When Eran Hammer first came up with what he called Nouncer, the idea was for a consumer-facing micro-blogging web service. Unfortunately, the service was still in development when Twitter arrived, forcing him to change his product. After a year of uphill struggling he decided to call it a day. “I realised I was already too much behind everyone else who joined the space, and decided it was better to give back some of the money I raised than burn through it trying to catch up. It was clearly a great idea, but execution is everything.”

Despite offering something unique to the market and spending a year developing his idea, Hammer’s start-up failed, and he’s not alone. According to research by Shikhar Ghosh, a senior lecturer at Harvard Business School, 75 percent of all start-ups fail. He defines failure as those who do not return investors’ capital, but if he were to include those that don’t break even, that figure reaches 95 percent. In essence, start-up founders have to have a thicker skin when it comes to failure, because they can’t escape it.

There is a certain stigma attached to the ‘f-word’, but not for the entrepreneurs of Silicon Valley. Never ones to follow the crowd, the world’s leaders in technology and innovation reject common perceptions of failure, instead seeing it as a necessary step towards success, and fundamentally, a valuable lesson learnt. Not only this, but failure is proof that someone is not afraid to take a risk – a personality trait both commendable and essential to survive in the tech industry. While failure in other areas of business, and everyday life for that matter, is worn like a scarlet letter, in the start-up capital of the world it’s a badge of honour.

It’s possible, however, that the industry’s somewhat lax attitude towards failure has allowed it to spiral out of control. Beneath the smiles on the surface, an image of the darker side of start-ups is beginning to emerge from the valley, as more and more entrepreneurs come clean on the challenges they face on a daily basis. The reality is that successes are sung from the rooftops, and failures are buried very quietly, says Ghosh. This instils the idea that if they suffer, founders must do so in silence.

A lesson learned
The mantra ‘fail fast, fail often’ is well ingrained in the culture of Silicon Valley. Plastered on office walls and often recited in meetings (or at least, that’s what some reports suggest), the concept of failure is welcomed with open arms among the world’s most innovative entrepreneurs and developers. The hugely popular conference FailCon sees start-up founders discuss the failures of themselves and others, and attempt to understand how to turn them into successes.

A 2014 report by CB Insights found that a whopping 42 percent of failed start-ups cited “no market need” as their reason for failure – essentially, they created a solution to a problem that does not exist (see Fig. 1). How effective an app or a product is at solving a problem is irrelevant if it’s not a problem that needs solving. Take Pay by Touch, for example, which sold biometric systems to retailers, allowing customers to pay for transactions by scanning their finger and entering a code. A nice idea, but only really a solution once its systems are installed everywhere. Although it had a long line of investors, the company never really got off the ground. Marred by allegations of fraud and board issues, Pay by Touch declared bankruptcy at the end of 2007.

“The best start-ups know that establishing a need in the market is the most important thing you can do when developing a product”, says Elizabeth Varley, CEO and co-founder of TechHub, a start-up incubator. “It can be very easy to get carried away with the excitement of what’s possible with technology and end up developing features that customers may not want. Ensuring you keep a constant feedback loop with customers helps avoid this.”

Every so often, a product or app comes along that makes everyone wonder how we’ve all survived without it. Uber, for example – a free iPhone app that connects customers with the driver of a luxury vehicle at the touch of a button – has been incredibly successful, raising a huge $1.2bn of venture capital in June. Granted, private transportation is a well-tapped market already, but Uber’s creators, natives of San Francisco where hailing a cab is a challenge at the best of times, identified a gap before creating their product. Convenience is higher on the agenda of consumers than it has ever been before, and the app also capitalised on the mobile payments phenomenon; the current hot topic on everyone’s lips.

Taking shortcuts
The nature of the mobile app market means that often just one app in each category can survive for a prolonged period of time. This is particularly true of social media and messaging applications, whose success effectively relies on the power of critical mass. The social aspect of a social network is obsolete if no one else is using it, so by default, companies such as Facebook and WhatsApp maintain a monopoly over the market, and just like Hammer’s Nouncer, the smaller start-ups don’t stand a chance.

