Failing Startup? Here are the best VC practices to handle the situation

Statistically, 90% of new startups fail. 75% of venture-backed startups fail. Under 50% of businesses make it to their 5th year. The odds are not in favor for entrepreneurs, but this is the exact prey that VCs hunt for. The nature of a VC firm is high risk = high reward, low risk = low reward. So the 90% failure rate does not scare VCs away to the same extent the 10% success rate attracts them. The life of a VC is full of failures and a few really huge successes, but you don’t always hear about these failures as you do the successes. 

Sometimes, the failure of a startup is inevitable, maybe because of the embedded structure, marketing issues, cash flow issues, or simply it isn’t a good idea and proves to attract no significant demographics. Here are some of the top reasons most startups fail:

VCs don’t always see this coming, and although statistically the failure rate decreases for VC-backed startups, the risk still stands sky high at 75% chance of failure even with funding and backing. Some ways that VCs can reduce risk is through the obvious portfolio or sector diversification efforts, investing at low valuations, investing via preferred stock so they have seniority when liquidation occurs (which entails investing in different valuations and stages of a company’s development and structure), time diversification, etc.

But what do venture capitalists do when it becomes clear a startup won't provide desired returns? 

When VC has a feeling of a startup underperforming, it usually comes down to these conclusions:

  1. The startup is going to crash and burn.

  2. The startup is not indicating growth at the rate expected, but with changes and fixes, it has potential to get on track and become favorable.

  3. The startup is not going to die, but it’s not on track for growth either.

Let’s examine each of the above three cases.

Case 1: Crash and burn.

In some cases companies would spectacularly fail even after raising loads of funding and forming a strong management team. However sometimes, there is nothing a VC can do in that case because the circumstances are beyond the VCs control. Let's take the example of the company Aereo, founded in 2012 and became defunct in 2014 -  They had an $8 USD service where the users can view live and time-shifted streams of over-the-air television on Internet-connected devices. They assigned an antenna to each user. They were sued for infringing upon the rights of copyright holders and had to close down. In this case, due to legal issues, the VC had to take the step down. In other cases, the startup may run out of money without achieving the milestone or even worse - not being able to add a single new customer over a year. What can VC do? Nothing.

In a backup strategy, the VC may help the CEO proceed with a sale of the company but still it's the CEO’s decision and responsibility to sell, and that is if it even sells.

Case 2: The startup is not growing but problems are temporary.

The startup is not able to grow at the expected rate and it could be that certain setbacks have lead to this, for example - maybe they did not hire a CTO in time, and the engineering team was poorly managed, leading to a delay in key technology upgrades. In this case if a VC has expertise in this area then they will provide guidance. However, it is up to the management team to accept or not accept that guidance, depending on how the board of directors is structured.

Case 3 : The startup is stagnant. 

These “walking dead” companies prove to be consistently performing and operating, however it is clear they will not create any significant value or growth. This is basically a failure in the eyes of a VC. These are the worst kind of companies because they are an absolute time suck and sometimes, it’s better off liquidating this company. Remember that the goal of VC is to find big time winners AKA “Unicorns” which bring upon lucrative exit opportunities, especially in order to balance out the rest of the portfolio - which consist of many walking dead companies as discussed here. VCs are not in that business to get 1.5X return or create basic profitable companies. They are in the business to capture a large market as fast as possible; a high risk and high reward scenario. Case 3 is the worst of all three because depending on the VC they may spend a lot more time with these companies for a mediocre return, in hopes that it will turn into a high growth potential investment. Time is money. So, it can be tricky, but as a VC, it is important to see this coming early on,  and take action before the opportunity cost eats you alive, leaving less time for the VC to source better deals, causing the VC to become blind to more promising portfolio companies and inhibit fund success.


Dear Ms. Venture Capital

This is a man’s world…but it would be nothing without a woman or a girl - James Brown

For as long as we can remember, women have always been placed in subservient roles in society which history can prove with evidence that we all have been exposed to. Let’s fast forward to 2020 -  what we are seeing here is an extraordinary adaption to feminist culture and women empowerment. Females are stepping up to take their well-deserved pedestal seats in society after many patient battles later.

