The fundamental reason why startups fail and 3 things you can do to avoid it.

What do you think is the fundamental reason why startups fail?

In a startup there are so many things that can and do go wrong.  Given enough time and resources most problems in a startup can be figured out and fixed however some problems are so fundamental that if they are not fixed then the startup is doomed, and no amount of money and/ or time will fix it.

What do you think this reason might be?  I think it has to do with how many startups begin life.

Michael Gerber in his book E- Myth called it an “Entrepreneurial Seizure”. It goes something like this; A founder gets an idea, in this fit of excitement the founder starts  to create the product/ solution, then tries to market and sell it, nobody or very few people buy it, the founder runs out of money and the startup fails.

This journey is reflected in the startup failure statistics. According to US Small Business Administration which has done the most comprehensive study of startup failure/ survival rates, the rate of failure is ;

 

  • 21.5% in one (1) year,
  • 40.6% in three (3) year,
  • 51.8% in five (5) years and
  • 66.5% in ten (10) years.

 

The rate of failure decreases the longer you stay in business. What is it that the successful startups get right in the early days?

Can you imagine the personal and economic impact of having two thirds of all that energy, time and capital investing in millions of startups around the world failing to reach their goal of economic sustainability? What is the root cause?

I believe the fundamental reasons why startups fail is because of a poor customer value proposition. Either they fail to create something of substantial value to the customer or they fail to communicate it to enough of the right prospective customers. Often because the value proposition itself is not clear to them.

According to Jessica Ruhfus, Marketing Expert, Founder of Collabosaurus and Panelist at the June 6 & 7 2019 B2B Rocks conference in Sydney, of the startups that failed the largest proportion (42%) of them failed due to “No Market Need” (Source: CB insights: Top 20 Reasons Startups Fail).

 

No alt text provided for this image

 

How can that be? How does a startup founder get an idea, spend all that time and money, possibly get others to invest their time and/ or money to create a product, try and market it, only to find out there is insufficient or “no market need”?

I believe the reason for this is because we focus too much on the solution/ product and not enough on the problem. That is, I believe the real reason why so many startups and product launches fail.  It is what causes the poor customer value proposition. Even all the other reasons given for startup failure like, running out of money, not the right team, getting out competed, pricing/ costing issues etc are symptomatic of a poor customer value proposition.

 

Here are three things we can do to avoid failure and ensure we have a quality customer value proposition. You should;

 

1. Stay focused on the problem

Too many founders and businesses fall in love with their solution.  You can hear it when you talk to them.  Eg. Qn: What do you do?  Ans: Machine learning, Artificial Intelligence, Blockchain etc. Focus on the problem. Understand it inside/ out. Solutions and customer expectations change over time but the problems, the human needs and wants, largely stay the same. This way when new technological advancements come in that are better ways of solving those problems you are more likely to adapt them into your offering.

 

2. Deeply understand your prospective customer

The key to a successful business is know your prospective customer.  Understand their needs and wants. Understand their experience of the problem.  Understand what they think about. Put yourself in their shoes. Only through this empathy can you offer a quality value proposition.

 

3. Create a solution/ product you are proud of

A product that you believe will make a positive contribution to your customer. A product that will help your prospective customer solve a problem that is important to them. We spend most of our waking hours at work, we might as well spend it doing something, we believe is going to make the world a better place.

 

If you are a startup and you have created something of value for other businesses or of you are a corporate that wants to tap into the innovation of a startup then you should come to the Next Startup&Angels in Melbourne.

Many large corporations by their very nature tend to be risk-averse culture and the bureaucracy designed to create order becomes a terrible hindrance to innovation, change, evolution and adaptability. Similarly, many small startups with their more open and innovative culture can try new things quickly but they lack the leverage and resources to make a large impact like a big corporation.

The Startup&Angels Conference is about connecting startups and investors. If you work within a startup in a strategy, business development, partnership or growth role then you should come along to the conference.

Click here to learn more about this awesome conference.

 

Leave a comment