Are new businesses and startups seeding their own failure?


460 million, or 6.3% of the global population. This is the closest number currently publicly available to quantify the number of people worldwide entrepreneurs and wanna-be entrepreneurs that attempt to start a new business each year. They try to start around 305 million new businesses, with 100 million new businesses actually being launched each year. The US alone births 6.5 million new businesses every year. Staggering numbers. What’s even more staggering is that 80% of SMEs will fail within 18 months from start. For technology startups, failure rate is 92%. Some of these new businesses are born out of necessity while others are driven by opportunity: regardless, an enormous amount of entrepreneurial dreams start and end, around the world, every day.

What causes technology startups and new businesses to fail?

New businesses & startups fail. Nobody’s arguing with this fact. But what causes failure, and how can threats and death drivers be morphed into opportunities and higher survival/success for entrepreneurs?

Following are the most common reasons why technology startups fail (fyi: premature growth / scaling, another major driver of failure, is not listed in the above chart):

What about new businesses that are not technology startups? Why do they fail? For this segment of entrepreneurship, the picture is a bit foggier. Numerous studies exist, sometimes with different view on what drives failure in new business. However, a few points seem to be coherent: running out of cash, poor marketing, problems with pricing, problem/inability to manage the business, no market need (which can oftentimes be linked to wrong / non optimal location and lack of communication with the market), and most recently, a disconnect to the digital/technology world and enabling technologies.

Failure commonalities between Technology Startups and new SMEs

Some common failure points that apply to both technology startups and non-technology-based SMEs emerge:

  • Running out of funds / reaching the end runways, which can be partially linked to pricing and business model issues, as well as with slow product-market fit
  • Developing and marketing products, services or companies that do not satisfy a market need, which can be linked to a disconnect to customers/market, as well as with wrong location
  • Poor marketing, which can be linked to both the above points

Can we improve survival and success rates of new small businesses and technology startups?

With this knowledge at hand, entrepreneurs can plan and act to improve their chances of survival and success. Yet, new business failure rates remain sky-high.

Are there not enough tools? Is a lack relevant skills, expertise and experience to blame? Maybe it’s a lack of structure and processes. Do entrepreneurs underestimate the challenges ahead, and the complexity and variables needed to succeed?

When I look at the failure commonalities between Technology startups and new SMEs, I’m inclined to believe that all of what I just wrote are having an impact on new business failure.

However, one core point seems to be missing in the equation: the time dimension of new businesses. A business’s runway is … a countdown. Tic tac, tic tac. Can new businesses and startups improve their chances of success by engaging, developing, engaging and converting their users, customers and market before they open, during their pre-market phase? Higher and longer market-facing activity during the pre-market phase would solve the wide majority of the problems, leading to better market-driven and market-validated products/companies, better market-driven marketing activities, faster business model and pricing validation, effectively increasing runways. Being pre-launch does not preclude market activities. However there is a lack of fast, simple, intuitive, structured tools and processes for new business owners to enable them to actively engage their users & customers prior to launch, during the pre-market phase of their new ventures. Ladies and gentlemen: could this be the bottleneck to improve entrepreneurial success?

Conclusions

The lean startup movement has generated a lot of value for technology startups: from reducing costs to generating revenues faster, fro validation to user acquisition, from product-market fit to community building. We approached and continue to approach the development and pre-market activities of Earlyclaim.com very much driven by the lean startup mindset, and we believe that new businesses’ pre-market engagement and pre-market activities can lead to significantly higher survival and success rates . What about you? How do you think new businesses and entrepreneurial success rates can be improved? What’s your recipe for success? Tweet me your point of view at @earlyclaim @rockyita, I’d love to hear you thoughts on this subject: let’s talk!

About the Author: Alessandro Marchesini (@rockyita)is a technology entrepreneur from Italy. He’s the co-founder & CEO of www.earlyclaim.com , an online service that lets consumers, professionals and businesses reserve their favorite usernames in new startups to easily create coherent online brand & identity and be more recognizable on the web. The service also helps pre-launch startups getting users by exposing them with interested prospects.