Lack of Funding Doesn't Have to Lead to Failure: Study

[qi:110] An underfunded startup can still succeed, and having a superstar management team isn’t key to doing so, according to a study published today out of North Carolina State University. The school’s David M. Townsend collaborated with Lowell W. Busenitz of The University of Oklahoma on the research, which aimed to determine how not raising enough money affected startups. My flip response is that those companies fail, but the research proves that’s not always the case. Some startups can adapt.

The two used information from a local non-profit organization that helps early-stage companies find and raise capital. They ended up reviewing 79 companies that were funded during a 10-year period. The language of the paper is academic, but essentially this is what they found:

  • Rockstar management teams with average technology, and average management teams with rockstar technology, are both more likely to fail because they ran out of money.
  • However, average management teams with average technology are less likely to fail because they ran out of money, possibly because they are more aware of their shortcomings and adjust their capital spend accordingly.
  • Rockstar management teams with rockstar technologies are also likely to get the capital they need to succeed.
  • The better the technology being pushed by the startup, the more likely it is that the startup will not get the money it needs to succeed unless it has a rockstar management team.
  • It’s better to invest in technology and people that work well together than to dump what works in favor of something that looks more attractive. To that end, the study recommends that VCs shouldn’t bring in a new rockstar CEO to a startup unless he or she works well with the current management team.
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