Why So Many Startups Never Reach Their Second Funding Round Seed funding often gives a company more opportunities to fail, not succeed.

The "valley of death." I hear this term used a lot in startup circles, representing the gap between a great idea and the task of turning it into a business. From a financial standpoint, it points to the moment when the feel-good times funded by an initial seed investment come to an abrupt end after a search for formal venture capital fails.

Josh Lerner, Harvard Business School's venture capital guru, estimates that 90 percent of new businesses can't bridge this gap and end up shutting down because of it. That's a frightening stat, and it begs an explanation.

Let's start with seed funds vs. Series A funding. Seed funds come from a variety of sources, many of which aren't necessarily validators for success. The most common sources of seed funding are friends and family who often care more about the founder as a person than about the business's viability. Seed and grant funding can also come from regional or state economic development offices whose major metric is job retention and creation, not necessarily value in the businesses.