Tech startups are all the rage, with digitally powered demand-based services and cloud storage or cloud function initiatives also gathering a great deal of coverage in mainstream media. Stories emanate out of the Silicon Valley, New York City’s Silicon Alley, Boston’s Rte 128 corridor, Austin, etc., appearing almost daily. Those tend to be the nerve centers of tech startups, but many other startup business categories exist that are not limited to mobile or app-based functions, wearables or home control systems and the like.
This coverage may contribute to the popularity of startups, which are emerging at a rapid pace. And yet the success rate of startups is a sad story. History tells us as many as 95% of startups do not make it, with only 5 to 10 % surviving, much less thriving.
There’s an element of romance to the concept of startups. At first it’s an idea – the proverbial light bulb over one’s head – then comes the impassioned early stage: devise a plan, write the early code or blueprint or spec, build the team. Next, hard core realities hit: the costs, the marketing, the raising of money; running it like a business, not a hobby or side project. Rethinking begins: is this a standalone company or is it really just a component or division of a bigger company? And, most of all, does it really make economic sense?
More gently put: startups are rooted in a combination of idea plus opportunity. Add to that a business scheme, revenue path, and in some cases an exit plan, and a life cycle emerges. How to grow the idea? The usual answer is Venture Capital. But before that the seed money for startups comes from Angel Investors. That can be a formal group, or friends and family. Not banks, not traditional lenders.
Venture capital is based largely on an exit plan: sell to a high bidder, go public, or merge with another company thus adding value to be realized via a stock sale or other liquidation event. VC firms make educated guesses, bets on companies that will generate large returns.
For VCs the average bet for their return is that two out of every ten of their holdings should develop into outsized winners of 10X or more. That’s a .200 batting average. In baseball that gets a player laughed of the team, not even good enough for the minor leagues. But Venture Capital is about money, not baseball batting averages. And that .200 average is mostly grand slam home runs.
Private Equity is another source of funding.
Digital Strategy for
Startups
By Dean Landsman