Why Startup’s Fail!
If you ask any business owner why they failed, they might say, “there were not enough customers to support their business”. In reality, they meant to say “there was no market for their product or service”.
Let’s examine some of the possible causes of “Why Startups Fail?”; not having a unique value proposition, entering into a saturated market, or the market size “niche” or a good fit, customer acquisition, poor business model, inexperienced leaders, not understanding how to raise capital and manage the burn rate, or not dedicating enough resources into market research or market capitalization for your product or service is low.
According to Investopedia, the definition of value proposition is “a business or marketing statement that a company uses to summarize why a customer should buy a product or service”. You may want to consider adding to that statement, “what makes your product or service unique – what additional value do you offer than possibly your competitors do not”.
I have consultant with several businesses who do not understand the importance of having a value proposition. A value proposition is closely regarded as an elevator pitch. You should be able to rattle off your value proposition in less than 20 seconds. Allow me to illustrate a typical conversation: “Mark, what business are you in? I sell computers. To me, that would indicate they are either a computer OEM (HP or Lenovo) or an aggregator who uses computer components to build a computer, like DELL. As I dig further, they tell me they build and resell the computer. Oh! So you are a computer reseller? Yes. I continue to plug away asking more questions. Eventually, after all of the prodding and questioning, and tweaking, I ask them to define their value proposition. Here is what we finally arrive at: We are a white box PC company who builds computers, based upon the customer’s requirements. We provide a 48 hour guaranteed build and delivery, backed by a 24-hour call center and each computer includes a 3-year onsite warranty. My response: Perfect! In this statement, this company’s unique value proposition is the 48-hour build and delivery, 24-hour call center, and 3-year onsite warranty. Here was have defined their unique value proposition and created their elevator pitch.
As you ponder your new app idea, keep in mind, you want to create a unique value proposition that your competitors are not offering. For example, let’s say you decide you want to create a mobile timer application. How different would your app be from all others? Would it be the branding that attracts users? Probably not. Customers will not pay for color, theme, or logo’s. Would it be the size of the of buttons? Possibly, if your research revealed that all timer apps offered buttons that were too small, thus creating an app with large buttons. Additional research revealed most of the timer apps only provide timer functionality for up to 12 hours — you know there are users that require timers for 24 to 48 hours. The goal in creating your value proposition is to draw attention to features and benefits your competitors do not provide, whereby your create a differentiating factor for your product or service.
Ask yourself this question: how many brands of toilet paper are there? Would you believe there are ten brands? Georgia-Pacific, Procter & Gamble and Kimberly Clark collectively earn $2.1B in sales. All three companies are vying for number one market share and revenue. Would you want to play in this saturated sandbox? As a startup, you have to ask yourself this question: what additional value can you bring to market that these top three mammoth corporations are not currently offering? As an entrepreneur, the only time I would enter into a saturated market is if you are going to introduce technology that will disrupt the marketplace. In the case of toilet tissue, I would stay away from a mature market. I would focus my efforts on creating a new product, or possibly re-engineering an existing product to make it better or better yet, be first to market, as known as a “First-Mover”. Being a First mover allows for a company to build name recognition and loyalty, garner market share, and be recognized as a product expert. However, if you feel you have the love for a specific industry and it is in a statured market, follow your dreams. Just understand that you might have an uphill battle competing in this space.
Is the time right for the picking?
Being a First mover or first-to-market does not always lead to success. A great example of this is Hewlett-Packard. HP and Microsoft collaborated on developing the PC Slate, now coined Tablet PC. The Slate PC was invented in the 1980’s and used with a digital stylist to input characters and Microsoft’s software was used for hand writing recognition. By 1990, pen computing was dead. Compaq, NEC, IBM, and Toshiba all got out of the PC Slate business – another flop at tablet computing.
Does it make good business sense to invent a product that is futuristic? Will consumers adopt the new technology or will the new technology confuse the consumer? Let’s fast forward twenty years later. Who reintroduced the tablet? Who used similar technology and invented the iPad – Apple. Apple introduced the iPad in April of 2010. Five years later, Apple’s total revenue for 2015 of iPads alone were $23B. Since the introduction of the tablet, many players have entered the market – Samsung, Lenovo, Huawai, and Amazon. All of these competitors have significant market share. Why do you think the reintroduction of the tablet took off? One possibility is Apples’s operating system. It was intuitive, simple to use, and it resembled Apple’s iPhone, but larger. The transition to the tablet was simple. User adoption skyrocketed. The rest is history.
Does it always make sense to be a First mover? Yes. Is there the possibility of failure? Yes, but that is for another discussion.