Plus, overcrowded app stores, where apps are mysteriously ranked according to a variety of factors – many of which are kept from the general public – make it incredibly difficult for lower profile developers to have their voices heard. Generally, once an app gets to the top 10 it stays there, but for users to find your app it must be near the top, and to get to the top users must have already downloaded it. The chicken-and-egg element means that many developers turn to complex tactics to manipulate the rankings, or employ ‘growth hackers’ to do it for them.

An example of this is overnight sensation Flappy Bird, a simple but frustrating game that generated $50,000 in revenues per day until its developer Dong Nguyen removed it from the store, unable to handle the fame it brought him. The secret to Flappy Bird’s success was very simple – in an early version of the game, a rate button was placed where the user would expect the play button to be. Therefore users were unwittingly pushing it up the rankings when starting a new game, and given its addictive nature, it wasn’t long until Flappy Bird was at the top of the app store.

Tactics such as this are referred to as ‘dark patterns’ by interface designers, and the very existence of entire websites dedicated to them shows just how competitive the market is. And these tricks and strategies are by no means limited to apps – a typical example is set by organ donor programmes around the world, where if people have to sign up, a relatively low number do, but if everyone is signed up by default and has to manually opt out, very few do. Regardless of all the covert tricks and tactics used, it’s inevitable that many businesses burn out in such an aggressive environment. And when they do, the impact on everyone involved can be detrimental.

Burning out
Seattle-based analysts PitchBook have claimed that burn rates among all US tech companies have drastically increased over the last four years, now reaching their highest level since the height of the dotcom crash of 2000. In this overcrowded and fiercely competitive market, companies are left with no choice but to raise unprecedented amounts of venture capital to spend on marketing exercises, in an attempt to gain some sort of edge over rivals. PitchBook found that the further along these companies are, the more they are burning – so while the average start-up in its series B phase of funding is burning at a rate of $660,000 per month, that figure reaches $1.82m for those at Series D.

Equally trapped, the venture capitalists investing in these businesses must continue to foot the bill despite many of the companies in their portfolios being unprofitable. To get around this, venture capitalists tend to invest in a multitude of start-ups, with the idea that even if just one takes off, the profits made will cover the costs lost on others. And yet, Silicon Valley’s culture of failure could be damaging to the industry itself, in that, if investors repeatedly lose out, they may refrain from such high-risk funding altogether. But Bill Reichert, of venture capital fund Garage Technology Ventures, disagrees, telling the BBC that what the industry loses in start-up failures is absorbed into other businesses – both in terms of talent and technology.

On the flip side is Fred Wilson, of Union Square Ventures, who wrote on his blog: “We have multiple portfolio companies burning multiple millions of dollars a month… it is more than I’d like and more than I’m personally comfortable with.” If fund managers like Wilson are growing increasingly tired of keeping failing companies afloat for little in return, and do begin to pull back, this could reduce the amount of products reaching the market, perpetuating the monopoly already in place.

Many founders say they can’t publicly admit just how dire the situation is to employees and investors, so continue working 100-hour weeks. In 2013 founder and CEO of e-commerce start-up Ecomom Jody Sherman committed suicide, after reportedly facing mounting difficulties raising funds for the company. Ecomom closed its doors just weeks after the tragic incident, with president Marcus Nucci claiming no less than $2-3m would be needed to rescue the company. Sherman lived a lavish lifestyle, once allegedly spending $75,000 on an Airstream travel trailer, which he planned to drive across the US, distributing food to children in need. Plus, as is often seen in tech companies, he was incredibly generous, paying unusually high salaries to ensure he retained the best talent.

As a consequence, anonymous support sites like startupsanonymous.com have begun cropping up, with confessional posts ranging from “we’re shutting down and I’m scared” and “everyone is telling me it’s hopeless. I’ve not exactly proven them wrong yet. All my projects have failed; hits me hard and makes me feel like a fool”, to more general questions and answers, such as “will most investors consider a prototype only?” and “are power naps effective in the start-up world?”

“The real price to pay for a start-up is the personal toll it takes on friends and family. Too many people lose their significant other, friends, or other important social interactions in the rush to ship a successful product”, says Hammer. “It is a lifestyle that is more and more limited to people in their 20s, who can afford to make less for doing more.”

