The risk-return tradeoff that links high risk with high reward fits well for entrepreneurship and startups. Where the excitement is peaking, the risk of failure is also touching the sky. That is why the majority of startups fail much before they reach their potential. Various studies and research shows that 90 percent of startups fail.
While the recent streak of a surge in VC funding in Pakistan’s startups is phenomenal and positive for the ecosystem’s growth, the next phase that begs attention is the need to not only sustain the momentum of investor interest but also for startups to graduate to the next level of scaling, growing, sustaining and earning. In short, is the recent foreign and local investor attention enough for these innovative ideas to deliver what they pitch?
Where the availability of capital plays a crucial role in germinating a unique business idea, it wouldn’t be an exaggeration that the actual deal for startups is beyond the funding stage. That’s when all the promises made, ideas pitched and strategies designed are tested for sustainability and endurance. Unfortunately, research shows that even after VC funding, startups have failed across the globe. According to one estimate, around 50 percent of the startups that raise initial funding fail, which means that the risk continues to be high, which is underplayed by the startups.
There is a multitude of reasons why a startup fails, such as infeasible business model, shortage of cash, inappropriate team, technical and operational challenges, lack of demand and customers, issues with the product or service, etc. However, one would assume that these issues are well addressed when one goes for funding rounds. Ideally, the venture capitalist and investor would look for revenue growth, market need and demand, scalability prospects, product or service specifications before putting in money into the business venture. So why would a startup still run a high risk of failure after its cash and capital needs are taken care of - albeit temporarily?
There are a host of reasons why startups can go down the ditch even after running high on cash. First of all, it is important to understand that VC funding is the riskiest asset class. Inability to increase sales revenue, not understanding the market correctly, and not having a product-market fit are some reasons that experts think are relevant to Pakistan. Also, many times, the funds are not spent judiciously; founders lose interest or lose their focus to build a business model that focuses on revenue as well as profit. After all, growth, scalability, and sustainability are the key promises that are pitched to the investors. Then there are factors that are sometimes beyond anyone’s control such a pandemic; market shifts; death or illness of the founder etc.
The lesson here for startups is to incorporate the chances of failure even after a good series of funding rounds. However, the way forward for startups in Pakistan should not be led by the fear of failure; the metamorphosis of the startup ecosystem where some excel and many fail has been witnessed across the globe. Monis Rahman in his recent interview with BR Research also said that many startups will fail, but some will succeed in game-changing ways, and entrepreneurs who failed in their first startups will rise again and succeed in their second or third; startup community will discover better business models and will pivot to create something of even more value.