[rrrrrrrrrrrryan]

One of my finance professors mentioned that ~70% of business fail in their first two years, and ~90% of those failures are purely due to a lack of working capital, not due to any fundamental flaw in the business plan. If they kept doing the same thing and just had more money and time, things would have eventually worked out.

People start businesses for emotional reasons, not logical ones, and vastly, vastly underestimate the amount of money they'll need to get the thing off the ground. Entrepreneurial people are inherently optimistic, (and they have to be), but he said their estimates were typically off by ~5x. If you think you need a million dollars of runway, you probably need 5 million. If you think it'll take a year to achieve profitability, it'll probably take 5 years.

[yunohn]

> due to a lack of working capital, not due to any fundamental flaw in the business plan. If they kept doing the same thing and just had more money and time, things would have eventually worked out.

Ironically, that’s what VC funding aims to provide - capital to extend runway and improve scale quickly.

Whereas the reality is VCs support negative unit economics and absurd customer acquisition costs.

[moonchrome]

> One of my finance professors mentioned that ~70% of business fail in their first two years, and ~90% of those failures are purely due to a lack of working capital, not due to any fundamental flaw in the business plan.

Having seen my share of failed businesses - I'm very skeptical of these numbers.

[mindwok]

Also skeptical. How would you determine if a business would have succeeded if it had working capital to continue?

[rrrrrrrrrrrryan]

Imagine you're starting a restaurant.

When you start a business, your costs basically fall into 3 categories: initial costs (like furniture and stove-tops), fixed costs (like rent and bare-minimum employee wages), and variable costs (like raw input ingredients and additional labor to handle additional business).

As long as your revenue is growing each month, and you're making money on each individual sale (as determined by your variable costs), you'll eventually achieve profitability.

When I say most new businesses have no fundamental flaw in their business plan, I mean that most businesses make money on each sale (e.g. they're not selling burgers for less than the cost of ingredients and the labor to prepare it), which is not that surprising. What is perhaps surprising is that the business is also usually growing each month and they're on a path to eventual profitability, yet they run out of money and fail anyway. When starting a business, you're not convincing investors and debtors that your business model is sound (most are), but rather, that your business model is more sound than most other businesses that they can invest in.

[friendzis]

This assumes that working capital management is magic and is not part of making business. If it was not the case, cloud hosting like AWS would have failed before even starting. And yet here we are, spending more per unit to free working capital.

[chii]

If the theoretical unit economics works out, _and_ that the market size allowed for the scale that those unit economics required?

[dtgriscom]

... skeptical in which direction?

[bitcoinmoney]

Seems like same numbers from e-myth book. The reasons though are entirely different. Businesses fail because owners don’t get out of technician mode.

[OJFord]

unicorn-hopeful startup buseinesses might fail for that reason; millions of businesses thrive with technician'/whatever relevant to the business owners.

'Bootstrapped' as we now say, 'mom and pop' as many here might say, or just 'small to medium businesses' as we used to say.