Thinking about why and how start-ups fail, let’s look at the main reasons for company failures.
- No market demand for your product
What we see too often in the startup scene is that a number of companies believe their invention is so appealing that the market will beg for it and money will begin to flow in. Most startup founders do not fully understand what their product might be able to achieve in the market – especially in the early stages. That is the reason for many pivots – when a company changes its course and product to satisfy another market. If they could validate their product in pilot projects before launching, or even beta-testing instead, those entrepreneurs might reduce significantly their failure and market rejection risk.
- Lack of skills needed for the business – in founders and in the team
Many founders can’t do what is needed for a business to take off. They should concentrate in industries that value their skills and educational background, besides their professional expertise. This will boost their odds of success and the practice and dedication they will inject in the business will not be a burden for them. Your skills must be complemented with the ones of your team. Always have someone good at sales, someone good at management and bookkeeping, someone good at marketing and someone good at product development. Customer service, business development and legal in-house employees can land on the company in a second phase. If you or your co-founders lack the skills or abilities needed to get your company going, be sure to identify those needs early on and read, study, learn and experience both theoretical and practical knowledge that can give you the upper hand against your competitors and prevent your company from crashing.
- Ignoring and not avoiding cash burn
Many startup founders are technicians and engineers at heart – meaning that they want to build the perfect product or solution to one problem and only launch after that. That can become a major problem when you must be cashing in the earliest possible for your company to keep the doors open. Important signals to identify in order to prevent cash flow problems are usually low profit margin, high payroll costs, small recurrence purchases, clients delaying payments and high churn rates. The more your startup’s cashflow see those situations, the closer you are to stretching the treasury and having the need of more cash, because of big distances between paying suppliers and getting paid by customers. Always try to negotiate terms with your suppliers that are longer than the payment terms you give to your customers. Spend only on essentials and do not be extravagant on your company spending in that phase. Ask yourself if that exhibition or that fancy office is really a mandatory piece for your puzzle and if that will bring the ROI you and your colleagues expect.
- Reluctance to get feedback and criticism on prototypes
Many founders have a hard time letting others see their prototype until it is reasonably ready. Failing to get feedback from potential customers is usually fatal to a startup. Do not be afraid of someone stealing your idea or that your prototype will not be perfect to be shown to the first batch of testers. With technologies democratising prototypes production for hardware and software, there is a good chance that getting a few prototypes made and having them tested with feedback from those who tested it – like in focus groups – will put you in a product improvement and learning loop that shall be repeated until people begin to demand your product.
- The market might not be ready for your product
Some companies launch products before their time and either the market (demand/need) or the technology is not there yet. Others launch too late, although they might not notice that it would be too late already. The key factor here is to always question yourself with competitors benchmark and with common sense when sales are not taking off. This would be the best time to call a “stop loss” and pivot or invest time, capital and efforts in another market.
We’ve asked Keith Beekmeyer, of London financial company Newpoint Capital Limited, for his input on this, and he said: ‘I genuinely think companies still fail to plan, fail to anticipate market changes, fail to diversify or embrace opportunities outside of their core product and of course all of that adds up to a static company. Companies that don’t grow, change and develop will ultimately fail.’
Effective leadership is, of course, the biggest reason that new companies falter. New Directors can be reluctant to let go and to delegate, and this can cause massive problems within the company. New Directors should look to take on as much advice and assistance from outside as possible, by networking to meet others and by using the advantages of modern technology: – there’s a wealth of advice stored freely on the Internet, for example.
Whatever your product or service, make sure you plan, plan and then plan some more. Don’t be afraid to change and adapt to suit the emerging marketplaces or in response to critical feedback in your early months – it will all play a hugely helpful part in how you manage to survive that chaotic first year.