Too good to last
The figures emerging are not for the faint-hearted. According to PitchBook, in the third quarter of 2014 alone, $13.8bn of venture capital was invested in start-ups – and that’s down 21 percent from the second quarter (see Fig. 2). Seed financings have also increased in both frequency and size, with 337 seed stage deals being made in the period, and just five of those were valued at a total of $10m.

These astronomical figures are leaving financial experts and the media alike dumbfounded, with some hinting that the industry could find itself in a bubble, not unlike that of 2000. When it happened before, start-ups were spending large amounts on servers and office spaces, and while this is not strictly the case now – technological advancements mean offices can be virtual when starting out – many are chasing the typical start-up model seen at the likes of internet giants Google and Facebook. In light of such success stories, too many small businesses still in their early stages are burning through capital, using the few thriving exceptions as a benchmark for success.

Start-ups just like Sherman’s Ecomom are overspending beyond their reach on lavish offices and unfathomable employee benefits and salaries, all of which shouldn’t be considered until relative success is achieved. Such is the competitive nature of the industry, with companies forced to market themselves to potential recruits as much as potential recruits to them. In January 2014, tech jobs site Dice put the average US tech professional’s salary at $87,811, but that figure reaches $108,603 when referring specifically to those in the Silicon Valley area. What’s more, real estate firm Cassidy Turley puts average office rent in San Francisco at $59.35 per square foot, its highest rate since 2000.

Blame does not lie squarely at the feet of start-ups. Overzealous venture capitalists, also suckers for a success story, have been pouring record amounts into these companies with high hopes for hefty returns. “It certainly is possible that a start-up bubble is looming”, says Adley Bowden, Senior Director of market development and analysis at PitchBook. “Almost everyone would agree in the industry now that things are definitely on the upside of the venture capitalist cycle as investment continues to climb, valuations are through the roof and the exit M&A scene continues to be very active.”

Making a lot of this possible is the US Jumpstart Our Business Startups Act, or colloquially, the Jobs Act, which was introduced in 2012, loosening restrictions on equity crowdfunding and allowing small businesses to expand their shareholder base before going public. This has transformed the landscape – crowdfunding sites were illegal under US law until the Jobs Act was introduced – and while easing the flow of capital to small businesses, it’s become a double-edged sword.

Whereas the last tech bubble saw young start-ups forced onto the public market prematurely, the Jobs Act has created a reverse effect. Now these companies are able to raise billions in capital before filing for an IPO, which is driving valuations through the roof – to the extent that over 40 tech companies have now broken the $1bn mark, it emerged in November 2014. Not only this, but some experts warn against raising too much too early on, due to the risk of relaxing into the idea that the hard work is over. Focusing solely on boosting company value and attracting investors, many lose sight of the most important stakeholder: customers.

Crowdfunding has transformed the investment environment, broadening and therefore increasing the pool of funding available to start-ups. With the act still in its infancy, its long-term impact on business is difficult to forecast, but it could prove problematic in the future. Giving away too much equity in early stages could discourage larger investment funds from participating later on, when larger amounts are required.

The soft landing
Shutting up shop for good is obviously the last resort, but it’s not the only option. Many start-ups manage to maintain an air of decorum in the form of an acqui-hire – a relatively new phenomenon whereby a company is acquired for its talent rather than its products. The concept lends itself particularly well to the tech industry, where the skills developed on one project are highly applicable to another. A form of recycling, if you will, an acqui-hire is a softer landing for struggling start-ups, allowing investors their money back and staff the opportunity for future employment.

In terms of achieving success, however, it’s most useful to look to those who are already there. Berlin-based mobile photography network EyeEm was launched in 2010 and has accumulated 10 million users in that time. “For us, it’s very helpful to have certain formats where failures are addressed in certain ways, such as post-mortems or bug-fests”, says Fabian Heuser, Head of PR at EyeEm. “The main thing you should avoid is an atmosphere in which employees are afraid to admit mistakes.”

Despite vast criticism of the Jobs Act and its subsequent impact, the US economy recognises the importance of fresh young businesses, and that’s something all governments could learn from. Stomach-turning rates of failure and the subsequent emotional impact aside, a thriving start-up scene is at the heart of economic recovery, and if embracing those failures is what works for them, then so be it.