In the tech industry, adjusting course is more the rule than the exception. Ninety percent of VC-backed startups veer off their initial investment thesis. Only about 4% manage to return ten times or more on the initial investment (Osterwalder et al, The Invincible Company, 2020, p. 54). Venture capitalists operate under the assumption that one or very few highly successful investments will cover the losses of many. Thus, they concentrate their efforts on identifying and supporting those few startups showing exceptional trajectories.
A high “fall-out ratio” is not a “system defect”; on the contrary, it is part of the system. And VCs play an important role. But still, there are the other 90% companies. Not all of them are completely lost. Depending on the source, 20-40% are indeed bets that did not work out at all. They are therefore a complete write-off from a VC perspective. But this also means: 50-70% of VC-backed tech ventures are – or may become again – viable businesses. These are the companies that we call “stuck businesses.” They are either stuck strategically, or they are stuck from an ownership structure perspective, or both. And they are severely at risk through a misalignment of interests.
The management methods to reignite a mid-performing company contrast starkly with the typical growth methods applied to the 10% outliers. Looking at the classical recommendations to scale, the majority of all VC-backed ventures are indeed “lost in translation.” Worse: Most VCs lack of expertise in reigniting a stuck business – and it is also not their role to do so. So the classical recommendation of a VC in view of those companies is to recommend a sale. But this is no strategic view on the options of a company. Nor does it align well with founders’ and other shareholders interests. Nor does it really work in many cases, as the companies are not ready to be sold.
So the longer it takes, the riskier it gets for everybody involved. The good news is: what is a dangerous situation and what may seem like a potentially complete crash of dreams and plans can open the gateway to a different, maybe even more successful growth trajectory. Some of the most successful companies in the tech world have emerged from painful pivotal situations. Also, many formerly stuck companies in VC portfolios have become significant successes, though they haven’t achieved a 10x+ return.
If all these companies had been given up on after their initial setbacks, significant value and opportunities would have been lost. This only leads to one conclusion: It’s worth fighting your way through a pivotal situation, at least go through a deep, structured analysis of options available.