The reality of startups is grim, survival of the fittest on steroids – few make it out alive. And even then, when does a startup stop being a startup and become a company? After an acquisition or public offering? No matter the answer to that question, most startups will never have the chance to address it for one reason: they'll never make it that far.
Late last week CB Insights released what it called the "R.I.P. Report," an insightful study into the death of startups. Looking at its own data between 2010 and 2013, CB Insights found that most companies that succumb to startup death have many things in common, and for the most part operate like zombies, unaware of their fate.
Many startups are mindful only of the successes of their surviving peers. "If Facebook is so successful, then I can be too" or "We're like Uber for [insert noun]." There's nothing wrong with going for the home run – in fact, if you don't, then what's the point? But disregarding the reality of an industry in which most fail is like a virus that will inevitably bring you to the same fate.
This leads to zombie startups, ones that are operating dead without even realizing it. According to CB Insights, most companies that call it quits go 20 months since their last round of funding before doing so. This means that about a year to a year and a half out from last funding, startups should be concerned if new funding is not coming around. There's a new trend in which many companies in that situation are opting for the "acqui-hire," when a struggling startups is bought for its talent.
A lot of this can be drawn back to the ugly Series A crunch. So many startups are obtaining seed funding, but when it comes time for that Series A, there's no money to be had. This leaves "orphan" startups, which must try to bootstrap again, somehow strategically exit or face an imminent demise. Most startups that die raise less than $5 million in their early stages, though some go into the double digits and still don't make it. About 55 percent never raise more than a million.
And though startup death is possible for companies in any industry, a staggering number of Internet-based companies never make the cut. CB Insights found that 79 percent of startups that died in 2013 were Internet companies. It's a sad reality of that sector, and one that could doom the market – the tech companies making the most money are Internet-based, but they're also the most vulnerable to implode at any moment.
Let this be a lesson to early-stage, newly-funded Internet startups. Facebook, Twitter, LinkedIn and the bunch are all glorious role models, but don't turn your back to the failure of your peers – or you might be joining them in about 20 months.
