Most Business Fail – Don’t Be One of Them.
Survival rates for technology companies are appalling. Within 5 years 80 to 90% of new ventures fail. Starting a technology company to develop a product is a lot like the Olympic games. Everybody celebrates the winners, but the reality is most Olympians lose.
First time entrepreneurs struggle to survive while developing their first product only to end up failing. Why do they fail and how do we improve success rates?
Building a business is much more than just developing a technology.
Studying how new ventures fail gives insights on critical success factors and choices to avoid. Like the National Transportation Safety Board (NTSB) studying airplane crashes to improve air safety, we can gain enormous insights into critical elements of new venture success by looking at how other companies fail. We can stand on the shoulders of those that have gone before us.
Let’s roll the game tapes and see why new ventures fail, what to avoid, and how to fix it.
Companies fail for a variety of reasons. CB Insights and Fractl Consultants have compiled data on more than 200 company failures. The data were collected from start-up company post-mortems and press stories about their failures. Kudos to the Silicon Valley culture that encourages founders to share their stories for the benefit of others. These stories provide some of the best insights we have on company failure. Other jurisdictions stigmatize failure and Founders/Investors are often eager to put the failure behind them and move on without hard analysis.
CB Insights classified 20 reasons and Fractl identified 27 reasons for company failure. The datasets have some limitations. The sample set is small and was only provided by founders willing to tell their story. Some of the reasons given may be symptoms rather than root causes of failure.
Limitations notwithstanding, the observations provide great insights into company failure.
Top Reasons Why Companies Failed – Founders’ Stories:
Companies failed for business reasons not technology reasons.
The most striking observation is that most of the reasons for failure were business related. They were not technology failures.
This is Great News, as most business challenges are addressable, especially if critical elements are identified in advance. The bad news is that it still takes a lot of work and most do not know where to start. Keep reading, we have some tips.
The reasons for failure appear diverse but mostly involve business aspects that are likely outside the experience of most technology founders. We re-examined the data to analyze 5 key business aspects that underlie the failures.
Top 5 Ways Companies Choose to Fail.
The data were re-examined to identify common cause factors. These root causes of failure are those areas that require critical attention before and during new venture formation. Founders that fail to address these critical business elements condemn the startup to almost certain death.
The critical function of management is making choices and decisions that lead to success. This analysis illustrates the critical decisions that must be made. Oh and by the way, not making a choice is still a choice.
The data were regrouped into the 5 critical business elements. A sixth category captured those random things that just happen.
| Critical Business Elements | CB Insights | Fractl |
| Value Proposition | No Market Need, Poor Product, Poor Marketing, Ignore Customers, Product Mis-Timed, Pivot Gone Bad, Failure to Pivot | Not Enough Traction, No Market Need, Customer Development Issues, Bad Timing, Failure to Pivot, Ignore Customers, Poor Marketing, Pivot Gone Wrong |
| Business Model | Outcompeted, Price/Cost Issues, Need/Lack Business Model, Lose Focus | Outcompeted, Pricing/Cost Issues, Business Model Not Viable, Lack of Focus, Veered from Original Vision |
| Finance | Ran Out of Cash, No Financing/Investor Interest | Ran Out of Cash, Lack of Financing/Investors |
| Team | Not the Right Team, Disharmony on Team/Investors, Lack Passion, Burn Out | Disharmony on Team/Investors, Inexperience/Skills Gap, Hiring Mistakes, Lack of Passion, Burn Out |
| Technology | Technical/Product Issues | |
| Other | Bad Location, Legal Challenges, Don’t Use Network/Advisors | Bad Location, Legal Challenges, Fraud Victims |
Reason #1: Building a Product No One Wants or Buys.
30 to 40% of companies failed because they didn’t have a Compelling Value Proposition.
Companies set out to create a product that no one wanted!
All that time, money and effort wasted because the product didn’t meet a customer need. The technology is developed into a product, and then the company goes looking for a customer.
Classic fail!
I’ve seen this failure repeated many, many times over the last 30-years. It’s common in companies started by technology founders. An investment banker colleague referred to this as “The Incorporated PhD Thesis Problem”.
Inventors would sooner spend a year in the lab than spend a day with a customer.
Lessons Learned:
Make certain that the product you plan to create will meet a customer need. Remember, it is not about you. Innovation happens in the customers’ hands. It is about satisfying a customer need and helping a customer so well that they are willing to give you money in return.
Step 1. Get out of the building and meet with customers. Go talk with customers, find out as much as you can about their problem. This requires empathy. Discover their problems, but don’t try to sell your solutions.
Step 2. Dig deep to discover the job that they need done, the gains to achieve, and the pains that they want to overcome. Build a list of each of these requirements. Compare your product. Does it line up with the needs? Survey says the product probably doesn’t meet the need.
