Current failure rates in venture backed investing average around 75%. Market forces ensure at least 1/3ʳᵈ of these could never succeed, remainder fail due to lack of leadership. Leadership within the startup itself most certainly. More directly, lack of leadership development on part of early-stage venture investors.
Single greatest roadblock to early-stage venture investing today is lack of sufficient exit opportunities. It isn’t lack of sufficient startups to invest in, with more than 500,000 launched each month. It isn’t a shortage of Capital, as there’s an estimated $1.8 Trillion and rising in Capital committed to private equity with nowhere to invest. Nor is it insufficient innovation, with R&D spending surpassing $2 Trillion in 2017. Given this, why so few exit opportunities? Simply put, problem is increasing shortage of leadership, quality startup leaders.
Early-stage venture investing experts argue there’s more than one reason for the slowing down of Angel and Seed investing, in order of frequency argued these are:
1- Lack of sufficient exit opportunities, as stated;
2- Cyclical nature of the investment world as whole;
3- Powerful technology corporations with ever larger cash reserves;
4- Growing number of startup incubators, accelerators and competitions; And,
5- High rate investments at this stage return $0 to investors and shareholders.
Taken together, all are valid reasons for decline in early-stage investing over past two years. However, the single greatest impediment to early-stage investing today, reducing all of these to a single common issue, is lack of leadership. Entrepreneur and investor alike.
Engaging with Seed/Angel investors, VC and PE friends and colleagues past two years, all incredibly busy making and managing investments, consensus is, there’s a paucity of quality leadership. Particularly troubling, as at this place in the larger investment cycle, since the IPO market dried up, more often than not, exit is through acquisition. What most startup leaders, founders and early investors fail to realize or accept is most corporations and private equity funds make acquisitions based on the strength of the leadership team far more than on product or market values.
Before investor fatigue set in, solution was volume, with investors constantly adding to their portfolios, walking away from any startup leadership team required more than minimal input. Relying on the numbers game. As result, despite many startups possessing real value given proper guidance and input, over 75% all investments fail, amounting to nearly $400 Billion in losses annually. This number is misleading however as direct dollar in to direct dollar not returned is not a proper calculation of overall loss.
Regardless whether self, crowd or investor backed, most startups fail due to poor execution. In a 2012 article in Fast Company, Faisal Hoque, articulated the reason, with both investors and entrepreneurs at fault. Investors place importance on financial valuation rather than operational capacity valuation. Relying on, “[t]he theory that in a numbers game, some will win and some will lose…” which he goes on to state, …”is not an acceptable approach…” At the same time, entrepreneurs generally lack an Operating Blueprint consisting of a 360⁰ view of their enterprise with impact analysis established upon appropriate scenarios.
Starving for entrepreneurial and investor leadership. Patrick Henry in a 2018 Entrepreneur article, drawing upon his own experience as an entrepreneur and startup consultant and on industry research, lists a number of reasons why startups fail, while making the case each item is due to one single issue, “… each of these reasons for failure is due to a failure in leadership at some level.” From direct experience with my own failed startups, as both entrepreneur and investor, I find Faisal Hoque’s assessment to be spot on, however for the reason Patrick Henry states. We are lacking entrepreneurial and investor leadership, despite all the many entrepreneurial programs springing up around the world.
I find I must agree with my friends and colleagues, leaders are harder to find. Over the years I’ve written about leadership, similarities between startup and Special Operations environments and requirements[i], on challenges[ii] and tools to develop leadership individually[iii] and within a startup team[iv]. During the course of twenty years in and around the technology startup industry and ten years in Special Forces, I’ve watched as the number of quality leaders, in virtually every industry and line of effort at all levels, has continued to decline. Despite herculean efforts and investments in leadership development programs.
At very most basic, reason for scarcity is leaders can’t be mass produced. Even more blunt, leaders can only be developed by already proven leaders. Which doen't mean someone with more education, or money, a better network or a formal title and position with a prestigious entity. Rather, only by someone with proven experience solving real problems. As well, educational programs and professional consulting efforts conflating management with leadership, attempting to develop leaders using manager development tools, processes and resources fail at the task. Investor models, practices and limited investor interactions are also utterly incapable. Even powerful Boards and seasoned advisors providing solid advice to founders on aspects of their business, are not the solution.
For startups on the verge of failure, leadership is everything, both at the level of the entrepreneur and the investor. Only solution for these failing startups, those with actual potential to realize returns, is at least one active investor who is also a proven leader. This is due to the fact, rapidly identifying and developing leadership while turning around a startup on the verge of failing is a nearly impossible task, requiring substantial time and effort from a highly experienced individual. Time and experience virtually all founders and most investors, board members and advisors simply don’t have, the later mostly due to extensive depth of committed obligations.
For failing startups, in rare cases where an active investor does have an interest to be more involved, five indicators must exist in the final decision maker of the startup, the leader, before investor can entertain contributing more of their limited time, network, resources and Capital:
1- Ability to see and listen – Constantly learning from everything, at all times. Even when in heightened states of stress, such as when confronted with the very real possibility of failing;
2- Reality above all – Where others retreat into comfortable illusions and provide a false front, leaders live in the very real world and find ways to bring others into that world;
3- Calm under fire – While the internal self may be under extreme stress, facing doubt and concern, outwardly there is only calm resolve. Mission success comes first, always;
4- Influence – Understanding the team, influencing individuals to rise to their own leadership potential in their given domain, rather than dictating tasks to be accomplished and how; and
5- Stakeholders first – Knowing how positive and negative movements impact all stakeholders and putting stakeholder needs above personal needs more often than not almost alone leads to success.
Perhaps as much as fifty percent or more of failing startups could realize real returns with the right guidance for the founder. Reason for potential returns is latent leadership is out there in great volumes, around the world, right in failing startups. But it can neither be recognized nor developed using methods perfected to develop management or to realize purely financial rates of return. Nor can it be realized with minimal engagement from boards, advisors and investors. For early-stage investors there's good news however. Proven models to identify and develop leadership in conditions of heightened duress exist, models developed and employed by proven leaders, wartime Special Operations.
Identifying and developing leaders requires considerable, direct and personal hands on engagement from individuals who have found and proven their own leadership capacities. Twenty years ago, during NextCard days, two individuals in particular, Shaun Deane and John Rouleau, showed me the critical importance of the hands-on approach to leadership development. Not giving up, taking time out of their incredibly busy schedules to help me mold and shape my thinking, to overcome experience deficits and Irish pig-headed stubbornness. Very same issues most startup leaders face. John and Shaun, with myself and many over the years, chose not to play the numbers game but instead to invest in and develop talent.
Now, with two decades of leadership behind me, one in Special Forces and one leading my own startups and investments, I’ve come to truly appreciate from direct experience, leadership is everywhere, solid leadership. There are real returns out there in startups which need not fail. However, at present most all is little more than potential, trillions of dollars of unrealized potential.
E.M. Burlingame: Founder Emerio Group and the Honos Foundation
Actively engaged, leveraging diverse experience and skills developed during 30 years in technology, entrepreneurship, startup investing and Special Operations to identify and develop the next generation of startup leaders globally.