What does it cost to acquire a customer? Having conversations with entrepreneurs and startups are very exciting. They have so much enthusiasm. They have great ideas, visions, and motivation. However, they are green and usually, not always, have no idea what it costs to acquire a customer. Have you ever seen the movie with Mark Hallman called “Field of Dreams”? In the movie there is a famous quote – “if you build it, he will come”, well, many entrepreneur’s believe if you create a new product or service, customers will flock to your business. I’m sorry to inform you, there is no truth to that statement. Acquiring a customer takes significant resources – time, money, and knowledge. I could write another article alone on explaining ARPU x Month of Life before canceling = Lifetime Value, then discuss Advertising Spend / Customers Acquired from Advertising = Customer Acquisition Cost, but I will not in this article.
As entrepreneur’s develop their business plans, they need to focus on customer acquisition costs and Lifetime Value of a customer. It might surprise you that the cost to acquire a customer is higher than Lifetime Value. To learn how to calculate LTV, click here. Failure to completely understand how to acquire your customers and the cost involved, will ultimately lead to the demise of your business. If you are interested in more data computation, you can read about CAC (Cost of Acquiring Customer) divided by LTV (Lifetime Value of a Customer) to determine profitability, read more here – another topic for discussion later.
Why have a business model?
A business model is essential to every business success, whether it is used to raise capital or for an existing business. A business model conveys “who is the customer, what does the customer value, and how does the business make money?” These questions are the fundamental foundation of why a company is in business. They answer the question, “how can we deliver a product or service at a competitive price”? In order to determine the economic impact of selling your product or service, you need to determine costs of manufacturing your widget, including overhead, wages, sales and marketing, and so on, plus your profit margin – of course there are many variables associated in determining costs, a conversation for another topic.
Business models are not written in stone, nor should they be. They are a starting point in which owners and executive leaders tweak in order to exceed the cost of goods sold against raw costs. A business model allows for the ability to revise, tweak, and modify on the fly. If profits are not following inline, maybe it’s time to revisit the “why”. Revisit and evaluate your hypothesis, test the results, and revise again to meet your business model’s business objective. First example: why are you not hitting P&L? Are the KPI’s off? Did your means test not work out? Is your customer acquisition too high? Are you not able to convert your prospects to customers? Why? The answers to these questions could possibly stem from not having a business model in place, which I see more often than not. Moreover, business models that were written in the past, never updated on a consistent basis or even followed, would ultimately spell out failure for startup’s and businesses alike.
So here you are, moving through the process of developing your business model and finalizing your business plan to possibly seek a venture capitalist for funding, better yet, you are fortune enough to bootstrap your business venture. Now you are thinking about putting a management team in place. A few thoughts go through your head. Should I hire a close friend, a neighbor, or recruit a past co-worker? One of the biggest mistakes a startup can make is hiring a weak management team. In experienced managers or people who do not have the skills required to run a startup, can run your dream business into the ground. More often than not, the skills necessary to develop a strong business strategy will only come with years of experience. Taking a text book approach is good for a final term paper, but creating a solid strategy and being able to execute a go-to-market strategy takes time, validation, and experience. Real world exposure has demonstrated, time and time again, that real life examples is the only form of reality that will make or break a startup.
I have seen startup’s fail at execution. Here is an engagement I observed. The client sets a drop dead date for product development that ultimately comes and goes. The entrepreneur barks out a few nasty words to the product development team. Product development gets rushed. Implementation gets delayed until finally, the release of the product is horrible. Inexperience breeds inexperience which leads to failure for some startups. Hiring a seasoned management team, is critical to any successful business.
You need CASH, why didn’t you say so…
Did the failing startup miss the memo on raising capital? Really? Yes! Raising capital is probably one of the most difficult parts of starting and running a business. At first you think to yourself, “I am bootstrapping my business. I don’t need a business plan.” Then all of a sudden, you run out of cash in the middle of development. What are you going to do? Did you write a comprehensive business plan that you can sell to investors or did you think that you really didn’t need a business plan? Oh no, what am I going to do? You decide you are going to talk to your employees and offer an equity stake in your business – your hope is, they will stay onboard, put in sweat equity to complete the development work and continue running the operations of your business. And you pray, will they say “yes!”. This is a bad place to be.
Only a seasoned CEO, with startup experience, understands the intricacies of running a startup business and manage the burn rate of conducting business. A CEO knows how to pitch to investors, knows how to write a comprehensive business plan that details expenses and liabilities to determine your company’s burn rate. A business plan defines how long you could possibly stay afloat before your company requires additional funding. If you are fortunate enough and somewhat established to seek Seed Money, Series A, Series B, Series C which eventually leads to an IPO, you are in a very lucky place. Many startups never make it to this level. These are great aspirations for any startup. Many startups do not understand the complexity of raising money and managing capital. It is a seasoned CEO who will deliver the required goods! An inexperienced startup will end up on the chopping block. Don’t be one of those casualties.
