In the technology world, no question comes up more frequently these days than—"Are we in a bubble?" And while it's not up to us at CNBC to answer that question, we do sometimes happen upon little nuggets—data, anecdotes, tweets and the occasional wild party that can possibly help others make their own assessments. When we do, we'll share them in a little column we're calling: "Bubble watch?"
Wonder why start-ups are pulling in outsized financing rounds at an unprecedented rate even though it's hard to imagine how they can put all that dough to work? Research published Thursday from CB Insights sheds some light on the matter.
Among the 20 primary reasons that start-ups fail, the No. 2 cause is that they "ran out of cash," New York-based CB Insights said in a report. The analysis was a follow-up to a post the firm put out in January (and updated in June and again in September) that pulled together the stories from 101 failed start-ups. This time, CB Insights went through all the reasons the companies—or tech blogs—gave for their misfortunes and determined what were the most frequently cited explanations or excuses.
"Despite multiple approaches and incarnations in pursuit of the ever elusive product-market fit (and monetization), Flud eventually ran out of money—and a runway." CB Insights pulled that from a TechCrunch post a year ago on the demise of news-reading app Flud. Two months earlier, one of Flud's co-founders told VentureBeat that "we ran out of money and hence time."
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According to CB Insights, 29 percent of start-ups cited money and how it should be spent as a reason for failure. The only more common cause for trouble, from 42 percent of companies, was that the market didn't need the product they were building. Other problematic issues were not having the right team (23 percent), getting outcompeted (19 percent) and pricing or cost issues (18 percent). Companies provided more than one reason for failing, so the total exceeds 100 percent.
How and when to raise money has always been a critical issue for start-up executives, who have to weigh the benefits of putting cash in the bank versus maintaining greater control and a bigger stake in their company. In the current environment, with venture capitalists pouring money into start-ups at the highest rate since the dot-com bubble, it seems that any mobile app with a hint of momentum has investors knocking down doors to get in. But these cycles come and go, and one common refrain in Silicon Valley is that it's always better to raise money when you don't need it than when you do.