In 2017, AIileen Li, the founder of Cowboy ventures sent out an email to some of the top women in venture capital. This group of women were on a secret mission to change the “boys club” industry from the inside. This group of women created an organization called “All Rise” where prominent women in the industry come together to brainstorm and implement inclusion strategies where female VCs and founders can thrive.  A few women on this ambitious list were:

  • Jess Lee - Partner, Sequoia Capital

  • Kara Nortman - Partner, Upfront Ventures

  • Rebecca Kaden - Partner, Union Square Ventures

  • Emily Melton - Partner, DFJ

  • Jenny Lefcourt - Partner, Freestyle Capital

This may be obvious but change starts from the INSIDE. Industry leaders should never be okay with the status quo. The same taste they have for change in the continuously evolving technology and startup world, should be mirrored in the culture of the funding side/financial industry as well. VCs see change and industry disruption as lucrative, but if they applied these same principles to not just the products they invest in, but the CULTURE as well, we will see much greater advancements in diversity efforts. These changes include adding bright women and minorities on their board and team of partners. 

In today’s world, the best leaders not only lead in logical ways, but empathetically. In past practices this was looked down upon, and it still can be, if exercised in extreme doses. However it has proven to unleash a new perspective when integrated correctly. By nature and historically, women tend to hold more of a nurturing characteristic, which can bring a fresh outlook to the table when deal sourcing, analyzing pitches, and making decisions on investments. Numbers and data matter of course, but it’s also so important to learn how to view a startup with a human perspective and not just as a machine processing all these logistics on whether an investment is correct for the firm. Seeing ideas in this lense will allow VCs to make a broader decision on investment potential and viability. It may not always be the service or product component of the startup which is the winner, but the founders and their team. Connecting and building empathetic relationships in business can be more of a strength than a weakness. However, it’s important to not only rely on empathy and logistics, but also make it RELATABLE to the client or partner. One can only reach a state of being relatable once they have enabled their empathetic side. This opens us up to so many opportunities for connection right off the bat, because relatability serves as a steady foundation in a client-investor, or client-consumer relationship. Women bring diversity to the table, and diversity is about embracing the differences, which can bring upon a wide range of beneficial intellectual styles. The power, success and lessons lie in differences. 

The new age of VC firms should view their human resources just as their capital resources. If a firm decides it would hold a portfolio full of only aviation investments, what happens when the aviation industry takes a fall? The portfolio stoops low and risks failure. However, if they had diversified their portfolio, they would have a safe cushion in times of downward trends. Parallel to this train of thought, if women and minorities take roles as partners and board members of a firm, there’s a monumental amount of value that the firm can gain. 

Although there are so many negative setbacks that women experience, such as workplace harassment, patriarchal comments, “mansplaining”, problems with blending in or “being one of the guys”, or trouble getting high profile projects - as these should never be tolerated, at the end of the day I see it as a positive learning experience that come with takeaways. Since, women have dealt with these issues, they are intrinsic strategists, problem solvers, and careful thinkers because of the numerous scenarios which they have unwillingly been dropped into. Women have already been through a maze of difficulties, which make them exceedingly resilient and armored. This personality trait is achieved only by going through these obstacles head-on, and it molds females into characters that will be ready to face any adversity in business.

women $.png

Another idea to understand is the female economy. Women now drive the world’s economy. According to Harvard Business Review, globally, females control about $20 trillion in annual consumer spending, and that figure could climb as high as $28 trillion in the next five years. Their $13 trillion in total yearly earnings could reach $18 trillion in the same period. In aggregate, women represent a growth market bigger than China and India combined—more than twice as big, in fact. Given those numbers, it would be foolish to ignore or underestimate the female consumer. And who better understands the female consumer than herself? Having women VC partners welcomes knowledge that could benefit the firm when it comes to startup sourcing and estimating the value of a startup, which can facilitate a clear point of view that may just lead to the next unicorn within the female economy, whereas the male majority counterparts might fail to see opportunity in. This unique judgement is so pivotal for a well-balanced investment or product recommendation. 

