Reasons For Startup Failures

Much has been written about the subject. I particularly like John Osher’s “Top 17 Startup Mistakes You Can’t Afford to Make “(Entrepreneur.com http://www.entrepreneur.com/article/66454), as it has similarities and is, in some ways, an expansion of my view.

My experience shows that the most frequent reasons for startup failures can be summarized in three groups: (1) the market is not really there; (2) you end up needing more money than anticipated; and (3) you not only make, but persist on managerial mistakes

The first reason relates to believing that there is a market ready to buy your product or service and finding out that people do not perceive the value that you expected. Or a variant from the same theme, the market not being ready to take advantage of the value being offered. For instance, I have faced a situation where, although our product could have a relevant impact in our customers’ sales, they were not prepared to implement the management processes necessary to achieve such benefit.

There is no magic formula to prevent this, other than extensive research and in advance planning. Talking to potential customers - if possible testing the market. Controlling the enthusiasm about your idea and really hearing what they have to say, mainly their objections.

The second and most usual reason for startup failure is underestimating the cash needed in the company. Sales projections are almost always too optimistic (especially when you have to attract outside investors). Actually, I have never seen a startup original sales projection be met! Demand usually takes time to build and a new trend is different from just a fad!

Then, costs and expenses are often underestimated. Lower volumes mean higher indirect costs per unit. Organization is hired based on projections that do not realize and fixed costs built up. Expenses and taxes are sure things in business, but the same can not be said about customers or sales! And sadly, it is also usual to see entrepreneurs implementing a “rich company” mentality in startups and “eating – instead of raising – the golden eggs' chicken”, meaning their company.

The best advice for that is: plan carefully and conservatively, build an austere culture and, most importantly, have a contingency plan. Pursue breakeven like water or oxygen. Too much focus on sales and too little on profit is a serious risk.

The third reason is the owner him/herself messing up. Making mistakes is human, persisting will destroy the business. Insisting on a bad partnership; on unrealistic sales projections; on the wrong market strategy or approach; on a weak management group (maybe including yourself); and so forth.

That does not mean that you should give up early. Perseverance is key to a successful startup. It means that you should build trust based partnerships, with people that have a common set of values; that you should have a good and reliable set of advisors, with courage to tell you what you may not want to hear, and that you should listen to them.

Sure there are other reasons for failure and the advices above are easier to say than to execute. Experiences vary and chances are we all will mess up. But, hopefully we end up learning. What do you think?