Convertible Notes and Startup Funding
February 12, 2025
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Advances in medical science have increased the life span of individuals. It is now common for people to live for ten to twenty years longer than their previous generation. This seems like a good development from a humanist point of view. However, from a pension fund’s point of view, a longer life span has several […]
Sports league sponsorships are a very important source of financing for many leagues across the world. The revenue derived from sponsorship deals is the second biggest source of financing for most sports leagues after the sale of media rights. However, many people are still not aware of the economics of sponsorships. This is because of […]
Startup companies typically have a high failure rate. It is said that 90% of all startup companies fail. The percentage of companies failing keeps on reducing as the company grows and obtains more funding.
Ideally, when a company becomes a unicorn i.e. achieves a valuation of $1 billion, then there shouldn’t be any chances of failure. However, surprisingly even unicorn companies fail. Many times, they end up causing a lot of damage to the investor’s funds as well. Hence, it is important for investors to understand the reason why unicorn companies fail.
It is important to understand the common reasons behind the failure of unicorns in order to be able to predict these failures.
Companies often try to convince investors that they will achieve dramatic growth in a very short span of time. It is not uncommon for unicorns to claim that they will grow the company at the rate of 15% per week. This immense speed comes at a cost. Often this leads to large-scale mismanagement in the company. Of course, scalability is an important aspect of the business model of startups. However, there should be reasonable assumptions, or else the growth process can turn into an operational disaster.
Public investors tend to focus on value which is found in the financial statements. On the other hand, private investors tend to focus more on the future. They believe more in the dreams being sold about the potential that the company has to change the world. Startup companies need to go public only after the transition is complete. If the company is not able to justify its valuation based on the numbers in the financial statement, then its stocks will be pounded in the open markets.
It is common for unicorns to list on the stock exchanges. However, some of them succeed whereas the others fail. Investors need to look out for some of the symptoms which are an indicator that a startup might fail.
The fact of the matter is that all types of companies are prone to failure and unicorns are no exceptions. Investors must be aware that sometimes the hype surrounding a unicorn can turn out to be just hype that is not backed by any substance.
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