From the founder point of view, being a female entrepreneur is grabbing the spotlight more than ever. According to recent data by Crunchbase, 2018 set an all-time high for investment dollars into female-founded startups, where female entrepreneurs are receiving more attention and money than ever before. As Crunchbase News reported earlier this year, “Nearly $40 billion was invested in companies with at least one female founder, representing 17 percent of invested dollars in the year.” And the women who are receiving funding perform 63% better than investments with all-male founding teams, according to a study by First Round Capital.

While these women entrepreneurs are working to close the Venture Capital gap, there still remains much work to do to establish industry ties and crack the male-dominated venture capital world. According to a recent Forbes study, women VCs only make up 8% of the total VC population:

In my opinion, I see this as an opportunity for women to make their mark. Since there is such a low female population in the industry, it allows space for awareness. The scarcity may just amplify the demand for bright female VCs. I see it more as an opportunity than a setback. In this day and age, I believe these numbers work more in a woman’s favor than against her. It’s a compelling time to be a working woman, and especially in male-dominated industries where a female footprint is desired more than ever, and that need is being noticed by everyone. Less % means more chances for us to increase it! It’s all about seeing the glass half full, rather half empty. The more women we see enter this notoriously male-dominated industry, the better we can leverage the connections from the outside to within - and we suddenly will see a chain effect as diversity prevails. That is POWERFUL.

According to the data in the graphic above, you can see that women provide undoubtful value to companies and startups when placed in leadership positions.

The data and statistics are all there. As females, the market is ours. We lead the spending economy, and our decisions are what keeps the marketplaces booming. As avid spenders, we know what we want to see reach our market. We know the innovation we hope to see our future families grow around, we understand empathy, and how to use it to build meaningful relationships, and we are smart, ambitious, and devoted beings. As the financial firms, along with all firms in various industries across America realize this, there is so much upcoming growth. Although history has shown otherwise, women are beyond capable of everything a man can do, and we’ve come to take our well-deserved place on our throne. Opportunities are endless, and we hold the power within ourselves to create the future we envision. It’s an exciting time to be a woman!

Unicorn Hunting - The Art of Pivoting.

Unicorns and Decacorns in the valley are rare and prized sightings, but what’s even more treasured is a unicorn in disguise as a donkey. Many investors may overlook these startups, only to realize they held value all along - all it took was a pivot.

In the VC industry, Unicorns are referred to as privately owned startups that have reached a valuation of 1 Billion and on. Decacorns are 10 Billion plus. The term was first popularized by venture capitalist Aileen Lee, founder of CowboyVC, a seed stage venture capital fund based in Palo Alto, California.

Aileen Lee first introduced the term unicorn in her article, "Welcome to the Unicorn Club: Learning from Billion-Dollar Startups." where she writes about how out of all the software startups founded in the 2000s, only 0.07% of them ever reach a $1 billion valuation. She explains that these startups which reach the milestone of the $1 billion mark are so rare that finding one is as difficult as finding a mythical unicorn. Ever since then, the term Unicorn has been embedded in VC culture.

Some notable Unicorns are Airbnb, Uber, Robinhood, SpaceX, and Stripe. Most of these have undoubtedly turned into Decacorns. Below is a chart that showcases the most recent valuations for these companies listed:

As you can see, becoming a Unicorn is already rare enough, but the Decacorn title is only awarded to the crème de la crème. According to recent data from CB Insights, Decacorns make up approximately a mere 5% of the total Unicorn pool: 

Majority of the time, these sky-scraping valuations result from long-term forecasting. This means their valuations have nothing to do with the way they perform financially in the current state. In fact, many of these companies rarely generate any profits when they first get running. One of the obstacles many VCs face when a groundbreaking technology or product comes into their vision, is that they have a difficult time accurately valuing the startup because there is none other to compare to, so it's a little bit of intuition, guessing, belief and luck!

