May 6, 2020

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by: Jonathan Hung

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Tags: Startup Funding

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Categories: Startup Funding

Can A Failed Startup Still Get Funding?

Entrepreneurs of aspiring startups often feel immense pressure to make their companies succeed. There are many reasons for this feeling. First, there’s usually money riding on the line, from friends, family, and investors. Second, entrepreneurs often have a passion and drive. They want to succeed, do well, and change the world. Finally, many people feel like having a failed startup on their professional resume would be disastrous. After all, if the person didn’t succeed the first time, why would investors assume the next time would be different?

At first glance, this logic may feel intuitively correct. However, it’s entirely wrong. Angel investors are frequently willing to give entrepreneurs who have had failed startups in the past more chances. Just because you’ve had a failed startup before doesn’t mean investors will refuse to put money into your new enterprise. Here are eight reasons why angel investors would be willing to invest in someone with a failed startup on their records.

Table of Contents:

  1. Entrepreneurs Willing To Try Again Have A Drive To Succeed
  2. Failed Startups Are Not Predictive Of Future Failures Or Successes
  3. More Experience Can Make The Investing Process Easier
  4. There Are Positive Mentorship Opportunities
  5. You’re The Right Person For This Idea
  6. Sometimes The Timing Was Wrong With Failed Startups
  7. The Founder Of The Failed Startup Has A Positive Reputation Of Honesty And Integrity
  8. You Were Able To Return Investor’s Money
  9. Experience, Trust, And Determination Matter More Than Failed Startups
  10. Conclusion

Entrepreneurs Willing To Try Again Have A Drive To Succeed

Even if that previous endeavor is a failed startup, the fact that someone is willing to try again shows tenacity, courage, and grit. There are many entrepreneurs who, after failure, shrink and go back to working for someone else. The fact that you would be willing to try something new is inspiring and indicative of the calculated, intelligent risk-taking behavior that entrepreneurs must have to succeed.

Of course, in addition to having the drive to succeed, returning entrepreneurs should demonstrate that they have learned from their previous mistakes. Many times, the endeavors of entrepreneurs fail due to errors that they can avoid in the next project. For example, perhaps you didn’t pay enough attention to cash flow, or you didn’t have the right team in place.

Regardless of the reasons why your previous company failed, demonstrating how you’ve grown, learned, and matured will give angel investors confidence to invest with you again.

Failed Startups Are Not Predictive Of Future Failures Or Successes

You may have heard that Walt Disney went bankrupt three times before he went on to create one of the world’s leading entertainment companies. Or you may have heard about Henry Ford going bankrupt multiple times before inventing a vehicle that would change the course of the American industry and life forever. More recently, Max Levechin founded PayPal after having four previous companies fail.

While people often use these stories as “pep talks” to encourage people to try again, angel investors know that these success stories happen all the time. Those failures are, to some degree, priced into the offers they make. Assuming the founder learns from their previous mistakes, having a failed startup does not mean the next one will fail. If anything, it gives a little bit higher chance of the next one succeeding because the entrepreneur will have learned some lessons.

As long as this startup idea is not a carbon copy of the previous plan with the same market conditions, there’s little reason why an angel investor wouldn’t consider this as a fresh start.

More Experience Can Make The Investing Process Easier

Founders who have had a failed startup in the past know the ropes. They understand what angel investors are looking for, how to do presentations, what numbers to get, and so forth. That experience doesn’t disappear just because the startup collapsed. In this respect, dealing with someone who has gone through the process before is often more straightforward than people who are going through it for the first time.

In addition to making the investment process simpler, founders of previous startups also know what investors are looking for in the future VC rounds. Let’s suppose that the founder’s previous startup failed due to a lack of series A funding. The fact that the founder got to that stage means that they know what does and doesn’t work to obtain this level of investment. The founder of the former failed startup will know how to structure their pitch, presentation, and the metrics they will have to hit to maximize their chances of success.

It might sound counterintuitive at first, but there is value in having someone that understands what investors are and are not looking for in a prospective company. It helps ensure a higher probability that each funding round will go smoothly and ensure a successful exit.

There Are Positive Mentorship Opportunities

Having a failed startup is a learning experience and one that the founders can share with others to avoid them making the same mistakes. For the investor, it’s nice to invest in someone that has the potential to mentor others for success. During networking events, the founder may advise another entrepreneur about their previous venture and the mistakes they made. It’s one of those situations where having experience makes both the angel investor and the entrepreneur look good.

Angel investors all want successful exits out of their positions, and sometimes investing in someone with experience, determination, and resolve helps inspire others and attract additional investment opportunities.

You’re The Right Person For This Idea

Sometimes entrepreneurs are just the wrong people for a particular idea. With failed startups, this happens more often than not. A software developer, for example, gets a plan to change the world using AI to develop vaccinations. They attract a team, financing, and it falls apart. Maybe it fell apart, not because it was a bad idea, but because the founder didn’t have the domain expertise necessary to connect AI to vaccinations. In this case, the founder was the wrong person for the idea, even if it was a noble intent.

Now, let’s say the same founder creates a new startup. This time, though, it’s a software developer making AI-driven chatbots. The founder now has the domain expertise necessary, being in software, to make this idea a success. Indeed, their particular skill set and the team go on to create award-winning, revolutionary chatbots.

