Skip to content

Why will your startup fail?

by on June 28, 2016

header

It’s very challenging to start and grow an idea into a successful company.  The odds are stacked against you.  A recent FRACTL study of over 200 company post mortems found that the #1 reason most often cited by founders, even more often than running out of cash, was that their business model was not viable.

The research shows that we have good ideas, but bad businesses.

Business_Model_Fail_1

One issue didn’t emerge as the primary cause of startup failure, but rather most startups pointed to a combination of reasons. This is likely due to certain issues being symptoms of another issue. If your business model isn’t sustainable or profitable, you’ll blow through cash quickly. Without money, you can’t grow. If you don’t show signs of growth, it becomes difficult to get funding … and so on.

Money won’t solve the problem

The study shows that funded startups are more likely to run out of cash than bootstrapped ones.

Business_Model_Fail_4More than three-quarters (76%) of the startups analyzed had some degree of funding, ranging from $10,000 to $850 million. Surprisingly, money-related issues were the most common reasons the funded startups failed, with a combined 40% citing running out of cash or a lack of funding as a reason for failure.

On the other hand, only 28% of startups without funding blamed a lack of funding or running out of cash for their shutdown. More than a quarter (26%) of unfunded startups blamed a poor business model, while 17% cited customer development issues, a lack of funding, and no market need as reasons they failed.

 

Business_Model_Fail_3Access to funding (in startups or established organizations) is often brought up as the key challenge in innovation or company building. However, the FRACTL study shows that money isn’t really the issue. In fact, the findings show that funded ventures (including those that raised $10 million USD or more) are more likely to run out of cash than bootstrapped ones. Why is that so? Because you are more likely to risk building something that nobody wants when you have the money to actually build it.

We are too product focused

According to the study, software company founders concluded their problems stemmed from focusing too much on the technical aspects of their products and ignoring what customers actually wanted.

These findings are relevant because they show that companies–startup or established– still focus very much on products and value propositions. Addressing a relevant market need only gives you the right to compete. Figuring out a profitable, scalable, and competitive business model is what gives you the right to succeed.

It’s not enough to create a product that sells well and that customers love. If it costs you too much to create and deliver the product or service, you will fail. If it’s difficult or too costly to acquire customers, you will fail. If the customer lifetime value is too low, you will fail. Or if your pricing model is generally flawed, you will fail.

In other words, even if your product or service gets good traction, it won’t be enough to save you if you don’t have a viable business model that allows you to grow. And if you have investors, you won’t be able to offer them a return.

Hindsight is 20/20

Startup postmortems are one part closure for the founder and one part giving back to the startup community.  Either way, there was one common theme across many of them: Hindsight is 20/20.

Companies need to have the right business models to survive and thrive. You have to ask: what is the right business model around this idea? Around this opportunity? Around this technology or patent? Around this product or service?

The companies that really understand business models and know how to design them with well guarded moats will win. They will succeed. And that’s the same for startups and large companies.

p.s.

If you’re wondering how you build a company that you can sell for a premium, contact me to discuss the Valuation Amplification Process.

I also invite you to download the white paper and learn the 5 step process on How to Quickly Increase Your Valuation: a Proven 5 Step Process

Advertisements

From → Uncategorized

One Comment

Trackbacks & Pingbacks

  1. Avoiding Business Model Failure | Mike Rogers

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: