Failure and Entrepreneurship
“Failure teaches you the best lessons in life”— a hackneyed statement, used especially by those who haven’t experienced failure personally. Having said that, failure is the most common occurrence in the world of startups and small businesses, even (especially??) if you have raised multiple rounds of funding.
As per a Harvard Business School study by Shikhar Ghosh, 75% of venture backed startups fail. Overall, almost 90% startups and small businesses fail to survive beyond the 5th year.
In India, the percentage of startups going to the IPO stage or providing an exit to investors through M&A is lower than that in the USA, showing how difficult it is to build a successful business in a matured startup environment like Silicon Valley’s, or in a developing one like India’s.
WHY DO STARTUPS FAIL?
I. PREMATURE SCALING — THE SILENT PREDATOR
One of the biggest killers for startups, and something which is not often talked about, is premature scaling. Premature scaling is often camouflaged by short-term spike in key metrics, when the business model, in reality, may not be as efficient as the metrics suggest, and hence goes undetected til the business is on the verge of shutting down.
Premature scaling means spending money on hiring and marketing before you have an efficient business model, or burning a lot more than your revenue without securing funding for the immediate future.
A large majority of startups which have raised outside investment face this problem at least once. The ones which succeed are mostly the ones which have founders who are eager to learn more, have the right mentors to provide the right guidance at the right time, and are hence able to pivot once or twice.
II. MENTORSHIP
Let us not confuse mentors with the hands-on approach VCs. In most of the cases, the hands-on approach VCs have little or no effect in the operational efficiency of the business. The answers to all the problems do not lie in infusion of more funds to hire more (apparently, better) executives.
One key ingredient which most of the founders (first time) miss in their journey of building a successful business is the right mentor. Somebody with segment knowledge and expertise, and experience of troubleshooting and building a successful business could, at times, be the missing piece of the jigshaw.
At MSMEmitra.com, we are fortunate enough to draw strength and receive guidance from our group companies’ founders (http://itpainform.com/) with more than 40 years experience in Financial Services, Due Diligence, Credit Reporting, etc, and advisors who have been champions in their field of work.
III. OTHER COMMON REASONS WHY STARTUPS FAIL:
- Lack of domain specific business knowledge
- Overestimation of the market need
- Not having the right team
- Underestimation of the competitors
- Poor knowledge of the target group, resulting in poor marketing
- Lack of passion and commitment in the founding team
ENTREPRENEURSHIP IN INDIA
As mentioned earlier, due to the poor exit options for investors, VC funding in India is limited to a few unicorns and a small number of innovative startups each year.
According to the Inc42 Datalabs’ Indian Tech Startup Funding Report, India witnessed only USD 3 Billion Investment across 372 deals till June 22nd 2018, a sharp decline of 47% in the funding amount and a decline of 17% in the number of deals at the same time in the previous year. M&A activities declined by 28%, with only 54 finalised deals till June 22nd 2018.
While India boasts of a fair number of serial entrepreneurs (with successful exits) inspiring the next generation of dreamers, entrepreneurship in India is still restricted majorly to bootstrapped small businesses which are always living under the fear of losing market share to competitors with deeper pockets.
India has a large number of Micro, Small and Medium Scale Businesses (MSMEs), which rely heavily on funding from the promoters and debt funding from Banks and NBFCs.
These 1.3 Million MSMEs employ 40% of India’s workforce (estimated to be 80 Million people), and contribute 8–10% of the country’s GDP and 40% of India’s total exports.
Because of certain stringent corrective measures enforced by the regulators on public sector banks for checking the uncontrolled bad loans, the debt funding to the MSME sector in India has dried up in the last 18 months or so, leading to a large number of entrepreneurs left licking their wounds or liquidating their personal assets to grow the business.
These MSMEs with a topline between up to USD 35 Million fail to attract private equity investment, in spite of having steady growth and the emergence of SME IPO platforms, NSE SME Index and BSE Emerge.
At MSMEmitra.com, we have had the privilege of working with a number successful businesses across industries, bootstrapped in their journey from Zero to 35 Million USD in sales (Figures for one such company are as follows —Founder’s Investment: USD 0.3 Mn; Reserves: USD 1.3 Mn; Debt: USD 3.6 Mn; Sales: USD 21 Mn per annum with 28% Gross margin within 6 years!!)