A VC fund usually holds three types of companies. 1) “Unicorn” - as you know, a company valued in the billions 2) “Dragon Egg” - the potential to be a Unicorn and is on track 3) “The Walking Dead” - a startup that is consistently operating and making steady returns, however the chances of it becoming a Unicorn are low...unless something very special happens. 

Hmm special? A portfolio with a “Walking Dead” startup can play its cards in very interesting ways, and can honestly be the most exciting time for a VC to get in very early on, before it catches everyone else's eyes! Once invested, there’s essentially 3 approaches to how a VC can handle this. 1) Active/Harsh - the VC takes on an active role in changing the company dynamics. For example, replacing the CEO, re-crafting the business plan, or even merging with another portfolio company. 2) Active/Supportive - the VC plays an active nurturing role, where they continue to highlight the company and what it stands for, but may call for a spin-off or pivot. 3) Dormant - the VC continues to accept the steady operation and doesn’t allocate as much time and resources to this investment in future rounds (not-so-exciting approach).

Although a Walking Dead startup may sound inferior, what's so exciting about these startups is that the VC can choose what role they want to play. Oftentimes, this underdog view can spark inspiration to pivot. KEYWORD: PIVOT. Almost all successful companies pivoted. Doing the same thing over again and expecting different results is the definition of insanity, so this calls for change. A pivot is not just changing the product. A pivot can change any of the different things in your business model. A pivot may mean you changed your customer segment, your channel, revenue model/pricing, resources, activities, costs, partners, customer acquisition -- lots of other things than just the product. Times change, technologies change, markets change. To survive, the best leaders realize that their businesses must change as well. And this just might be where the treasure lies.

Remember when Amazon sold just books? And Youtube started as a video-based dating service, where users could upload short videos describing their ideal partner, and browse for potential matches. Xerox switched from selling office machinery to handling business operations such as data processing, and CRM services to businesses and governments around the globe. Groupon started as The Point, where people could get together and rally about social causes. Yelp began as an automated platform where you could ask friends for direct recommendations, when the founders noticed something interesting: Users were writing reviews of local businesses just for fun. The founders decided to run with this and have since built Yelp into a system with more than 17 million reviews.


So what’s the takeaway? As a VC, you don’t need to find Unicorns to invest in. You should aim to invest in Pre-Unicorns, where potential can be unlocked with pivots, and where you can be an early investor and reap all the benefits of the investment once it reaches success - which will be more beneficial than investors who entered in late funding rounds, once traction has picked up. Of course, you want to find the next Amazon or Yelp, but you want to get in on it before they are even Amazon or Yelp. The jackpot lies in pivoting, challenging, adapting, and constant growth in parallel to the current market and demographic, as well as future needs. So your best bet here is to not only invest in the company and product, but more importantly the founder and their malleable personality when facing obstacles. It’s not always the product that gets you the Unicorn deal, but its the founders and their abilities. Invest in people and potential, because although its risky…it brings you the highest reward, and after all, that IS what the VC industry thrives on. So- while everyone else has their eyes mesmerized on the Unicorns, look away and search for the donkey that you can turn into a Unicorn!

Silicon Valley Money Trees

Oh, is that why they call it “seed funding”? Asking for a friend……

You’ve probably heard a few venture capital terms, or firms that sound similar to nature…like seed funding, growth equity, Sequoia Capital, etc. That’s because when an investor injects funds into a startup in exchange for equity, they are planting these “seeds”, which are the first official funds a startup raises. You can think of the "seed" funding as part of an analogy for planting a tree. This early financial support is ideally the "seed" which will help to grow the business. Given enough revenue and a successful business strategy, as well as the perseverance and dedication of investors, the company will hopefully eventually grow into a "tree”, aka an exit opportunity or IPO.

