A Guide to Micro Seed Funding

 

Disadvantage: High Risk of Failure

As an entrepreneur, one should understand that there is a high risk of failure when starting a company.  The U.S. Bureau of Labor Statistics found in a 2005 study that nearly 6 in 10 new businesses fail within the first 4 years of operation.  [1]  Success of companies in the consumer internet space is defined primarily by distribution.  Chances are high that after building and releasing a product to the public, it does not receive the growth expected.  The reason for failure may be because of a bad idea or bad execution, but the fact is that most startups are unsuccessful.

There are many variables factoring into the success of the company, some of which are out of one’s control.  Market conditions are great example.  In the late 90s the internet economy was booming along with company valuations.  As company valuations rose, so did the expectations on return.    From March 13th through March 15th of 2000, the technology heavy NASDAQ index lost nearly 9% of its value. [2]  The descent continued in what is considered the “dot-com crash” which dried up the IPO market for new companies and also hindered the mergers and acquisitions activity of publically traded companies.  As a result, many internet startups had to file for bankruptcy because they were not profitable and there were no exit opportunities in sight.  The “dot-com bubble” was falsely supported by high expectations, but not earnings or smart business models.  The internet economy has since improved as demonstrated by Google’s IPO and stock price appreciation backed by true profits.

The risk in starting a startup has to be weighted against the level of risk one can support at their current stage in life.  For example, it would be risky for a middle aged person trying to save for retirement to quit a steady job and start a company.  However, young adults recently out of college  have little to lose if their startup fails.  If nothing else, they will have gained valuable experience and connections in the process that can be applied to their next startup or elsewhere.  The entrepreneurial life clearly has its ups and downs, but that’s where the excitement lies.  If one has any qualms about starting a company, Paul Graham’s Why to Not Not Start a Startup is the perfect reading material.


NEXT: Details on my experience in Silicon Valley >>


Notes:
[1] http://www.bls.gov/opub/mlr/2005/05/ressum.pdf
[2] http://en.wikipedia.org/wiki/Dot-com_bubble