There
is a hot new startup that is being seeded by its founder and breaking out of
its incubator every so often each day and yet there is another startup that has
had its place in the sun and basked in its glory and is quietly riding off into
the sunset.
Every
one of all ages is keen to start up something new or to encourage someone to
startup something or to make an angel investment in a great new idea. Founders
are determined to commercialise an idea that will change the World. They want to
do something no one has done before or to something that is executed better
than anyone else. Few startups make it to the “unicorn” status. Some
Over
US$ 125 billion private equity was invested in the Startup world in 2015. This
amount does not take into account the billions of dollars of the investments
made by founders, their friends and family as well as their angel investors. It
also does not include the billions of dollars that has been “invested” by
suppliers who did not recover their money from the company that went belly up.
Nor does it include all the money that employees have “invested” through all
the salaries and wages that have not been paid to them. If statistics were
available, the total amount would be quite large. Much more will be invested in
each coming year in the hope that a few unicorns will recover the investment
made in all the others.
It
is estimated that over 90% of startups fail. New ventures are more likely to
fail than succeed. And yet no epitaph is ever written for a failed startup.
Private equity investors, suppliers, employees prefer to give a quiet burial to
“a punt that went wrong” rather than talk about it so that future generations /
versions of startups have the wisdom of experience.
The
Startup environment is changing as well. Business plans have to be realistic
and must show profit within a finite period if additional funding is to be
sought. Market share, top line and customer service is critical but no longer
the only reason to get funding. So why do startups fail? Why don’t they reach
the goal of the founder promoter? An understanding of what could potentially go
wrong so as to make course correction is better than doing a post mortem after
the patient has gone.
Some
of the reason why startups do not make it are outlined in this article.
Business
idea is flawed
There
could be several reasons for the very basic idea of the business to be flawed. What
seems like a great idea does not necessarily mean that it will have a strong
revenue model. A startup banking on the change of Government policy is starting
off on the wrong foot from the very beginning. Examples that come to mind in
India are E Commerce platforms for selling medicines or a company like Flytenow
in the US which wanted “to share the joy of flying by allowing aviation
enthusiasts to meet pilots and go flying together.” Older examples relate to
piracy of music and videos based on which businesses were planned to be built.
Ideas
could be well ahead of their time in a market not ready to accept it or ideas
could be significantly behind the stage the market is in. If the business
itself is suspect, there is really no hope for the Startup. If the customer
does not buy your idea, no matter how smart or good it may be, the startup is
doomed from the very start.
Thousands
of people have developed and launched their “apps” on the Apple or Android
platform and most disappear after some time because they have not been able to
gain the critical mass required to become self-sustaining.
Remember
that the D-word, “discounting” may be good to gain early market share but can
never be sustained in the medium term.
Funding
is insufficient
Most
startups boot-strap their early months / years till they are able to raise
funding. The moment funds are received, it has generally been seen that the
expenses of the organisation increase in a ratio completely out of proportion
of the business of the company. Once overheads are built up, it is very
difficult to pull back.
A
lot of time is spent trying to keep raising funding to keep the business going.
When funding starts to dry up, the business starts to flounder. A common reason
given for pulling down shutters is “we never had enough money in the bank!”
Burn
Rate is too high
Most
founders underestimate their “burn” rate. Burn, very simply put is the amount
of cash you are spending every month. Once the company starts to earn from its
business, burn can be classified as spend minus the earnings. Therefore if
there is a constant burn in the startup, funds need to come from equity to meet
cash flow requirements. The longer the period of the burn, the more difficult
it is to raise new funding.
Remember
that the Cost of Acquiring a Customer but never be greater that Life Time Value
of the Customer. Most startups believe that this equation will gradually change
in their favour. They also wrongly believe that Life Time Value of a Customer
is the top line earned and not the profit from the revenue.
Competitive
landscape
No
matter how good a startup idea maybe, an understanding of the competitive
landscape is critical for survival. Keeping track of what your competitors are
doing is essential for survival.
As
the E Commerce, music streaming, logistics boom started to happen all over the
world, dozens of players emerged in the same space, each one claiming a better
technology or a better service delivery platform. As long as they had funds
they survived, giving larger and larger discounts. Later they had no option –
either to sell out to their larger rival or to shut shop.
Weak
Management Teams
Many
promoters start with friends as their team members instead of bringing in
strong management teams. Weak or in-disciplined management teams have weak
execution and their insecurity perpetuates the challenge faced by the startup
when they bring in even weaker team members down the line. This leads to a
domino effect and does insurmountable harm to the young startup.
Scaling
Up
A
big reason for losses is when a startup scales up before it has established its
business plan in a smaller and more controllable environment. Conversely,
startups have failed because they have not scaled up fast enough. There is
really no right or wrong answer when it comes to building a startup.
One
solution that is being looked at very positively by the startup founders and
startup funders is to bring in strong mentors for the startup. The young and
abrasive energy of a startup founder needs tempering with the wisdom of an
older manager. Bringing together the vision of the Startup Entrepreneur and the
experience of an older manager in an unobtrusive and non-threatening manner
will prove to be very helpful. In addition to watching the back of the startup
entrepreneur and guiding him when the ship hits troubled waters, such
individuals will also bring in strong subject matter knowledge, from their
respective domains.
In
addition to the points listed above, the million dollar reason for why
most startups fail because while they have incredible ideas and technology,
they have not invested enough time and effort in understanding how they will
reach the customer. Without a paying customer, no business can succeed and
getting a paying customer and retaining him for repeat purchase needs more than
just a great business idea or pot loads of money.
The
epitaph of a startup need not be written if the founder has the wisdom to build
the startup into an institution with strong ethics and values and not simply work
towards building a huge valuation for the company!
*******************
The author is the founder Chairman of
Guardian Pharmacies and the Chairperson of Bizdome Advisory Board, the
incubator of IIM Rohtak. He is also the author of the best-selling books,
Reboot. Reinvent. Rewire: Managing Retirement in the 21st Century; The Corner
Office; An Eye for an Eye and The Buck Stops Here - Learnings of a #Startup
Entrepreneur.
Twitter: @gargashutosh
Instagram: ashutoshgarg56
Blog: ashutoshgargin.wordpress.com |
ashutoshgarg56.blogspot.com
