- Failure. The vast majority of venture backed early stage startups fail. Most of the numbers I see are in the 90s in terms of percent of those startups that eventually fail. It’s a very high risk, high reward security to invest in.
- Failure to fully raise. One of the biggest things I’ve learned as a founder of Titan Angels is that there’s a herd mentality with investors. For many investors, they won’t even consider an investment unless some other investor has already invested. Part of that can be chalked up to a lack of conviction on the part of investors but it’s really more about the risk associated with a startup failing to raise the money that they need to effectively launch. Let’s say a startup needs to raise $500,000. Would you want to be the first person to invest $20,000 in that company? They still need to raise another $480,000 after you have invested. And if they don’t raise the rest of that money then the startup will likely fail and will almost certainly failing at coming through on their growth potential.
- Technology Risk. Can the startup even make what they say they are going to make? It’s great that something works in the lab or in a model on the computer but can it be created at scale? You don’t know until you do it.
- Market Risk. Even if a founder has followed all the great advice from organizations like Y Combinator and experts like Paul Graham they never know for sure if all their affirmation from potential customers is actually going to come to fruition. Even if you get 95% of potential customers saying that they would by your product that doesn’t actually mean they are going to buy your product. You don’t know until you do it.
- Failure to raise enough money. This is another issue and for many first time founders it’s something that they don’t give enough attention to. Growing a startup is hard work and early successes could make it even harder because in that situation you’re going to need to raise more money to keep up with demand. Is that million they’re raising enough to last them to the next round of investment? Assuming they can get one, does taking out a loan early on in the life a startup make sense? Being under-funded could make it so that a startup misses out on taking advantage of an opportunity or multiple opportunities that could make or break their business in the long run. Looking at it another way, if you’re going on a car trip you’re going to make sure that you have more than enough gas in the tank to make it to the next gas station and if you don’t then you’re going to get stranded in the desert without much chance for help to come rolling by.
There are a lot of other risks with early stage startups but let’s stick with those five for now. Happy Good Friday!