Venture

In 2019, More Heavily-Funded Startups Will Succumb To Premature Scaling

More than seven years ago, a research outfit called the Startup Genome Project set out to determine the top reasons why funded startups fail. Are they crushed by larger rivals? Doomed by incompetent founders? Hounded to collapse by regulators?

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After a data crunch covering 3,200 startups, researchers came up with an answer: More than any other factor, promising young funded companies fail because of “premature scaling”. Essentially, they tried to grow too fast.

Mortal Mistakes

Startup deadpools are filled with entrepreneurial companies that pushed ahead in scaling flawed business models rather than fixing problems first. In recent years, the losses resulting from these flawed executions has been ticking higher, thanks to venture investors love affair with giant funding rounds.

Take Juicero, the juicing startup that raised $118 million before abruptly shuttering a little over a year ago. The company’s star fell after reports came out that hand-squeezing the fresh produce pouches it provided to customers was just as effective in producing juice as using its pricey juicing machines.

Or Airware, the enterprise drone analytics startup that raised the same amount from a Who’s Who list of big name Silicon Valley VCs. The company’s software was well-received, but an attempt to branch out into developing hardware proved costlier than even its well-funded coffers could bear. The San Francisco company shut down in September.

Then there’s Ofo, the China-based dockless bike-sharing giant that is reportedly on the verge of bankruptcy after raising $2.2 billion in venture and growth funding. Turns out Ofo put out far more bikes than it could feasibly keep track of, let alone repair, leading to huge piles of broken and abandoned bicycles.

How To Die

Every startup failure story is unique. However, when it comes to flawed scaling, there are a few common threads that crop up repeatedly.  A big one is companies growing sales before a core product is honed into marketable form. Another is mistaking a bunch of enthusiastic early adopters for an indicator of mass market potential.  

These days, bigger capital inflows are leading to bigger crashes. Until a few years ago, a good-sized seed round was a few million, and early stage rounds usually stayed below $20 million. Rounds of $100 million and up, at any stage, were a rarity.

Of course, that’s no longer the case. For 2018, in particular, supergiant rounds of $100 million or more have become commonplace. And it’s not just late stage. Globally, more than 100 startups have raised Series A or B rounds of $100 million or more this year, in sectors from scooter rentals to autonomous vehicle tech to coffee.  

Now, I won’t be predicting exactly which of those 100+ companies will hit a brick wall in 2019. But there probably will be at least a few — either startups that shutter entirely or begin a slower fade-out after failing to secure follow-on funding.In many of those cases, I predict we’ll see the massive sums of capital raised were a contributing factor to the startup’s eventual failure. While moving fast and breaking things may work for a few unicorns, there’s a reason it tends to turn out poorly for the rest of us.

Illustration Credit: Li-Anne Dias

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