Posted by Alan Nazarelli ● Mon, Sep 24, 2012 @ 01:31 PM

Venture Capital and Venture Failure: Why do Certain VC Startups Fail?

venturecapitalThe Wall Street Journal reported this week that three out of four venture funded startups fail to return a single dime to their investors.

I often wonder why specific Venture Funded companies fail. As we have heard before, it comes down to three things-money, management and marketing. We address the marketing part in this article

As CEO of a market research firm, I see countless situations where customer insights reveal severe gaps in product features or marketing approaches. I see this with our most sophisticated technology clients, so I can imagine how acute the situation would be with start-ups and early stage companies. The good news is that when working with an experienced technology marketing research firm you get an opportunity to fix these items before launch. We assist clients by creating a laboratory or simulator for real world market conditions. One common refrain we hear is very few start-ups have the means to conduct formal market research. It is certainly understandable that scarce resources make this difficult, if not impossible, for the start-up founder. You would think though, given these dismal statistics, the VCs on behalf of their investors, would want to take steps to alleviate this critical reason for venture failure.

Here are some things VCs could do:

1. Set up a blanket arrangement with an outside firm specializing in market research and predictive analytics and make these services accessible at a pre-negotiated or subsidized rate to their portfolio companies. Many are reluctant to do so, mainly because they see their role as providing all the guidance their portfolio companies need and have sold themselves that way to their investors. Some VCs I talked to have told me that since they charge back their portfolio companies for their consulting services, they would not be willing to have those dollars flow to an outside firm. Isn't that a little like General Practitioner not sending a patient to a specialist that could take better care of the problem and bill the patient or his insurance company?

2. Insist that portfolio companies develop strategies based upon a solid foundation of customer intelligence as a pre-condition for funding or additional funding.

3. Provide a market research specialty firm with domain experience in the field an opportunity to consult with their portfolio companies' CEOs. Even if the companies don't engage with the firms, the dialog can only help the founders appreciate what customer insights they need to think about before launching.

Here are some things start up founders can do:

1. Reach out to market research firms you feel specialize in your space and engage them in dialog. Try to gain an understanding of tools and techniques that are used to measure and assess customer needs, desires and tastes as they pertain to your offering. 

2. There are some great tools available today to do some basic things to do yourself or in-house.  Level with the market research provider about your current budget situation and seek guidance. Many providers are only too happy to provide guidance in anticipation for long term relationships. They too will benefit from your success when you raise your series A and B funding and when both your needs and resources evolve to where you could become a client.

3. Ask the provider if he will be willing to work for a lowered fee in exchange for certain trade-offs. Valuable trade-offs could be flexibility with project time lines, giving the provider permission and access to write you up as case study, referrals and introductions to industry contacts.

4. Last, but no least, you may be surprised at the provider's willingness to be flexible if they get excited by your technology. This is particularly true of smaller boutique providers.

Let us know if you agree with our recommendations for the VCs and the start-up firms. What have been your experiences with funding startups and bringing a start-up firm's product to market.

Topics: Customer Insights, Market Research

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