The balance between risk and return that links high risk to high reward is well suited for entrepreneurs and start-ups. Where the tension is greatest, the risk of failure also affects the sky. This is why the majority of startups fail a lot before they reach their potential. Various studies and research show that 90 percent of start-ups fail.
While the recent rise in VC funding in Pakistan’s startups is phenomenal and positive for the growth of the ecosystem, the next phase that attracts attention is the need not only to sustain investor interest but also for startups to graduate to the next level to scale, grow, maintain and earn. In short, is the attention of the latest foreign and local investor enough for these innovative ideas to deliver what they put forward?
When the availability of capital plays a crucial role in spreading a unique business idea, it would not be an exaggeration that the business itself for start-ups is outside the financing stage. This is when all promises, ideas and strategies designed are tested for sustainability and perseverance. Unfortunately, research shows that even after VC funding, startups have failed worldwide. According to an estimate, about 50 percent of start-ups fail to increase initial funding, which means that the risk remains high, which is underestimated by start-ups.
There are a variety of reasons why a startup fails, such as impossible business model, lack of cash, inappropriate team, technical and operational challenges, lack of demand and customers, problems with the product or service, etc. However, one could assume that these questions are well addressed when going to funding rounds. Ideally, the venture capitalist and investor should look for revenue growth, market needs and demand, scalability prospects, product or service specifications before investing in the business venture. So why would a startup still run a high risk of failure after its cash and capital needs have been taken care of – albeit temporarily?
There are a number of reasons why start-ups can go down the drain even after having high money. First and foremost, it is important to understand that VC financing is the most risky asset class. Inability to increase sales revenue, not understand the market correctly and not have a product market fit are some reasons that experts think are relevant to Pakistan. Also, many times, the money is not used wisely; founders lose interest or lose focus to build a business model that focuses on revenue and profit. After all, growth, scalability and sustainability are the most important promises given to investors. Then there are factors that are sometimes beyond anyone’s control such a pandemic; changes in the market; death or illness of the founder, etc.
The lesson here for start-ups is to incorporate the chance to fail even after a good series of financing rounds. However, the way forward for start-ups in Pakistan should not be led by the fear of failure; the metamorphosis of the start-up ecosystem where some excel and many fail has been witnessed around the world. Monis Rahman in his latest interview with BR Research also said that many startups will fail, but some will succeed in ways that change the game and entrepreneurs who failed in their first startups will rise again and succeed in their second or third; Starting the community will discover better business models and will swing to create something of even more value.