Fact: 9 out of 10 start-ups fail. Ouch. 90% failure rate is a pretty big number. Of course there are many reasons why start-ups fail, specifically tech start-ups. Simply go to Google and type in “why do start-ups fail”, and within 0.78 seconds, to be exact, you will have millions and millions of links at your fingertips. I did a quick exercise and did just this. Now, for this exercise, assume that reasons such as running out of cash, too much competition in the market, no market need exists (this is dumb, but 42% of failed start-ups cited this issue as the primary reason why they failed… sigh), changes in the market (i.e. financial regulatory changes crushes a fintech platform), and accurately understanding the right target audience are not in scope. I’ll explain why I am putting these factors aside.
Here’s what I found
- Not the right team dynamic
- There are big gaps in the strategy
- Shortsightedness – entrepreneurs live in a vaccum
- Imbalance in work and life
- Inflexibility and not being nimble enough
- Lack of connections
You can see a theme here. Every single one of these things center around people. 37% of founders reported that finding a balanced team was their biggest challenge. I am actually surprised this figure isn’t higher. I have maintained throughout my career that it doesn’t matter how well articulated a strategy is, if you do not have the right team to execute it, the strategy means nothing. Using the same analogy for start-ups, if your team is imbalanced your strategy WILL FAIL, every single time. It may not fail tomorrow, or next week, but it will fail at some point.
Let’s Take This 1 Step Further
When entrepreneurs are faced with problems they usually just dive right in and fix them. If the evidence is glaringly obvious that finding the right team dynamic is critically important, you would think they would place a significant emphasis on making this right. Right? Well, we all know that cash is king when it comes to the start-up world. You simply can’t build anything for free. This is as simple as it gets, and if you have cash, and you’re smart about how to spend it then your chances are higher. Fine. But even though many start-ups have the cash and the right product roadmap and strategy, they still fail. It’s because of the team — not the right team.
So, I did another little exercise. I did some research on how venture capitalists make investment decisions. What are the core criteria? I found a lot of material around this, and the key factors that influence VC decisions are varied. From gut-feeling, to level of customer excitement, to doing mounds and mounds of market research to founder passion to great management teams. Let’s focus on the last one, great management teams. Specifically, what I saw was that many VCs look at the quality of the management team, but I didn’t see anything about what they consider to be a great management team, or how they go about evaluating teams. I did find one interesting article titled, “Evaluating a Company’s Management” but the article did not talk about evaluating leadership qualities and competencies, or how this evaluation criteria connects to a great management team. I did some more digging and came across a Mashable article titled, “4 Things Your Startup Needs to Attract Venture Capital” where the 4th thing was “assemble the perfect team”. Once again, no specific details on what a perfect team looks like, and how you go about evaluating a team.
Several years ago I met with a couple of local Toronto-based VCs to talk about the idea of supporting investment decisions by integrating an assessment tool focusing on people. I also pitched the concept of supporting portfolio companies with their human resources requirements with the objectives of a) helping successful growth and b) protecting VC investment. What happened? I was shot down every single time. I dove into the reasons why the interest wasn’t there and each time the response was, “we already evaluate prospect founding teams”. Digging deeper… what exactly do you do when evaluating? Standard response: “we use our gut feeling and our years’ of experience”. Hmmm hmmmm, I’m not overly confident with that one because we know that people are VERY biased when it comes to judging and evaluating people.
The Moral of the Story
It’s relatively straight-forward actually. VCs royally suck at evaluating teams, because, well… they actually don’t. People are the most important thing to any successful business, no matter how big or how small. The evidence is clear that team make-up is critically important, and if VCs suck at evaluating them then we have a serious problem that needs to be fixed. What’s the solution? Well, if I were putting my money into risky ventures I would want to add another layer of assessment on people. Imagine for a second that a VC could reduce its portfolio fail-rate by 10% simply by strengthening its assessment practices on venture teams? You don’t need to be a rocket scientist to figure out what would happen.