Angel investors recognize the fact that sometimes entrepreneurs have fantastic ideas, but they weren’t quite the right fit for them. Angel investors frequently invest in the team and people and how that team will be able to tackle a new challenge. If your new endeavor is different from your previous failed startup, the angel investor could view you as being an excellent fit for your new enterprise. In that case, they’d be happy to invest in you.

Sometimes The Timing Was Wrong With Failed Startups

Continuing with the notion of the failed startups are not predictive of future results, sometimes the timing was off with the previous enterprise. Many entrepreneurs have stories of being either too early to market or too late. When this happens, businesses often have to close up shop.

However, angel investors also know this happens. If your business was visionary for its time, then it’s possible to look at your previous venture in a positive light. Indeed, if your business were visionary, then your failed startup wouldn’t be negative, but instead, investors would view it as a positive and predictive of your future success!

The Founder Of The Failed Startup Has A Positive Reputation Of Honesty And Integrity

Reputation matters a lot in the startup world, and the way founders fail can have a significant impact on future investment prospects. Consider the following two hypothetical examples.

Founder A’s startup is a hit, but slowly losing money. The founder sends emails repeatedly assuring investors that their money is safe and that everything is alright. Then, suddenly, one day, the business files for bankruptcy. All the money is gone.

Founder B’s startup is also a hit and losing money slowly. The founder communicates this with investors and lets them know what’s going on. The investors advise specific ideas, which the founder tries. None of them work. Instead, the business continues to lose money, lose traction, and eventually has to close up shop. During this process, though, investors knew the precise state of the company.

Which founder is more likely to get a future investment? Founder B, of course. In this case, founder B has already shown that they are adaptable, honest, and willing to work on challenging problems. In some respects, founder B is less of a risk than an unknown entrepreneur because you know precisely what founder B will do if times get tough. On the other hand, for someone who has never had a startup before, the investor has no idea if they will handle failure gracefully or blow all the money at a lavish party.

If you have a reputation of honesty and taking fiduciary duty seriously, even if your startup failed, investors will know in what type of character and team they’re putting their money.

You Were Able To Return Investor’s Money

It’s important to note that from an angel investor’s perspective, the definition of failure might not be the same as yours. If an angel investor put in $100,000 and the company wound up being able to return some or all of that money throughout its life, then this is much different than investing in a company with no returns whatsoever.

The company failing is not necessarily indicative of investors losing everything. If you returned or tried to give back some portion of the investment, and the company still failed, then angel investors might be willing to take a chance since they know you intend to return their finances.

Again, with a brand-new entrepreneur, an angel investor is taking a chance on them that they will adhere to their fiduciary duty. With a founder of a former failed startup, you might have a track record indicating that you will treat their funds with respect and use them as wisely as possible!

Experience, Trust, And Determination Matter More Than Failed Startups

Failure is inevitable. No matter how wildly successful your company is, you will have times along the way where you fail. Even some of the largest companies in the world, like Apple and Microsoft, have had failures at some point in time (Apple’s video game console and Microsoft’s Zune are classic examples). What matters most is how founders respond to it and the experience that they learn. In the cases above, Apple has now found its way into the homes of millions with Apple TV, and Microsoft still has a strong entertainment foothold with Xbox.

No CEO will do everything perfectly all the time. Every founder will make mistakes, and sometimes companies fail due to those mistakes, or they fail due to outside market influences. Less important than why it failed is how it failed and what came after.

  • Did you learn anything from experience?
  • Did you display determination and professionalism through the difficult times, or did you give up?

However, once you have a startup – even a failed startup – investors know precisely what type of person you will be. If you “failed well,” meaning you were transparent and treated employees, customers, and investors with respect, then an angel investor can factor those positive characteristics into their investment decision. If you “failed poorly,” then you might have a much harder time convincing an angel investor to take a chance on you.

Conclusion

Each of the reasons outlined above was a reason why an angel investor would give a founder of a previous failed startup a second chance. However, at their core, they’re all based on the same three key personality traits that all investors want for their company’s CEOs: experience, trust, and determination.

When someone invests in a founder they’ve never worked with before, all these questions are unknown. They have no idea what someone will do with the money, how honest they will be, or how determined they will be to make the startup work. A first investment, therefore, is quite risky. Investors will be using their best judgment to determine what type of person you are.

So, if you have a failed startup or two on your record, don’t despair. There are plenty of angel investors out there who will likely be happy to still work with you!

About the Author

Jonathan Hung is one of the most active angel investors in Southern California, his mission is to drive value creation within each portfolio company. In support of this mission, he serves as Co-Managing Partner at – Unicorn Venture Partners. Unicorn Venture Partners target investments in US companies that have global market potential with a focus on long-term growth expansion to East Asian markets. Jonathon developed his investing prowess as a Managing Member for his family office fund, J Heart Ventures. To name a few startups he funded in startup companies such as Gyft, ChowNow, Miso Robotics, Clover Health, and Bitmain. He has degrees from the University of Southern California, London School of Economics, Massachusetts Institute of Technology, and The Wharton School at the University of Pennsylvania.