So where is everyone planting these seeds, and why? San Francisco/Bay Area aka Silicon Valley!

Originally a Spanish mission and pueblo, the San Francisco Area was first conquered by the United States in 1846. Little did anyone know that just a few years later, this city would become so coveted due to the 1848 Gold Rush. This opportunity brought hundreds of thousands of people to this city in search of gold, and this sudden influx of ambitious people spurred up the beginning of a newfound golden city. Roads, schools, churches, and markets were all initiated to accommodate the population.

The San Francisco area may have had intrinsic luck in this case, but the real treasure comes over a century later, when the name Silicon Valley was coined and became a global synonym to represent the area. This name sprung from the silicon material needed to make semiconductor computer chips. 

You must be thinking, how does silicon compare to gold? Money was initially backed by gold, however that is no longer the case as this backing only applies to less than 4% of the funds in circulation. In my opinion, data is the new gold...and computers are the cornerstone for data collection and efficient organization, which made them crucial for the new generation of startups to operate and succeed. We value our startups based on ideas, data, and potential. In this day and age, a startup can be valued in the millions even if it is pre-sales, pre-revenue, and even pre-product. Definitely worth more than a block of gold. Tell this to someone back in 1848 and they would laugh in disbelief! 

Data is what makes the world go round. Now take all this data, and create from it. Analyze it, manipulate it, capitalize on it - and there you go. You’ve created your own gold mine. The San Francisco area has become the breeding ground for many of the nation’s brightest entrepreneurs who trek from far away to come get a piece of the pie, just as back in the 1848 Gold Rush. If you are eager to roll your sleeves up and put in the work, the rewards would be endless. The size of talent it has attracted has also lured the millionaires and billionaires with funds to invest. While a lot of risk averse investors hung on to their safe strategies, the investors who were interested in more precarious investing jumped on this bandwagon, where it then only took a few winners to prove the goldmine of industry. As more and more investors flocked, entrepreneurs were encouraged to bring their ideas to life because of extensive and available funds. Overall, this combination of creators and investors brewed up a suitable ecosystem for inevitable success. A notable idea brought to fruition meant a golden ticket into the garden of money trees.

Over the last few decades, the bay area has been home to some of the world’s familiar tech powerhouses such as Apple, Google, Facebook, Netflix and more. Many of which modern day consumers heavily rely on. But this could have happened anywhere else.. Why Silicon Valley? This land of fog and delicious tacos isn’t the easiest to replicate. The Valley didn’t come freighted with old attitudes and cultures. It started when professor Frederick Terman, the iconic dean of Stanford Engineering during the 1940’s and 50’s, inspired a tradition of faculty starting their own companies. These engineers were not after money, but instead they were motivated by creating what didn’t already exist. However, funds were needed in order to get the ball rolling, so many of these early startups sought after funding from the financial capital, New  York. What started off with these conservative sources of funding, increasing demands and risks birthed the Venture Capital industry which could seamlessly cater to, and focus on these niche investments which were often early stage technology companies. 


This generated many VC firms to open up offices on the west coast, as opposed to the formidable financial center, New York. Some of these early firms were Kleiner, Perkins, Caulfield and Byers, and Sequioa Capital, which were actually adjacent to the Stanford campus. The secret to Silicon Valley's success? Failure. This is what fuels and renews this place. It serves as the foundation for innovation. In order to innovate, a company must realize that what it’s doing isn’t working. Realizing this failure will trigger the company to adapt to an ever changing climate of consumer needs, and in turn create success. This is the secret sauce. Venture Capital only follows innovation, and as long as entrepreneurship is embedded into the fabric of Silicon Valley, there will be no shortage of investors running to gladly hand over their money.

Since end goal of VC investors and entrepreneurs are parallel, this is far from a zero-sum game. Will you end up a creator, investor, or both? At the end of the day, all we want to do is enjoy the fruits of our labor, grown from the very seeds we planted, and leave behind a meaningful footprint!