The Perils of Raising Cash
Here you are, you are on a mission to raise MONEY. You are within three to six months of running out of capital. You received your first round of funds from personal investors. Now you think you will have no problem raising Seed money, but wait, are there certain requirements that need to be met before a venture capitalist will hand over more capital? Yes, it is called valuation. What is your company worth today as opposed to yesterday? Has your company hit certain milestones that reflect a bit of success?
During these steps, you want to remove any possible barriers that might stop the progression of receiving funds. A startup might have an MVP (minimum viable product) developed. The MVP would be used to promote the concept or idea to investors. The MVP can be used to gain some insight and get customer feedback. As you are seeking input, you are trying to get validation that your product or service is a winner.
Once your idea is validated, you move into the next phase of software development. Your idea is developed into a full product and ready for beta testing. During this phase, you work out all the software bugs to achieve Gold status. Your goal is to achieve high validation, promote your app to gain customer buy-in, build your subscription base, and eventually sell your services.
If you are not able to sell your subscription services, it’s very possible that your company valuation will NOT increase. Once this happens, it will become difficult to raise additional capital.
Assuming you achieve the milestone of customer acquisition, customers are paying for your services, social media is providing thumbs up with positive feedback, software bugs are at a minimum with version 1, software sales continue to grow at a steady pace, your business model is on track to meet sales revenue targets and the know-how of scaling this model can be accomplished, you have the data to show the cost of acquiring customers, SG&A are fairly low with great profit margins, then you could possibly be on your way to successfully raising Seed money.
Hitting this types of milestone will only provide the ammunition required to become a successful startup and increase your company’s valuation. Without the experience and know-how of a seasoned CEO, a startup could possibly set itself up for failure. These milestones are not set in stone nor are they the only selling points in raising capital or increasing a company’s valuation.
Can you raise capital without hitting these valuation milestones? Sure you can. However, the targeted capital requirements you need to operate your business may fall short. The net-net of falling short on raising capital is the need to attract additional investors sooner rather than later.
I have mentioned why hiring an experienced CEO to run a startup is critical to a businesses success. Another critical component of a seasoned CEO is knowing when to pull the reins back on spending or when to begin the on-boarding process. During the development process, the CEO will minimize overhead costs, focus all resources on production costs, develop a go-to-market strategy, and keep the company’s burn rate as low as possible. One mistake startup’s make is hiring and spending too soon. They are overzealous with ideas, aspirations, and not in touch with reality. Many startups do not possess the business acumen — overspending and retiring capital too soon, resulting in another startup failure.
Research. Research. Research.
Just because you have a great idea, do not think the market is going to flock to your product or service. I have seen this over and over again. Before you even develop a prototype, invest your time into market research. You need to determine if there is a market for your product – are their enough potential buyers? Are you entering into an untapped market – a great place to be? What is the market capitalization? Are you able to scale the business to meet the demand? After you compile your research and the data indicates it is prime-time to move forward, you will want to communicate with your potential market and/or customers. Customer feedback is essential to building version 2 of your product – sometime clients can help you see the largest business opportunities. Numerous startup fail because their product or service does not “fit” the markets need. According to Neil Patel from Forbes, 9 out of 10 startups fail. That is 90% failure rate. Do you want to be another negative statistic? Do your homework. Research. Compile Data. Research again.
Part of your research should include a brief questionnaire. Lets say you want to target a specific verticle – like Healthcare, but you are not sure what you should focus your efforts on. I would reach out to business leaders and ask them, “what keeps you up at night? What are your biggest pain points that you would like to see resolved? What impact would this problem have if I can solve this problem? Can you tie a financial savings to this solution? How much would you be willing to pay to have this problem solved?” The more time you dedicate to your research, the better outcome will be. If you do not put in the due diligence to determine a market need, you might create a product or service that has no “fit”.
So here we are. You are off running to the races again. You have great ideas. You are not going to be another negative statistic of “Why Startups fail?”. You have a written your unique value proposition. You discovered a market that is untapped. You discovered you will be a First-mover. You have your business model and business plan written. You understand the importance of hiring an executive leadership team to help manage your company, raise capital and reduce your company’s burn rate. During the days and months ahead of you, you understand the importance of revisiting your business plan to make sure you are on track to meet your business objectives. You continue to research the market and gather as much market intelligence as possible to solidify your decision to enter your market. There is no one holding you back.
Now go out and conquer the world!