1: Market Problems
A major reason
why companies fail, is that they run into the problem of their being
little or no market for the product that they have built. Here are some
common symptoms:
- There is not a compelling enough value proposition, or compelling event, to cause the buyer to actually commit to purchasing. Good sales reps will tell you that to get an order in today’s tough conditions, you have to find buyers that have their “hair on fire”, or are “in extreme pain”. You also hear people talking about whether a product is a Vitamin (nice to have), or an Aspirin (must have).
- The market timing is wrong. You could be ahead of your market by a few years, and they are not ready for your particular solution at this stage. For example when EqualLogic first launched their product, iSCSI was still very early, and it needed the arrival of VMWare which required a storage area network to do VMotion to really kick their market into gear. Fortunately they had the funding to last through the early years.
- The market size of people that have pain, and have funds is simply not large enough
2: Business Model Failure
As outlined in
the introduction to Business Models section, after spending time with
hundreds of startups, I realized that one of the most common causes of
failure in the startup world is that entrepreneurs are too optimistic
about how easy it will be to acquire customers. They assume that because
they will build an interesting web site, product, or service, that
customers will beat a path to their door. That may happen with the first
few customers, but after that, it rapidly becomes an expensive task to
attract and win customers, and in many cases the cost of acquiring the
customer (CAC) is actually higher than the lifetime value of that
customer (LTV).
The observation
that you have to be able to acquire your customers for less money than
they will generate in value of the lifetime of your relationship with
them is stunningly obvious. Yet despite that, I see the vast majority of
entrepreneurs failing to pay adequate attention to figuring out a
realistic cost of customer acquisition. A very large number of the
business plans that I see as a venture capitalist have no thought given
to this critical number, and as I work through the topic with the
entrepreneur, they often begin to realize that their business model may
not work because CAC will be greater than LTV.
3: Poor Management Team
An incredibly
common problem that causes startups to fail is a weak management team. A
good management team will be smart enough to avoid Reasons 2, 4, and
5. Weak management teams make mistakes in multiple areas:
- They are often weak on strategy, building a product that no-one wants to buy as they failed to do enough work to validate the ideas before and during development. This can carry through to poorly thought through go-to-market strategies.
- They are usually poor at execution, which leads to issues with the product not getting built correctly or on time, and the go-to market execution will be poorly implemented.
- They will build weak teams below them. There is the well proven saying: A players hire A players, and B players only get to hire C players (because B players don’t want to work for other B players). So the rest of the company will end up as weak, and poor execution will be rampant.
- etc.
4: Running out of Cash
A second major
reason that startups fail is because they ran out of cash. A key job of
the CEO is to understand how much cash is left and whether that will
carry the company to a milestone that can lead to a successful
financing, or to cash flow positive.
Milestones for Raising Cash
The valuations
of a startup don’t change in a linear fashion over time. Simply because
it was twelve months since you raised your Series A round, does not mean
that you are now worth more money. To reach an increase in valuation, a
company must achieve certain key milestones. For a software company,
these might look something like the following (these are not hard and
fast rules):
- Progress from Seed round valuation: goal is to remove some major element of risk. That could be hiring a key team member, proving that some technical obstacle can be overcome, or building a prototype and getting some customer reaction.
- Product in Beta test, and have customer validation. Note that if the product is finished, but there is not yet any customer validation, valuation will not likely increase much. The customer validation part is far more important.
- Product is shipping, and some early customers have paid for it, and are using it in production, and reporting positive feedback.
- Product/Market fit issues that are normal with a first release (some features are missing that prove to be required in most sales situations, etc.) have been mostly eliminated. There are early indications of the business starting to ramp.
- Business model is proven. It is now known how to acquire customers, and it has been proven that this process can be scaled. The cost of acquiring customers is acceptably low, and it is clear that the business can be profitable, as monetization from each customer exceeds this cost.
- Business has scaled well, but needs additional funding to further accelerate expansion. This capital might be to expand internationally, or to accelerate expansion in a land grab market situation, or could be to fund working capital needs as the business grows.
What goes wrong
What frequently
goes wrong, and leads to a company running out of cash, and unable to
raise more, is that management failed to achieve the next milestone
before cash ran out. Many times it is still possible to raise cash, but
the valuation will be significantly lower.
