What the heck happened to Quibi?
Once upon a time, Quibi was a streaming startup with all the makings of a homerun:
- A name-brand founder (Hollywood mogul Jeffrey Katzenberg).
- A proven CEO (Meg Whitman, the former CEO of PayPal and Hewlett Packard).
- And plenty of cash ($1.8 billion in funding).
But in October 2020, just six months after launching, it went belly-up.
Today, I’ll explain what happened — and explain why its investors lost their shirt.
Then I’ll show you a simple trick to ensure YOU never lose your shirt on a startup.
Why Startups Fail
After Quibi shut down, Katzenberg and Whitman wrote a letter to their employees.
In the letter, they admitted that Quibi “wasn’t strong enough to justify a stand-alone streaming service.”
In other words, in a world filled with 200+ services like Netflix, Hulu, and Disney+, there was no need for it.
This is a very common reason for business failure…
In fact, last week, research company CB Insights published an article entitled “The Top 12 Reasons Startups Fail.” Its research was based on an analysis of 110+ startup failures.
And it found that “no market need” was the cause of failure 35% of the time.
But that’s not the only reason a startup fails…
Not the Right Team
It’s common sense that the people behind a startup are incredibly important.
But what’s not so obvious is the importance of a team’s diversity — in particular, its diversity of skill sets.
CB Insights’ research found that a “diverse team with different skill sets was often cited as being critical to the success of a company.”
For example, many founders realize too late that they need a co-founder with tech skills. As CB Insights reports, many founders of failed startups said something along the lines of, “I wish we had a [Chief Technical Officer] from the start.”
And meanwhile, founders who already had technical skills realized too late that their startup needed “a founder that loved the business aspect of things.”
Bottom line: a startup needs a balanced team — with one founder focused on tech, and another founder focused on business.
But what else can go wrong in startup land? Let’s take a look.
And Now… The No. 1 Reason that Startups Fail
Thanks to the excitement around a sector known as Augmented Reality, a startup called Daqri was able to raise more than $250 million.
But in September 2019, it was forced to shut its doors.
As CB Insights reports, Daqri learned the hard way that sectors can rapidly fall out of favor. So a company better have a plan to stay alive beyond “we’ll raise more money.”
And as it turns out, this is the No. 1 reason a startup fails:
It runs out of cash!
The Risk of Ruin
And this gets to the reason why Wayne and I undertook a major research project when we were starting Crowdability…
Since running out of cash is the No. 1 reason a startup fails, we wanted to build a system that could assess how likely it was that a company would run out of capital.
So we hired a team of statisticians and financial experts from the M&A group at Citigroup. And we eventually identified NINE factors that were historically proven to be correlated to a company’s probability of running out of capital — which in turn, correlates to a company’s likelihood of failure.
And then, using these nine criteria, we developed software that could automatically rank and score investment opportunities.
We call this score the Risk of Ruin.
A Simple Way to Analyze Risk
Essentially, the Risk of Ruin is a metric for analyzing investment risk.
It provides an objective look at a startup’s risk of running out of money, and reveals how one startup’s risk compares to others.
As just a couple of examples of what it analyzes…
The Risk of Ruin analyzes a startup’s team — because the data are clear: companies started by more than one person have a higher survival rate.
For example, the Startup Genome Report found that “solo” founders take 3.6x longer to reach scale compared to a founding team of 2. And the longer it takes for a startup to reach scale, the more likely it is to run out of money!
Furthermore, as it relates to what you just learned about “balanced” teams, startups with one technical founder and one business founder raise 30% more money and have 2.9x higher user growth than teams who are strictly technical or business-heavy.
Performing a Risk of Ruin analysis on every investment opportunity you’re exploring can help you steer clear of the ones where you’ll lose your shirt.
But analyzing a company’s risk is complicated, difficult, and very time consuming.
That’s why we invested over $250,000 into building special software we call CrowdabilityIQ. This software automates the Risk of Ruin analysis, and provides key insights into a startup’s valuation and traction.
Wayne and I often publish articles on our free site about how we leverage the Risk of Ruin to identify winning investments.
But if you’d like to learn about getting access to CrowdabilityIQ to make winning investments yourself, give my colleague Lauren a call, toll-free, at 1-844-311-3191.