Step 3. Iterate. Don’t be discouraged it wasn’t right on the first try. Better you should learn this before raising investment money, assembling a team, and ramping up development. Much better to test an idea and discover it won’t work than to spend years building something that was never going to delight a customer.
Reason #2: Building a Product without a System to Effectively and Profitably Produce and Deliver the Product to a Customer.
One quarter of new ventures failed because they lacked Effective Business Models.
Founders failed because they did not have the models, systems and mechanisms in place to effectively produce the product, get it to the customer, get paid, and realize a profit.
Founders failed even though they created a product that customers wanted and were willing to pay.
A company won’t make money at scale without a well-designed business model.
Lessons Learned:
Business models have discrete components that can be designed, engineered and operated to enable a company to grow, scale and generate a profit. These components include revenue, cost of goods, overhead costs, and cash flow models. Getting these components right are every bit as important to the success of a company as building a great product.
Great business models are the difference between Apple and just about every other company in the smartphone market.
As with Value Propositions, Business Model design is readily addressable through sound business principles.
Reason #3: Companies Failed Because They Ran Out of Money.
Up to 20% of new ventures cited financial issues as reasons for failure. Money is the lifeblood of companies. Startups were not able to raise money when they needed or spent too much of what they had. They ran out of money and died.
The moment of death for most companies usually occurs when founders either call it quits or run out of money.
An interesting observation was that companies that raised money were more likely to rate finance as a reason for failure than companies that bootstrapped.
Money is lifeblood. Out of Money = out of business.
Lessons Learned:
Financing has 2 components: Raising money and using it wisely.
The money company really wants is revenue from a customer buying the product. The new venture becomes self-sustaining when this can be done predictably, profitably, and at scale.
New ventures don’t start out self-sustaining. They require money to develop and produce their product before they can sell to a customer. Investment capital is needed.
Investment: Raising capital is a complex process.
In simple terms, the process to raise capital is convincing an investor: 1) you have a product that meets a customer need, 2) a product customer is willing to pay to acquire, 3) the product is built on a profitable business model and, 4) managed by a team that can deliver at scale, in the face of competition, with high profitability.
That’s right; investors are evaluating your value proposition, business model and team. Seeking investment is offering the company as a product. If the investor finds the company attractive, then they may purchase part of the company with their investment capital.
When that happens, then you get investment capital AND become part of their business model. Selling to an investor is the first hard check on value proposition, business model, and team.
Frugal Fiscal Management: Do more with less.
If product can be developed for less money, then less investment is needed, and the founders get to keep more of their company. Furthermore, demonstrating to an investor that your team can do more with less is a great way to build confidence in your ability to deliver.
Reason #4: Didn’t Have the Right Team.
Team deficiencies or dysfunctions were cited as contributing to 10 to 18% of company failures.
Founders can’t do it by themselves. They need access to a wide variety of skills. Founders may have technical skills and will need to hire or acquire other skills. Be very careful hiring. Mistakes are very costly and could kill the venture.
Team diversity is critical in some interesting ways.
Number of Founders: Companies with more than one founder are more likely to succeed. It is hard to have constructive conflict with only one person in the room. Look for a co-founder.
Skills Set: Focusing only on technical aspects creates a lopsided team without skills to develop a successful business. Hire selectively or contract to acquire or access necessary skills.
Gender: Interestingly, companies with at least one female founder outperformed startups with all male founders.
The Canadian Federal Budget (March 2018) announced strategies to help more women-owned companies grow into world-class businesses. (https://www.budget.gc.ca/2018/docs/plan/toc-tdm-en.html)
Reason #5: Didn’t Have the Right Technology.
Technology wasn’t a prominent source of failure. Only 6.6% identified technology as a failure factor.
This is not surprising. Most technology has already been proven to work in laboratory conditions.
What is surprising is the extraordinary attention we pay to technology. Yes technology is important, but most founders have checked that box before deciding to start a company.
Reason #6: Other Factors.
New ventures can fail for many reasons. However, only 5 to 8% of companies identified other causes that contributed to failure. Those causes included Bad Location, Legal Challenges, and Fraud Victims.
Summary:
New ventures fail for a variety of reasons. The most common reasons are related to Value Proposition, Business Model, Finance and Team issues.
In many cases these factors are ignored until too late because founders were not aware of their critical importance for success.
The good news is that these are skills that can be learned. We created Frugal Innovation Coach to help you learn and develop these skills. In the months ahead, we will explore these fundamental skills and other critical entrepreneurial factors.
In future posts we will examine the multiple facets of value proposition, product design, business model engineering, and finance.
Stay tuned as we roll out specific tips, tools, strategies, courses, and workshops to help you prepare for and continue your entrepreneurial journey. Specific topics will also include budget development, project & company cash flow management, and conventional & alternative approaches to raising capital.