Tech startup and scaleup businesses face numerous challenges, and if the worst comes to the worst and the enterprise fails it is usually due to a combination of factors. That said, not all risks are equal or indeed as difficult to defend against. In this article we’ll look at the most common causes of early-stage business failure and some steps you can take to mitigate them to avoid catastrophe.
While there have been numerous surveys on this subject, the precise cause or combination of causes (and the sequence) of each individual case is not uniform across all situations. However there is a degree of consensus as to which half dozen or so causes are the most prevalent so I have concentrated on these in the first part of the list.
Product-Market Fit Issues or Lack of Market Demand
Building a product or developing a service that nobody wants or needs is the most common reason for startup failure. This can be blindingly obvious to someone impartial taking a purely objective view. But startups require passion from the founder and the early team members and it’s easy to get seduced into believing that because you think it’s a great idea then everyone else will too. Associated with this is pricing; even if a customer acknowledges they need a product or service, are they prepared to pay the price you are asking for the benefit they derive from it?
Mitigation
Startups (or scaleups looking to launch a new product or service) should conduct thorough market research to validate their idea with potential customers and gauge what they would be willing to pay. Test the market with a minimum viable product / service (MVP) before committing to significant investment and scaling. Continuously iterate to ensure your product aligns with market needs and solves a real, on-going problem. Regularly validate and adjust your product or service based on customer feedback.
Closely related to this is simply ignoring customers or not assimilating their feedback.
Ignoring Customers
Talk to customers frequently and actively listen to their feedback. Watch how they use your products or services and where that use contributes the most value to their operation.
Mitigation
Listening to customer feedback is crucial to tuning your offer to ensure it delivers maximum value. It also helps inform decision making on whether a pivot is appropriate. However, that feedback has to be converted into tangible actions that directly address the feedback, especially if it is in the form of complaints or pointing out glaring omissions. If you fail to do this, new customer acquisition and existing customer retention will both suffer and erode the value of your business (or prevent its value increasing) over time.
Insufficient Funding or Running Out of Cash
Many startups have limited backing with bootstrap and seed funding coming from family and friends and the founder’s own resources, creating financial pressure, especially acute in the early stages. This cash limitation is then sometimes compounded by poor financial management.
Mitigation
Startups should create a comprehensive financial plan ideally reviewed by someone who is independent and objective. The financial plan should establish a realistic funding requirement including contingency in the event that things don’t track those projections. Cash flow needs to be closely monitored to ensure pressure points are identified and that the business is sustainable.
Spending should be focused only on essentials in the very early stages and this rigour maintained as the business grows. Only so much can be achieved by controlling cost and so there should be a focus on ways to drive revenue early.
While the requirement for external investment might not feel imminent it’s important to start identifying target pools of financial backers well in advance and begin to cultivate relationships with potential future financing partners. In parallel thought should be given to the full range of possible funding options available to early stage businesses including grants, specialist debt finance providers and strategic partnerships.
I have written a blog specifically on Finding The Ideal Investor.
Wrong Team
Assembling and developing a strong team is essential for any startup and growing business, but it can be difficult to find the right people at the right price, especially where there are tight financial constraints.
Mitigation
Build a diverse team with complementary skills covering technical, business and marketing expertise. Hire slowly and fire fast if needed. Foster open communication, establish clear roles and responsibilities, and address conflicts promptly. Continuously invest in team development and morale. Don't be afraid to hire ambitious, energetic, bright but less experienced candidates if the potential to develop them is there. Experience can be supplemented by building a support network of trusted advisors and non-executive directors.
Inextricably linked to building the wrong team and failing to create a positive culture is ineffective leadership.
Ineffective Leadership
Weak leadership can severely hinder a growing early stage business. This is often borne out of the founder’s lack of experience and allowing team conflicts to persist.
Mitigation
Develop a clear vision and strategy for the company underpinned by a healthy work culture. Becoming a capable leader and building a strong, adaptable management team requires fostering a positive and collaborative work environment and providing ongoing professional development opportunities.
It is important that a founder recognises their own leadership limitations, especially if it’s their first business. I recommend seeking high quality mentoring and / or coaching (see my blog Mentor or Coach?: A Buyers Guide) to develop your own leadership skills and those of your team. A willingness to adapt your leadership style based on feedback is critical to being able to respond to the evolving needs of your business.
See also my blog on 15 Leadership Skills Every Entrepreneur Must Master.
No Business Model
A flawed or non-existent business model will inevitably hinder a startup's growth. Linked to this is the lack of a clear strategy that should be used as a reference point to guide decision making, especially in light of changes in the target market and the wider economy.
Mitigation
At the outset startups should develop a solid business plan and strategy, identify their target market, understand their customers' needs, and create a sustainable revenue model, including unit economics. Test pricing sensitivity to verify assumptions and pivot if needed. Even the best startups experience unexpected events so have a contingency plan in place so that you can respond quickly and effectively. Review the strategy and underlying business plan regularly to ensure they’re current.
My blog on stress testing your business model 12 Proven Strategies To Test The Strength Of Your High Growth Business.
