Reasons Your Startup Can Fail
The entrepreneurial spirit is alive and well and no matter what part of the globe you are in people are establishing businesses and startups at every opportunity. In the US hundreds of thousands of business and startups are established every year. These large numbers unfortunately come with a high number of failure rates. It is estimated only about 50% percent of small businesses make it past five years and startups with angel investors have a lower rate of success. Although there is no guarantee you can bet your hedges by following some steps often ignored by novice entrepreneurs.
Think Of The Mundane First
You have the next great idea that is going to sweep the world of its feet so who has time to think about the minutia of the day to day operations of the business, certainly not you because you are the idea man or woman. You have to make or force yourself to be aware of the details of your startup. So before you put your John Hancock anywhere brush up on the following or have a professional you trust implicitly explain it to you.
- Have the right type of company LLC, C Corp, S Corp or any other structure
- Tax laws
- Protection of your intellectual property and data protection laws
- Contracts with everyone – employees, vendors etc. understand what you are signing every time
- Your responsibility – this means total responsibility don’t forget you are an adult
Granted without the idea nothing would be initiated but it is very hard to recover from costly mistakes when you are a startup and the business world is very unforgiving.
Understanding The Business Model
What is your business model? Once you find out what it is you have to focus on two basic and simple questions with two very difficult answers. Ask yourself a) is your startup able to get customers in a scalable way and b) when you do get them will you be able to monetize the customers with more money than it took you to acquire them. Go over the numbers and make sure you can make it work before you proceed.
The Wrong Business Model
Just because you think your idea is great doesn’t mean anyone else will. Assuming customer acquisition is easy is one of the biggest reasons startups fail. The Cost of Acquiring a Customer (CAC) is expensive and most of the time the Life Time Value (LTV) of the customer doesn’t pay for that acquisition. This yet again is something that is overlooked by startups and if the numbers are not right you can count yourself in the 50% of the business that do not make it.
Your idea is great and everyone around you loves it but you have to remember they are not the market. Ask yourself is my product nice to have or must I have it? Each answer will lead you in two and very distinct directions, understanding the market will help you accept the inevitable whether it is a good or bad outcome. Another important factor in the introduction of your product is timing. Introducing a product sooner than you should or a tad bit too late will have poor results. That is where the importance of good funding plays a role.
A common problem and the cause of many startups going under is running out of cash. Hiring a CFO who is capable can help you run your company until you reach a milestone for a successful financing round or let you know if you will not make it. Each milestone you achieve does not guarantee you will receive additional funding. In order to get an increased valuation of your company investors want to see:
- Progress since the seed round
- Have customers validate the product
- Customers have purchased the product
- Product and market issues are fixed
- The business model is proven to work
Rules are different for each industry and each milestone is assessed differently but you have to meet these and other milestones in order to get more cash.
Startups fail for many reasons including poor management and the failure of your product to deliver in the market. The most important thing to consider before you dive in is to be aware of what you are doing at all times and what is going on around you, it sounds very obvious but it has eluded even the brightest amongst us.