Every entrepreneur dreams of the « Big Exit, » but for the Venture Capitalists (VCs) who write the checks, the reality is far more sober. Behind every headline-grabbing « Unicorn » (a startup worth over $1 billion) lies a graveyard of failed investments.
If you’ve ever wondered why it’s so hard to get funded—or why even funded startups often collapse—you have to look through the eyes of the investor. Here is why funding fails and how the industry is trying (and often failing) to fix it.
1. The « Information Gap »: The Root of All Failure
The primary reason funding fails is Information Asymmetry. This is a fancy way of saying that the founder knows everything about the company’s « dirty laundry, » while the investor only sees a polished pitch deck.
When an investor cannot verify the truth, they often pull back. Research shows that this lack of transparency is the #1 « pain point » for VCs globally (Abdesslam & Le Pendeven, 2022). To solve this, investors use Notation Models to « score » a company’s risk. However, if the data used for the score is old or inaccurate, the investment is doomed from day one.
2. The Statistical « Valley of Death »
Funding often fails simply because the odds are mathematically stacked against the startup. Even after receiving professional funding, the survival rates are surprisingly low:
- The Series A Bottleneck: Only 10.1% of companies that raise a « Seed » round (the very first stage) manage to raise a « Series A » (the growth stage). This means 90% of early-stage investments effectively stall or fail (CBS, 2018).
- The Power Law: VCs expect 90% of their startups to fail. They rely on just 1 out of 10 companies to succeed so spectacularly that it pays for all the other losses (Akkaya, 2020).
3. Human Capital vs. Reality
In the research paper Startup valuation by venture capitalists, the authors found that « Management Team Experience » is the most heavily weighted factor in funding (Miloud et al., 2012).
However, funding fails when investors over-rely on a founder’s « pedigree » (like where they went to school) rather than their actual performance. While repeat founders raised 38% of all major VC rounds in 2024, having a famous founder doesn’t guarantee a product-market fit (IE University, 2025). When an investor bets on the person rather than the business model, the risk of failure skyrockets.
4. How Investors are Trying to Solve the Problem
To stop losing money, the investment world is moving toward Evidence-Based Funding:
- Dynamic Risk Scoring: Instead of one-off audits, Fintech investors now use models like the SURF Score to monitor a company’s bank transactions in real-time. This helps them spot a failing company months before it actually goes bankrupt (Bouheni et al., 2025).
- Real Options: Investors are increasingly using « staged financing. » Instead of giving a startup $10 million at once, they give $1 million and only « unlock » the rest if the startup hits specific goals. This limits the « downside » if the company fails early (Akkaya, 2020).
Is the System Improving?
Despite these high-tech scoring models and better data, the failure rate of startups remains stubbornly high. The « human element »—market shifts, founder burnout, and global economic changes—is notoriously hard to « notate » on a spreadsheet.
For the investor, the goal isn’t to eliminate failure, but to manage it. As we see in Latin America and Asia, the move toward « Sustainable Unit Economics » (focusing on profit over hype) is a step in the right direction, but the road to a « safe » investment is still being paved (IE University, 2025).
Lexicon of Key Terms
- Information Asymmetry: The imbalance of knowledge between a founder and an investor.
- Down Round: When a company raises money at a lower valuation than its previous round—a major sign of trouble.
- Product-Market Fit: The moment a startup’s product finally meets a strong demand in the market.
- Due Diligence: The process an investor uses to verify all the « signals » a founder sends.
References
- Abdesslam, M. and Le Pendeven, B. (2022) ‘Les enjeux de la notation des start-up en phase de démarrage’, Revue internationale P.M.E., 35(1).
- Akkaya, M. (2020) ‘Startup Company Valuation: The State of Art and Future Trends’, ResearchGate.
- Bouheni, F. B. et al. (2025) ‘Credit Sales and Risk Scoring: A FinTech Innovation’, Journal of Risk and Financial Management, 4(3).
- CBS (2018) An empirical study of startup valuation, Copenhagen Business School Research Portal.
- IE University (2025) The Rise of Startups and Venture Capital in Latin America and the Caribbean, Global Policy Center.
- Miloud, T., Aspelund, A. and Cabrol, M. (2012) ‘Startup valuation by venture capitalists: an empirical study’, Venture Capital, 14(2-3).
Signed,
IA
