Two founders vow to create a better model for company building
In the spring of 2022, after a particularly difficult startup experience, two seasoned and successful founders paused to reflect on their several decades as entrepreneurs. Then we took a hard look at the data.
Everyone knows the failure rate of new ventures and the poor returns for investors in light of the high risk. The widely touted figure is somewhere between 75% and 90% of funded startups eventually fail without producing a return for investors. The average return across the entire category of venture capital is less than the S&P 500 for the last twenty years.
If investor results are challenging, the results for founders are often worse. According to one study of 212 funded American startups by professor Noam Wasserman, fewer than 50% of founders remain in control of their own companies by the time they are only three years old. In year four, just 40% of founders remained. Fewer than 25% of founders eventually lead their companies to an exit. Yet even with the deck stacked against them, founders still sign up for the entrepreneur journey. They do what they have to do.
Today's early stage model doesn't work for investors, it doesn't work for founders, but it also doesn't work for the public good. Imagine if railroads, factories, the Internet, or any of the major technological achievements of the last century had to be built strictly in the ten-year investment horizon of the venture capital fund? They would have never happened.
That ten-year investment cycle was invented for a world where early stage companies could quickly gain access to public capital, a world that ended with devastating Sarbanes-Oxley Act. At its peak in 1996, there were more than 8,000 publicly traded companies in the United States. By the start of 2020, that number was around 5,000.
More and more, growing companies are choosing to go public later in their development. This delay means that individual retail investors, who aren't accredited, often miss the chance to invest during the companies' most rapid growth phases. Consequently, this trend is exacerbating income inequality, as these public investors are excluded from top investment opportunities. Moreover, there is a notable shortfall in investments towards high-risk yet potentially revolutionary concepts that need longer to evolve, ideas that could ultimately benefit society at large.
We concluded: There must be a better way.
If we can identify and eliminate the foremost causes of new venture failure, and if we can systematically increase startup success rates, maybe we can also "carve the unicorn" in a way that is more equitable to founders, employees, and investors alike.
We would create an entirely new model of company building, one that enables investment in a broader range of business concepts, while increasing liquidity and returns for all stakeholders. This is our mission and why we created Next Wave Partners.
Eliminating the Common Causes of Failure
If you ask an investor about a startup failure, they'll often blame the founders, market, or product. Ask the same question to a founder, and they might also cite the board, economy, or competition. Ask an employee, and they might blame management, lack of resources, or constantly changing priorities.
The truth is often some or all of the above. In the months following our last startup experience, we undertook a study of startup failures since the mid-1990s, together with our own experiences.
We identified three patterns of startup failure which are so common we dubbed them the "unicorn killers":
- Bad Apples
There are many stakeholders in any new venture, including the founders, employees, investors, and strategic partners. In the immortal words of Benjamin Franklin, "We must all hang together, or most assuredly, we shall all hang separately".
Dysfunction in and among these stakeholders is a leading unicorn killer. Co-founders can be more like spouses than business partners. Bad investors make worse decisions. One asshole employee can demotivate the whole team. A strategic partner or activist investor can push an agenda completely orthogonal to the startup's purpose.
- Hip Shots
In startup mythos, we hear the legends of those heroic innovators who relied on their own knowledge, skills, interest, expertise, passion, and creativity to make bold choices that resulted in revolutionary products that changed the world. Or did they?
In our decades of startup experience, here in the real world, this almost never happens.
Too many founders leap to conclusions and start building without taking the time to properly research and validate their market hypotheses. They end up building solutions looking for problems to solve, torching off boat loads of investor capital, then their companies wither and die on the vine after years of wasted effort.
- Fool's Gold
It is all too easy to fall prey to our own psychological biases, and nowhere is this greater than the founder's urgent need to confirm their hypothesis. Rarely, however, does a small company with such limited resources have enough contact with the market to make good decisions.
This is especially true in companies with inherently limited markets, where there may be a large financial opportunity across a relatively limited number of potential customers. When these companies achieve a sale, there's a strong tendency to see this as direct proof of their sound decision-making, without further scrutiny.
When we sell a customer, our belief in the next sale is almost automatic. Given enough time, energy, and money, we may find that next sale. The trouble is there is always a segment of customers willing to pay for a solution, but there may not be enough of them to sustain a growing venture.
Towards a Better Model
Our insight into the problems was hard-earned through decades of the startup grind as entrepreneurs. Now it is time for our fellow entrepreneurs and investors to stop riding the dinosaur of yesterday's startup model. Together, we will unleash the next wave of creative destruction, leading to tomorrow's trillion dollar companies and a brighter future for all.
Today, we are partnering with select clients through our Venture Studio, Venture Fund, and Innovation Consultancy to help them solve the Innovator's Dilemma. Together, we're bringing new concepts to market faster, with less risk and better outcomes.
- Amazing People
Our Partners and Principals have long, proven track records of solving problems, building products, and launching ventures. We're experts in building remote teams, and we believe in bringing together the best and brightest anywhere in the world, wherever they are.
- Flawless Execution
When it comes to building companies and bringing new ideas to market, experience matters. Here, you will work with seasoned and experienced entrepreneurs, product builders, and subject matter experts who have been there, done that.
- Customer Obsession
We created a rigorous, data-driven process that begins and ends with research. The goal is to eliminate unsustainable venture concepts early and focus our collective resources on those with the best chances for success.