Why do 54% of tech scaleups fail to raise the next round?
Doug: Once a startup reaches product-market-fit, investors must be lining up?
Roland: You are right, raising money becomes easier at that stage. The risk is much lower when there is sustainable traction, with first revenues earned.
Doug: Then it must be all smooth sailing from there. Once you have a proven business model, investments will flow in and you can enjoy the ride.
Roland: It is not so simple. Startup literature gives the impression that, after product-market-fit, it is all smooth sailing. That is not a reflection of reality, but of most startup advisers' focus on the early-stage.
The truth is that not everything gets easier after product-market-fit. Few people realize that scaleups still fail often after several rounds of financing. It is not a smooth ride. Quite the opposite. That is the reason we wanted to make this book available to founders. Founders face new challenges at every new stage and many of them fail to adapt. I call it the Silicon Valley roller coaster.
Doug: Meaning that founders can expect lots of ups and downs?
Roland: Lots of ups and downs. And feeling pulled in completely unexpected directions. And getting nauseous. And fearing for your life. All that, exactly like a real rollercoaster. But without the guardrails.
Doug: Once a startup reaches product-market-fit, will it always become a successful scaleup?
Roland: Not at all. At each funding stage, on average 54% of scaleups never raise a subsequent round. So across the four funding rounds we cover here (Series A through D), you are looking at a 2% survival rate. And this is of all the startups that were able to raise a seed round. If we include those that did not, the survival rate would be far lower.
Doug: What causes this high failure rate?
Roland: At a superficial level, it is almost always that the scaleup did not meet its growth targets.
Doug: Right, it is all about growing the company.
Roland: Growth is the part all founders and investors can agree on. But growth is a result, a lagging metric. Unless you assume that growth will be automatic, the question is how to reach and sustain that growth.
Doug: How do scaleups reach and sustain that growth?
Roland: Well, founders asking themselves that question would already be a start. It would make the team aware that product-market-fit is only the beginning of the journey. That it requires hard work to sustain the growth founders have projected to investors. On top of that, the kind of work starts changing and it requires new competences and behaviors. Behaviors often at odds to what worked well when the founders were still leading a startup.
"Even after product-market-fit, growth will not keep coming automatically"
Doug: We would caution against assuming growth is automatic.
Roland: Absolutely. The notion that growth is automatic may seem ludicrous to some. But unfortunately, many startup founders do share that assumption. Startup manuals have trained founders to see product-market-fit as the ultimate goal. Once you reach product-market-fit, you have made it as a founder. You have more customers than you can handle. Investors will line up. Eternal glory will be yours. In other words, automatic.
Doug: With that expectation, scaleup teams are bound to miss their growth projections
Roland: Indeed. Teams are surfing a wave of market demands and fool themselves it will last forever. Targets get set too high, the company cannot find enough sales people in time, investors lose fate. But there are other root causes causing these slumps in growth.
Doug: What are these underlying causes? What can founders do to avoid this fate of failure?
Roland: I am tempted to name many causes. Undisciplined growth, founder strife, losing focus, etc. I could name ten more. But for me, they all come together into one big challenge. That this is a difficult journey without a roadmap, a manual, a playbook for this stage.
"I wish someone had a methodology as simple as The Lean Startup for how to scale my company"
–Patrick, quoted by Steve Blank
Roland Siebelink regularly speaks and writes about leadership in fast-growing tech startups. You can find more of his insights, including free chapters of his book “Scaling Silicon Valley Style.”