
The basic concept of business is that they require consumers who will pay them money in return for their service or product. If the company’s products bring in money, that’s a positive sign; if they don’t, that’s an unfavorable sign.
Fact
There are several things on the market that are both new and unique. Seeing this, the entrepreneur believes that our product will sell in the market, and the investor believes that our startup’s product will sell well. In this manner, investors start the fundraising, after which the company gets extremely large in a few weeks, and after a few months, people do not even remember the name of their products.
Real-life Example
Clubhouse
You’ve probably heard of the Clubhouse app. It was a social media platform, and everyone assumed that this app would bring an end to several platforms such as Facebook. In just 18 months, the valuation of the Clubhouse reached $4 Billion. Today you can see the condition of this platform.
Friends, many such new startups had come and gone, and everyone thought it will do something different and surpass its competitors. But unfortunately due to unforeseen circumstance or because of the bad decisions of the company a situation arise where the founder does not have any choice but to shut down his/her business.
Now you may be thinking that the idea of that startup was not good, the company may be small, and the business model may not be good that’s why they failed. Yes, you may be right but let me tell you one thing, and after reading that your opinion might change in 1 second.
Startup — CommonBond
Citibank, Goldman Sachs, BMO Capital, and Barclays Bank all invested in CommonBond, a student loan financing firm. The firm had surpassed a $1 billion valuation. Today this startup has failed after the pandemic.
Startup — Nice Tuan
Nice Tuan was an e-commerce platform that provided daily essential goods. This was funded by large corporations such as Alibaba Group, GGV Capital, and DST Global. The company’s worth had hit $1.2 billion before collapsing today. Market Behaviour and Misleading Adds Promotion are the causes of failure.
Startup — Katerra
Katerra was a startup that specialized in building development, design, and construction. SoftBank Group, Foxconn Technology Company, and Khosla Ventures were among the major investors. The company was worth more than 1.5 billion dollars, however, it has now failed. The reason for failure was the product-market fit was incorrect, and profit was not flowing in.
- Quibi: Streaming Service Platform
- ScaleFactor: Technology startups
- LeSports: Live Sports Streaming
- Arrivo: Transportation
Many startups like Reali, Kitty Hawk, Airlift, Singulex, and Panda TV came up with very unique concepts in the beginning and today they have no name.
Many startups had also come in crypto, but they are all now disappeared. Take a quick look at the list of altcoins; today the majority of the altcoins have fallen up to 99%.
What is the Cause of All of This?
When we set up a new business today and get the funds, it seems like we have won. Getting funding is not a victory. So What is victory?
- When did you get your 1000 customers?
- How much have you saved in operational costs?
- When did the business come to the break-even point?
When you achieved all of these things then you will get a real victory. Actual celebrations should be held in these situations. Having 100k social media followers and getting comments is not a victory.
Profit, revenue growth, repeat orders, average order value, and customer feedback are very valuable.
Today, owners get excited when they see their company’s name on social media or podcasts and believe themselves to be market leaders. After some time, the firm begins to experience losses.
Real Example
Have you heard the name of SegWay? In 2001, the SegWay company entered the market. At that time, SegWay had introduced electric scooters. Steve Jobs himself appreciated this product. According to Steve Jobs, there will be a dedicated zone within the city for Segway scooters, which will result in an extensive redesign of the city in the future.
Today, you can look at SegWay’s condition; their goods could not scale at all. People use SegWay once for fun and then put it back.
In the beginning, SegWay got a lot of attention from Steve Jobs, publications, investors, and others. SegWay believed that we were heading in the right way because of the initial major accomplishment, but this was not the reality. This is the most important time to determine if profits are being made or losses are being incurred.
In the end, it is important for every startup founder to find Product Market Fit.
Getting money from an investor isn’t the same as earning money from a consumer.
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Disclaimer
I am not a Financial advisor. I am not affiliated with any of the websites or coins and also this is not financial and Investment advice. This article is meant only for educational purposes. I am just sharing my thoughts and analysis based on my many years of experience.