Monday, June 13, 2011

Why most startups fail… and here is how not to

By Brett Commaille

Every couple of days we hear about a new start-up jumping onto the public stage with much fanfare. After that they’re a bit like a pimple in the middle of your forehead — every time you open your eyes it’s all you see.
But then one day, for no specific reason… it’s gone.
“Anyone know what happened to whatchamacallit?” After some enquiry, we’ve got a handful of rumours with a bucket of spin. All we know is: “it’s over”. Truth is, most of the time, it’s one or more of the same basic reasons.
There will always be those special individuals who find exceptional ways to kill their business — like setting fire to mom and dad’s garage and destroying the code (and backups). But the majority of startups fail in far more mundane ways. Being in the venture capital game for a number of years, I’ve seen it all. Here’s a number of key reasons I’ve seen startups fail… and here are some ways to avoid them:
1. Not understanding the user: Your plans are based on what you think the user wants, and maybe you even have a few buddies who thought that was cool. Make sure you take the time to find out exactly what the user wants and how they like doing things. Be careful about telling them how they should act, this usually backfires.
2. To in love with the tech: You love adding features — “Wouldn’t it be awesome if we could also let them Skype with the dead?”. You’re building an elephant, but haven’t tested any of it. Maybe users only need the trunk. Keep it to the core and market-test before you go wild on features. Getting this wrong has massive knock-on effects.
3. Launching to slow: If you’re building that elephant, you’ll keep holding back on the launch until everything is perfect. So it’s never fully ready or tested and now the competition has hit the market with a good basic solution. So keep it lean, get to market fast and add functions as user demand warrants it.
4. No real sales strategy: Capturing 20% of the market is not a strategy! Who will the first customers be? How do you reach them? What does it require to close the deal? How many sales people do you need to do this? What will the sales number look like based on all of this. Brush past this and you will have drastically overestimated your revenue.
5. Market too small: It’s easy to pick a niche that doesn’t seem too challenging. Remember you may face competition, even in that niche, and end up with a potential market which is just too small to support a sustainable business. Make sure your market is big enough and growing.
6. Basic copycat: Enter the many thousand Groupon clones around the world. Working international concepts have been launched successfully locally, but only if you’re the first to do it locally. Doing this into a busy market because you see the current players making tons of money is a sure recipe to burn cash and stay small. I learnt this far too well, having launched a super cool sunglasses brand … one of hundreds in the market (just before a recession too – damn!). We sold some of course, but the big boys in the market sold millions. Might as well have sold Chappies on the Metro. Be different, not “the same but better!”
7. Fast burner: You ramp up your costs as you grow a big developer team to match those massive revenues you expect. The revenues don’t happen and you’re suddenly burning money faster than a new MP planning Gala dinners. Again, get into the market with the basic product and start generating revenue. When the conversion metrics show you’re getting it right, then you can grow the spend.
There are more reasons why startup businesses fail, but these are the most important. Bear them in mind and you may avoid some of the most common pitfalls. Of course, the easiest way not to fail, is to not start. Fortunately you’re not scared, (else you would have closed your browser after seeing the word “start-up”) — and now you’re just a little a little more likely to make it.
Good luck!


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