Thursday, 06 May 2021 05:39

Why most startups fail and how to avoid a similar fate

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Research indicates that there are a few unrecognized mistakes that lead to the majority of startup failures.

Almost every entrepreneur and new business owner I mentor is certain that his or her idea has a very high probability of success, and all find it hard to believe that only about half of businesses with employees survive at least 5 years.

They always ask me for the key reasons that other people fail, but because I've seen so many different situations, I'm have been reluctant to generalize the failure patterns.

Thus I was pleased to see my own insights covered in a new book, Why Startups Fail by Tom Eisenmann, a Harvard Business School professor, who has mentored entrepreneurs and authored more than a hundred HBS case studies from real-world startups.

I realize that he and I see several common patterns that account for a large percentage of new venture failures. I paraphrase these for you here, not as a deterrent to you moving forward with your new venture, but as a guideline for how to do it better, avoiding the high-risk elements, and enjoying the challenge and ultimate success of your innovative initiatives:

1. Make sure you have a robust, well-rounded team.

If you are the hot-shot technical innovator that invented your solution, make sure you have an equally adept business and marketing expert to complement your skills. "If we build it, they will come" doesn't work in today's worldwide information overload. It takes the right team to build a great business.

For example, I believe Bill Gates would have failed without his partners Steve Ballmer and Paul Allen. Bill Gates was the technical genius, but Steve Ballmer, from Procter & Gamble, ran the business side of the equation. Paul Allen was the technical visionary,

2. Test the viability of your business parameters.

I recommend a trial run with an experiment or MVP (minimum viable product), at full price and cost, before the big bang launch, risking your investment money and a major time commitment. Pivot early, as required, to tune your features and marketing to meet the market and technical realities.

I once met with an entrepreneur who had developed a new algae strain to cure world hunger and make him rich. He seemed to ignore the fact that hungry people have no money, and governments rarely pay. Even non-profits need income to run a business.

3. Look for validation from your mainstream customers.

No matter how passionately you believe that everyone needs your product or service based on positive feedback from friends and early adopters (false positives), talk to some real customers before you invest in scaling the business. Make sure you set and meet good metrics in cost of customer acquisition, recurring sales, and margin.

With my software background at IBM, I'm well aware that technical early adopters value more and more features, and are able to deal with complexity. Typical consumers, on the other hand, value simplicity and usability, and are turned off by features they don't use.

4. Gather your resources before scaling the business.

Growing too fast kills many new ventures, due to staffing costs, inventory, and funding delays. The focus of key leaders has to change from driving innovative initiatives to replicating repeatable processes and tuning the overall product cycle. Mergers and acquisitions also require new skills.

5. Needed help can be your biggest burden.

You need the funding and support, but venture capitalists can be very demanding, and set high targets. You need advisors and a board of directors, but they require regular communication and reporting, a strategic plan, and discipline. A growing team needs skilled managers and an HR organization.

6. The market is unpredictable and changes fast.

The repeated bold innovations needed for long-term growth and sustainability are fraught with risk. Culture and environmental changes come quickly, or take longer than anticipated, as the number of markets you must service increases. You need predictable miracles and moonshots for success.

Despite all these challenges and the angst that comes with them, almost every new venture founder, failed or successful, interviewed by Eisenmann and myself insists that they have no regrets, and can't wait to do it again.

Thus I continue to urge aspiring business owners to get off the sidelines and into the race. It's an amazing ride, and there is no satisfaction like creating something out of nothing. The world needs more entrepreneurs to envision and create the needs we haven't even thought about yet.

 

Inc