In the world of businesses we observe every day new promising companies that strive to succeed, but after a period of time, they do not manage to survive. There are many reasons for that failure (please find below the relative infographic). In this post/article, I will focus on how to avoid the top 3 reasons startups fail.
In more detail:
- No market Need
The most important reason startups fail (42% based on http://www.ibbds.com/top-20-reasons-startups-fail-infographic) is that they offer products or services that the market does not need. More specifically, the market:
- is not interested enough to buy at a scale that makes the operation of the startup viable.
- is not interested enough to buy repeatedly, in the long run, in order for the startup to be sustainable.
- is not ready to buy now (bad timing).
- is not convinced about the value of the offer.
- is buying already by a competitor that has a better offer.
Two of the most common mistakes are the following:
- Many startups have not prepared an analytic business plan with a marketing research included before they start operations.
- Other startups that have prepared a business plan and a marketing research underestimate the situation or make wrong assumptions about their research results, so they begin too.
Whatever the mistake, it seems that they have not devoted specific thought on answering the above-mentioned issues, concerning the market reaction or it seems that they interpret too hasty, optimistically and inaccurately the research results. The general rule is that if the overall value proposition of a startup is not compelling, the market will not respond positively.
How to Avoid:
- Prepare a realistic and thorough situation analysis: http://www.ibbds.com/how-to-conduct-a-situation-analysis-for-your-business. This will be entered in the business plan.
- Formulate a business plan (a marketing plan: http://www.ibbds.com/marketing-plan-infographicand a marketing research are essential and must be included) in order to think and resolve as many issues as possible before they actually happen.
- Conduct a marketing research and investigate repetitively possible wrong assumptions.
- Hire the appropriate human resources to help you with (Consultants, Marketers, Lawyers, and Accountants etc.).
- Trust your instinct but use also your logic.
- Invest time/money in preparing all of the above (according to your resources) before you invest large amounts of money in the real business and then to discover that it is too late.
- Run out of cash
The second most important reason startups fail (29% based on http://www.ibbds.com/top-20-reasons-startups-fail-infographic) is to run out of cash.
The factors that this scenario occurs may be:
- Insufficient preparation and planning.
- Bad allocation or management of the existing financial resources.
- Lack of the initial invested capital needed.
- Underestimated assumptions about the cash flow needed (in the short or long run).
- Investors that stop the funding (for various reasons).
- Lack of alternative funding solutions.
Without a steady and healthy cash flow, a business cannot operate. Once it runs out of cash, the end is near. The best exit scenario would be to sell the business if this is possible. Usually, it is too late for that option, because there is not enough value left to be able to accomplish that. Frequently, the startup shuts down with debt.
How to Avoid:
- Develop three scenarios of financial statements (pessimistic, realistic, and optimistic). Expect always the pessimistic scenario as the realistic one. The financial statements should be prepared for at least 3 years of operation. The financial statements should include:
- Balance sheets.
- Income Statements.
- Cash Flow Statements.
- Calculate carefully the initial capital required.
- Estimate realistically all the financial data.
- Utilize the appropriate professionals to help you with (Consultants, Marketers, Lawyers, and Accountants etc.).
- It goes without saying, that you should prepare a complete marketing and business plan that will incorporate all of the above, and that will demonstrate everything (in numbers). In the business plan, you must insert also exit scenarios.
- Try to find an angel investor (if you do not own the appropriate capital to start, or if you feel that you need more help and know-how). Please remember that this solution will have a cost (company stake must be given). Another option, at a later stage, and if your startup has potential, would be to find a venture capitalist, but again this will cost you (a percentage of your company must be given) and the final goal would be either to sell your company, when it will be big enough, or to go public.
- Arrange in advance, if possible, friends or family members or even a bank (as a loan) to assist you financially (as a backup) if an extra, but logical, cash injection is necessary. Try to bypass banks as your first option.
- Crowdfunding may be another way to obtain the capital needed if you cannot find other solution but consider the disadvantages. For instance, it is not always an easy process, you must succeed in gathering the amount that you need otherwise you are obliged to return the money back, it is essential to protect your idea with a patent or copyright, and you have to pay attention to your reputation in case that your project does not go well.
- Not the right team
The third most important reason startups fail (23% based on http://www.ibbds.com/top-20-reasons-startups-fail-infographic) is the wrong choice of team members that will run the business.
In this scenario, the executives that are recruited to help the business owner with the implementation of the strategy are not the appropriate ones. This means that they probably do not have the skills, or the experience needed, or the training, or the culture, or the willingness, or even the belief to follow the strategy. Periodically, there are disagreements between the team members and the owner, or in other instances, it is all about low performance. The essence is that the team members of the startup are not delivering results and gradually the business follows a downhill path, which leads to the final end.
How to Avoid:
- Select the right recruitment agency and explain thoroughly to them your requirements and expectations.
- Try to hire managers with experience in transforming startups into successful businesses.
- Recruit executives:
- with the right attitude and with the necessary skills and experience, being able to perform extremely well in the assigned role.
- that have a continuous motive and willingness to succeed (without gaps in their performance).
- that are a perfect fit for the culture of the startup.4. Make an effort, after the hiring procedure, to provide sufficient training about the processes of the business.
- Offer appropriate rewards and constant motives.
- Create a healthy and inspiring working culture in the business.
- Communicate very well the vision, the mission, the goals and the values of the startup to all the team members in order to comprehend how to implement them without misinterpretation.
- Identify, as quickly as possible, team members that are not having the pre-mentioned characteristics.
- Establish an effective model of internal communication.
I believe that if you follow all of the above directions on how to avoid the top 3 reasons startups fail, you will minimize the risk of failure to a great extent and also you may identify and skip other reasons that startups turn out badly.