👎The Top 3 Reasons Startups Fail
Recent research shows that around 90% of startups fail over a period of years:
- 20% of startups fail in the first year,
- 30% fail in the second year,
- 50% fail in the fifth year,
- 70% fail in the tenth year.
Several reasons are behind these disheartening rates. They all seem obvious, however when in the thick of the action they are a bit tougher to spot!
👎 Running out of cash
I have seen this scenario play out multiple times, unfortunately. At the end of the day, it comes down to 1) a business that is not profitable enough to cover its costs mixed with 2) its inability to raise enough capital to bridge that gap.
Lack of revenue, high fixed costs and flawed allocation of resources explain the first part of the equation.
The causes behind the inability to raise capital are more complex. This can come from a business model or geography perceived as unattractive by potential investors, unfavorable market conditions for early-stage investing (such as what we are seeing now), but also less obvious reasons such as, the founder / CEO communication skills (or therefore lack of), and, as we know all too well, the race, gender or socio-economic background of the founder / CEO.
Some founders will also wait until the last minute to raise capital in order to show the best possible metrics to potential investors. I believe this to be a very risky game, removing a lot of leverage for the company during negotiations.
Most management teams dislike fundraising, however this is a necessary evil for most companies requiring heavy upfront investments.
Keeping a very close eye on the financials and having financing options readily available if needed (even if not optimal) will mitigate this risk of failure.
👎 Lacking market need and alignment
This arrives when a founding team gets enamored with a business model, but doesn’t perform the proper research to validate that there is actually a market need for their solution in their specific geography and industry.
I saw that quite a bit in fintech in Canada where entrepreneurs “copy-pasted” business models from The US or The UK without considering Canada’s specificities, such as the oligopolistic nature of the financial services industry, the heavy regulatory burden, the small size of the population, the slow decision-making process within financial institutions, the overall satisfaction of the general population with their banks and so on.
All these differences made it so much more difficult for Canadian Fintech startups (or foreign startups) to be successful in Canada while using business models that had been very successful in larger, more competitive and nimble markets. Many companies ended up in the familiar situation of “a solution looking for a problem”, versus the other way around.
Research is very important to validate the viability of a business model. However, keep in mind that the best test is: Will potential clients pay for this solution? Validating product-market fit early via “pre-selling” the solution is the best approach. Not only will it generate some cash-flow, it will be the real litmus-test of the business model. I know that it is more pleasant to just assume that people will want the solution and start building (build and they will come 😀). However there will be way more opportunities for a fun and exciting future if the “unpleasantness” of pre-selling comes first!
👎 Getting outcompeted
A lot has been written on the benefits of ignoring competition and running one’s own race.
However, being aware of the market dynamics (which doesn’t mean obsessing over competitors) is necessary for success.
Whether an established player decides to enter the market, bringing its client’s list, brand name, cash and structure with him or a new entrant comes with a better solution and execution, these are serious and real risks for a startup.
As Bezos famously said “Your margin is my opportunity”. Once product-market fit has been found by a startup, copycats will flourish, learning from the success and failures of the trailblazer.
Being prepared ahead of time to deal with competition, versus ignoring it, or obsessing over it, is the balanced approach that will create the most options for a founding team.
I hope you enjoyed this article my Dear Readers! 😀