Quite a few of these bootstrapped businesses, ripe for an IPO in the next 2-3 years on the SME Indices, are considering raising Private Equity funding at this stage to hit a few milestones before going public. While, the promoters of a few other companies are considering M&As to exit and work on a new project.
THINGS THAT THE OWNERS OF THESE BOOTSTRAPPED BUSINESS DID RIGHT
We were able to compile the following top 10 reasons why these entrepreneurs feel they were able to survive and grow steadily for a long time:
- Worked hard to develop expertise in and a clear understanding of their segment and market place.
Relevant education and training, work experience, and the habit of regularly analysing the industry and competitors. - Were always open to learning from the industry peers.
If a competitor adopts a better strategy which disrupts the market, there is nothing wrong in analysing your own strategy and pivoting to keep the momentum going for your business. - Took criticism in their stride and were hence able to adapt to the ever changing business scenarios and customer needs.
- Through experience and regular research, developed understanding of the target group (TG), what it wants and how much it could afford to pay.
One of the keys to success is knowing the pulse of your TG and building your sales and marketing strategies to best suit the TG. - Rarely made the same mistake more than twice.
Making a mistake once is understandable, making the same mistake twice is manageable, but making the same mistakes over and over again shows that you are not paying heeds to the situation and fighting a losing battle. - Left ego out of the front door, meaning, they were focused on doing what was right for the business, even if it meant accepting that they were wrong about something.
If a particular strategy hasn’t worked in spite of your best efforts, chances are that the strategy isn’t the right one. Work out a new strategy to help the business succeed, in stead of playing the dangerous game of risking everything to prove that your strategy was right. - Were always focused on implementing a balanced business strategy and achieved profitability within the first 2–3 years (In some cases, the businesses have been profitable since inception)
Giving equal importance to the top and the bottom lines is of utmost importance for building a successful bootstrapped business. - Implementated a very disciplined financial management mechanism and ensured that they hired a new member to the team only when they had cash to cover at least 1 year’s salary, and only borrowed the funds they could easily repay without affecting the profitability during the currency of the loan.
A lot of Indian MSMEs have failed because of poor financial management, premature scaling and a high outgo on loan repayments (failure to repay loans leading to shut down, as the creditors start recovery process by liquidation of mortgaged and hypothecated assets of the business and promoters) - Avoided the temptation of raising private equity funds when not necessary.
- Ran a privately promoted (in some cases, solely) business with utmost diligence and professionalism, and built an amazing core team and work culture.
FINAL THOUGHTS
Failure is not the worst thing to happen to an entrepreneur. The stories of entrepreneurs building successful companies after failing spectacularly in previous ventures are inspirational, but the ratio of failed entrepreneurs eventually hitting the home run to the ones who don’t is very low, almost negligible.
Failure in a business doesn’t guarantee success in the future, but it does guarantee lessons on what not to do and how not to do something.
Failure, at times, blinds us and pushes us to try harder to reach the goal. But is it wise to let our ego dictate the terms for our pursuit of success?
There’s no shame in accepting your mistakes and changing your approach.
One of the reasons why people fail over and over again at the same thing is because they do not learn from their mistakes and / or try to do the same things over and over again, without changing the approach.
The ones who eventually succeed after failing once or more, learned from their mistakes and changed their approach after walking out of a business with their tails between their legs, even if they tried solving the same problem.
When humbled by the sea, do not fight the waves!!
ABOUT ME
After failing multiple times in achieving the goals that I had set for myself in my career before the age of 25 (each time differently at the same thing or failing at something new, quite spectacularly at times) and completing my post graduation in Statistics, I worked for 3 years in the SME Credit Assessment and Monitoring, and Corporate Management departments in the Banking sector before founding MSMEmitra.com with Ashish Jacob.
MSMEmitra.com helps businesses in assessing the exact funding requirement, identifying the most suitable funding options, fundrasing, deal structuring, due diligence, providing bespoke financial consultancy and business advisory services, and effective financial management.
Through an automated process on our website, MSMEmitra.com helps Start-ups and MSMEs identify and avail the benefits of the industry specific applicable schemes and subsidies promoted by the Union Government of India.
On the product side, we are currently working on building solutions for problems we have encountered and overcome by the use of technology.
We are a young team of founders, executives and associates, drawing strength from our group’s experience of over 40 years in Financial Services, Due Diligence, Credit Reporting, etc and dedicated to staying true to our mission and vision.
If you have different point of view on the issues highlighted in this write-up, lets connect on Twitter (@SilverHawk_24)
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