[This post has been coauthored by Abhishek Surendaran, Principal, Exfinity Venture Partners.]
There is a lot of buzz about startups over the past few years and justifiably so, given the disruption that these are causing by either decimating existing business models or creating new business models where none existed. A lot has also been written about their funding, unicorn status, acquisitions, and exit.
However, the media writes overwhelmingly about successful startups and while few articles are written about the failures, it is not in proportion to their mortality rate. If you ask any VC or look at statistics of success vs failures, you will find invariably that approx. 10-20% of the VC portfolio gives blockbuster returns – the rest either give par or mostly sub-par returns but the blockbusters really return your fund.
The phenomenon of power law in VC portfolios is well-documented and popularised by Peter Thiel in his VC bible “Zero to One”. The power law is a modification of the 80-20 rule which dictates that 80% of the returns of a VC portfolio is from 20% of the deals. The deals that provide blockbuster hits are called Unicorns – startups that are valued at > $1 Bn.
Union Square Ventures and Sequoia Capital US lead the unicorn tables with a hit rate of just 8% and 5% respectively. This is not surprising as only very few startups can get it right in terms of team, product market fit, capital, business model etc. Increasingly, most tech-led businesses are becoming winner take all businesses. As a startup progresses from Seed stage to Series A, B, C etc., the bar for business metrics keeps increasing and just 1-2 companies emerge as victors. As per a report by PwC, over 100 horizontal ecommerce companies were launched in India in 2010 but by end of 2015 only two – Flipkart and Snapdeal – survived and emerged as victors.
Why are the mortality rates so high? What makes start ups succeed? What makes them attractive to acquirers? What has been the key learnings thus far?
One of the prime reasons why few startups make the cut is because they have successfully metamorphosed their idea into a business. Many startups fail because they fail to decipher the problem statement correctly or assess the opportunity size or fail to understand the competitive scenario which results in an abject failure to design a robust and differentiated value proposition. I am not going to delve into this issue.