Inability to Pivot / Bad Pivot
If the business strategy is at all unclear and the contingency plan is too rigid then options to pivot will be limited. Even where a pivot is potentially viable because a range of outcomes have been considered, if the strategy and plan are poor then the direction of that pivot could be as flawed as the current trajectory.
Mitigation
The tech industry is constantly changing, so you need to be prepared to pivot your business model in a responsive and timely way. Stay adaptable and open to change. Regularly reassess your business model and strategies. Foster a culture that values innovation and flexibility, be agile and adaptable.
Ineffective Marketing and Sales
Poor marketing and sales strategies can lead to sluggish and inadequate customer acquisition and revenue generation.
Mitigation
Develop a robust sales and marketing strategy. You need to invest in developing a strong brand identity and building a scalable sales process to effectively reach and convert customers. Train and empower your sales team to respond to customer demand and use feedback loops from the sales team’s experience to refine marketing messaging. Regularly analyse and adjust your marketing and sales strategies based on that performance data. Where appropriate make use of digital marketing and social platforms to rapidly test, learn and iterate sales and marketing approaches.
Bad Timing
Timing is everything for startups. If you launch your product or service at the wrong time, it will make it difficult or even impossible to gain traction within the financial runway available.
Mitigation
Carefully evaluate market conditions before launching, whether you are a brand-new startup or a growing business looking to launch new offerings. Be prepared to adjust strategy and timing. Consider pivoting or going after different markets if the original concept doesn’t hold-up under scrutiny.
Competition and Differentiation Challenges
The tech industry is highly competitive making it difficult for startups to stand out from the crowd. Facing intense competition without a unique value proposition will make it incredibly difficult for you to succeed.
Mitigation
Research the competition thoroughly to assess their weaknesses. Differentiate primarily on product functionality or service innovation that creates customer value and on customer experience. Avoid competing on price unless internal costs can be maintained comfortably below the competition and that cost model can be at least held or improved as you scale. If price is your only differentiator, larger, more established players can often afford to reduce their prices to squeeze your margins and even put you out of business by selling below their own cost in the short-term .
Poor Execution and Project Management
Startups and growing businesses need to take advantage of their inherent agility to out manoeuvre their established competitors. This means being in a position to execute on their plans quickly and efficiently.
Mitigation
Focus on building a strong team with diverse skills and clear roles and responsibilities. Hire those key team members early. Foster a culture of accountability and transparency.
Implement effective project management methodologies. Set realistic timelines, milestones and goals. Regularly assess and refine, adjust and adapt project plans based on evolving priorities.
Technological Challenges
Inadequate technology infrastructure or failure to adapt to technological advancements will impede a startup's growth and leave an aspiring scaleup business behind the curve.
Mitigation
You should invest in robust and scalable technology solutions, stay updated on industry trends, and continuously innovate to stay competitive. This can be extremely challenging in the face of stiff competition and limited internal resources and finance.
An ultra-focussed approach is required to concentrate those available resources on the areas of product functionality or service that will deliver the maximum value to customers and be the most differentiated versus the competition from the fewest resources possible. Easier said than done in practice but a critical discipline to maintain.
Legal, Regulatory and Compliance Issues
Startups need to be aware of and comply with all applicable laws and regulations. Ignoring legal and regulatory requirements can lead to costly consequences and in the worst case pose an existential threat.
Mitigation
Stay informed about industry regulations and compliance requirements. Consult legal experts to proactively address compliance issues and ensure your business practices align with relevant laws to avoid costly legal complications. Prevention is far less expensive than cure in the long-run!
Founder Burnout
Starting and growing a company requires sustained high levels of energy and is often immensely stressful for extended periods which can lead to founder burn-out.
Mitigation
It's important to take care of yourself, both physically and mentally or you may not be able to sustain the necessary levels of energy or mental well-being required to function effectively in the long run.
Be sure to take time out to exercise, eat healthily and fully relax. Maintain social connections with those outside your business and find an equilibrium where you can achieve what you need to in business without neglecting those people important to you.
Unforeseen Events
While every entrepreneur should strive to keep control over all the factors they are able and expected to, there are always unforeseen external factors and events way outside any of our control. These include natural disasters, economic downturns, global conflicts, and changes in the regulatory landscape.
Mitigation
Focus on building a clear plan for the factors you can influence and have a contingency plan for external factors that you cannot control. This doesn’t mean attempting to predict the next volcanic eruption or conflict between nation states; it’s a matter of understanding the consequences of significant damage inflicted on your business as a consequence. For example, what if your customer acquisition or renewal rate dropped by half over a very short timeframe? How much financial headroom would you need to survive over what period? What costs could you trim in the short-term? Would job losses be necessary?
Conclusion
By addressing these key challenges and implementing the suggested steps, startups and early stage businesses can increase their chances of success and mitigate the risks associated with failure.
Remember that these factors are interconnected, and addressing one may positively impact others. Continuous learning, adaptability, and a focus on customer needs are crucial for startup success. Regularly reassess your business strategies and be willing to pivot when necessary.
It's important to note that each business is unique, and the specific challenges you face may vary. Therefore, it's crucial to assess your own situation and tailor your strategies accordingly. This is one of several areas Crossing The T can help you with. Contact me here for an informal consultation.
Image attribution: Free Stock photos by Vecteezy
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