When to hit Accelerator Pedal
One of a CEO’s
most important jobs is knowing how to regulate the accelerator pedal. In
the early stages of a business, while the product is being developed,
and the business model refined, the pedal needs to be set very lightly
to conserve cash. There is no point hiring lots of sales and marketing
people if the company is still in the process of finishing the product
to the point where it really meets the market need. This is a really
common mistake, and will just result in a fast burn, and lots of
frustration.
However, on the
flip side of this coin, there comes a time when it finally becomes
apparent that the business model has been proven, and that is the time
when the accelerator pedal should be pressed down hard. As hard as the
capital resources available to the company permit. By “business model
has been proven”, I mean that the data is available that conclusively
shows the cost to acquire a customer, (and that this cost can be
maintained as you scale), and that you are able to monetize those
customers at a rate which is significantly higher than CAC (as a rough
starting point, three times higher). And that CAC can be recovered in
under 12 months.
For first time
CEOs, knowing how to react when they reach this point can be tough. Up
until now they have maniacally guarded every penny of the company’s
cash, and held back spending. Suddenly they need to throw a switch, and
start investing aggressively ahead of revenue. This may involve hiring
multiple sales people per month, or spending considerable sums on SEM.
That switch can be very counterintuitive.
5: Product Problems
Another reason
that companies fail is becuase they fail to develop a product that meets
the market need. This can either be due to simple execution. Or it can
be a far more strategic problem, which is a failure to achieve
Product/Market fit.
Most of the
time the first product that a startup brings to market won’t meet the
market need. In the best cases, it will take a few revisions to get the
product/market fit right. In the worst cases, the product will be way
off base, and a complete re-think is required. If this happens it is a
clear indication of a team that didn’t do the work to get out and
validate their ideas with customers before, and during, development.
6: Overestimating Success
Many
entrepreneurs have a bad habit of overestimating initial success, and
for some this means disappointment. Don’t get discouraged if your
endeavor isn’t initially as successful as you thought it would be. Good
things usually take time to develop into great things. Continue to work
toward your original goals and keep in mind that any progress is better
than none. Don’t give up.
7: Misplaced Purpose
Money is
something we’re all concerned with, but don’t let it blind you from the
main goals of your business. Your passion should be focused on your
customers and products. Focus on your organization’s message, how you
set yourself apart from the competition, and why your business is a
valuable asset to consumers, the money will come.
8 : Negative Mindset
Often,
entrepreneurs find themselves discouraged in the beginnings of a
start-up. Failure and lackluster achievements almost always have that
affect, it’s natural. What sets true entrepreneurs apart from the crowd
is their stamina and willingness to push through the rougher times. Keep
your head up and stay focused. Don’t let yourself fall in to the
mindset that you can’t accomplish your goals. Good things usually take
time to develop. With vision and determination comes success, it’s
inevitable.
9 : Jack of All Trades
Entrepreneurs,
especially at the very beginning of a business endeavor, often find
themselves wearing multiple hats, and while it’s almost always
necessary, it can be very taxing and discouraging. Don’t let this
discourage you — if it was easy everyone would be doing it. Try to find a
balance between the various duties you must tend to, set a schedule,
and stick to it. Things will get easier.
10 : Employee Motivation
This
one is may important As an entrepreneur, you’re leading an
organization to either a clear victory or miserable failure. There’s no
middle ground. One of your primary job duties should be to keep
employees motivated and focused on success. Often, entrepreneurs lose
sight of the importance of motivating team members. An organization’s
staff is its life blood. All hugely successful organizations have
extremely motivated, talented, and happy team players.
11 : Lack of Support
Sometimes
entrepreneurs find it difficult for family and friends to understand
their drive. We aren’t built the same way as most. Push through any
criticism you encounter and stay focused, you’ll find that, following
success, those very same people will often be singing a very different
tune. Find support in colleagues and industry connections. Get involved
in professional organizations that are related to your endeavor and stay
motivated by connecting with other successful entrepreneurs. You aren’t
alone.
“Keusahawanan itu tidak dilahirkan bersama kita, tetapi ia sebenarnya dibentuk dan dipupuk dari masa ke semasa..”
