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The statistics look bleak. Nine out of ten start ups fail…and only a quarter of them make it beyond that all-important first year. But this doesn’t seem to be dissuading hopefuls who continue to jump onto the entrepreneurial bandwagon like never before. Anyone and everyone with an innovative idea is hit by the urge to be the next superstar on the start up horizon.
Starting a new business is often a roller coaster ride, with mostly downs and not many ups. So what makes this failure rate so high? Let’s do a post mortem, so that new enthusiasts can create a risk management plan and learn from their mistakes. In fact it’s customary for start ups that fail to pen down their reasons for shutting shop.
A research report submitted by cbinsights.com had the key driver of failure as the lack of real market need. This happened to Treehouse Logic, a next-gen visual configuration platform that helped brands to build ecommerce sites using product customisation experiences. They underpinned their failure on the fact that they weren’t solving a market need.
Too many start ups are launched without adequate research, with the result that the product or service on offer is not what the end-users want. When the product fits a missing gap in the market jigsaw, it tends to do better. Today, sites like Survey Monkey offer a very easy way to check the pulse of the market and find out what’s hot and what’s not.
Lack of adequate funding was the second most quoted reason. Quirky, a startup launched in 2009, was an exciting invention platform where concepts were described and people could vote for the idea they wanted converted into an actual product. Margins were thin and the cost of creating prototypes of the winning ideas turned out to be prohibitive.
Every new venture needs a team that has diverse skill sets- someone who is business savvy, another who is an ace at marketing , and obviously those who have in-depth knowledge and experience of the business itself. If the team isn’t right, then that’s another big reason for the lack of success. Recruiting portal Standout Jobs had a great product and adequate funding, but the founding team wasn’t able to build a Minimum Viable Product (MVP) on its own without outside help – and they didn’t think to take on co-founders who could pitch in at that point in time.
Competition is also stiff, and when the market gets hot there will be plenty of wannabes who want to piggyback on your success. If your competitor delivers a product that meets user needs better than yours, then chances are that he will succeed and you may not. Personal finance management platforms Wesabe and Mint were very similar at heart, but Mint saved people money from the start and ended one-up on its precursor Wesabe.
Start ups often have issues with pricing their product right. They struggle with fixing a price that’s attractive to customers, yet brings in enough money to allow the business to run. You need to look for the perfect price point- determine your actual running costs, how much business you need to generate to be profitable, and check out whether the market will support the selling price you have arrived at through this analysis. Zirtual, an on-demand virtual assistant provider, closed down very abruptly when they found the company had overstaffed itself without having matching demand- and their pricing wasn’t enough to match up to the costs of running a full time employee pool.
Then there are the ventures that get enmeshed in red tape and regulatory demands. Homejoy, a favourite of the media, offered low cost cleaning services and took on bookings through an automated software platform. Worker misclassification issues led to heavy lawsuits that choked the company, ultimately shutting it down. Music streaming service Grooveshark didn’t secure licenses for the music they streamed, and ran into problems with copyright violations.
Start ups need a viable business model. Optimism rides high at the start of any venture, and, when reality sets in people find that customers aren’t really beating a path to their door. If the cost of acquiring new customers is higher than envisaged, the business model may fall flat. Again, if the business model is not scalable, then the growth will not be sustainable in the long run.
Failure is often a stepping stone to success, though, and many first time failures have gone on to be successful at their second venture. Case in point: most people don’t know that Microsoft was built on the ashes of a company that didn’t even see the light of day. Bill Gates and Paul Allen had tested the waters with a company called Traf-O-Data, which never got off the ground! The experience they gleaned from this venture laid the foundation for creating software giant Microsoft.
Even if 90% of new ventures fail, do your homework on the 10% that do get it right. With a foolproof risk analysis plan, you could just hit upon the new-age mantra for success!
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