One look at the title and you may think that this is an obvious thing to say. Of course, you need to be successful to prevent your business from failing. At the same time, this wasn't always the case. Years ago, so much money was floating around for investment, it wasn't necessary to create success before angel investors, or venture capitalists (VCs), were willing to back fairly wild ideas. Things have changed.
For a time, venture capitalists were willing to invest in anything that sounded good. But too many of these ideas were colossal failures. One of the biggest problems is new business owners with no experience can't effectively run a company. When they get investments, they are not able to turn it into profits. The business fails and the investor are left with nothing.
With venture funding dropping by 25% in the first quarter of 2016, it's harder than ever to find investors. A stagnant economy means today's startups must prove their worth by building a viable business - before VCs will even consider investing.
Here are three reasons you might have trouble finding investment money.
1. The Economy
Not long ago, a startup could survive on its idea alone. There was plenty of lending capital floating around, and with many investments, the risk was minimized for investors. If one investment failed, others would succeed. Profits remained steadily high.
Investment opportunities abound when the economy is strong. Economic uncertainty leads to more cautious investment. Interest rates are rock bottom and are unlikely to rise anytime soon. The banks are not lending and now investors have pulled out as well. Startups are often on their own in a cash-strapped economy.
2. Your Idea is Less Unique than Ever
Ideas used to be acquired for hundreds of millions of dollars because investors could see the potential in them. These ideas were truly unique and they would stay that way for at least as long as it took for the startup to actually scale them up. But all that has changed.
You can have a unique idea that will be copied by another company in China or elsewhere within a matter of weeks. Investors are only interested in the finished product that is already making money.
Take 800razors as an example. Their idea was unique in that they offered high-end razors at a 50% price differential. And so every other company did the same and their uniqueness was lost. They changed their ways by producing razors of their own. In this case, it worked, but it could have gone differently.
3. You Don't Know When (or How) to Pivot
Did you know that YouTube started as video dating business? That's right, this giant was once a video-based dating site. Unsurprisingly, the idea failed and they shifted to simply making videos instead. And that's where they started to make money.
And guess what? They survived and Google acquired them for $1.65 billion.
Sometimes the ideas we think are great fall short. Your idea may sound terrific on the surface, but in practice, people won't use it. The key is in knowing when to pivot.
So How Do You Find Success as a Startup?
Per Wickstrom is one entrepreneur who knows how difficult it can be to build a company without a huge amount of outside investment. To start with, he focused entirely on giving customers what they wanted. He researched his target market and made a series of holistic rehab facilities.
Only after he established his business and made progress on his own, did investors see the potential. He proved his concept by making it work, and investors helped him grow his business to the success it is today.
His experience shows that an idea alone is not enough to convince investors. Startups have to make the right choices, based on client needs. By risking his own money and investing his own time,
The unicorns of today are falling short, and that's forcing the whole startup industry to reevaluate itself. If you're considering a startup, be prepared to go it on your own until your idea is a proven success. If your business idea has staying power, it will attract investors and grow.
In your opinion, what is the biggest reason why startups are struggling to obtain outside investment today?