As the founder of a startup, you probably know the statistics. About 9 out of 10 – or 90% – of startups fail. According to Bloomberg, about 80% of businesses fail... within the first 18 months. It’s a sobering reality – but this does not always have to be the case. Why do startups fail? Based on CB Insights’ analysis of 101 failed startups, the three most common causes are the lack of market need, running out of cash, and not having the right team.
Here, we gather four key questions for troubleshooting your business before concluding it a failure. Recognising where you’re at, understanding what might have gotten you here, and identifying concrete resolutions are critical to moving – your company, product and team – forward, and hopefully in a surviving piece.
Question 1: Is there actually a need for this product?
Many founders go into the startup world because it’s sexy. After all, it’s cool to build an innovative product.
This ‘cool’ image is furthered with the help of tech industry buzzwords, written into elevator pitches with the end goal of hundreds and thousands of dollars in venture funding. You’ve heard them all – AI, Big data, blockchain, Fintech, etc.
While all of this is part and parcel of starting and running a business, it’s important to get clear about whether or not there is an actual need for your product.
What real problem is your product trying to solve? More, is your product designed to address your market’s problem in a way that works for them?
As is the case for many founders who are too close to their product, it’s often difficult to get objective about this question. But the reality is, if there is no market need for what you are offering, you are simply building this for yourselves.
Market need: this is arguably the most important indicator of a startup’s likelihood to succeed.
To guide your evaluation, consider the Design Thinking process of empathising, defining, ideating, prototyping, and testing.
Empathise with the market you are trying to serve. What does a day in their life look like? What dreams and desires do they have, and what obstacles do they face in achieving them? What do their needs really look and feel like?
With an understanding of this in mind, define – and redefine – the problem they face that you are trying to solve with your product.
Do they align? Does your product meet a need? Does it help solve a problem for your market?
Once the problem is defined, spend time ideating – brainstorming – for solutions your product can deliver, as well as ways your product can deliver this better.
With a number of solutions at hand, come up with a prototype that someone from your market can use. This first-time user can be anyone from your team, your friends, or members of the wider community you’re trying to serve.
Finally, test this prototype. Test your product or your service. See if it works – and if it doesn’t. Take notes.
And then repeat.
Based on your findings, update your knowledge of your market. Empathise with the people using your prototype. Redefine the problem.
Ideate for new, or better, solutions. Create an updated version – or a completely different iteration – of the prototype. Test it once more.
Do this until you can answer the question, ‘Is there a market need for this?' with a positive, resounding yes.
Question 2: Are our finances on track?
This is a tough one, but the sooner you acknowledge the state of your finances, the quicker you can course-correct your startup’s trajectory.
Unfortunately, not all of us are Uber. Burning through funds and running out of money is a common problem among startups. This is typically the result of poor planning – failing to account for the cost of operations, payroll, as well as cost-efficient marketing activities to ensure funding success in the next round.
There also seems to be the false assumption among founders that sufficient funds can and will be raised in the next round of fund raising – without sufficiently demonstrating why your startup is worth the investment.
Rapid user growth, acquisition metrics that have been tested and proven, as well as sales and marketing strategies that demonstrate a savvy use of limited budget to achieve targets – these are all critical to justifying the funding resources you hope to receive.
But many startups budget poorly, and as a result, the team’s valuable time, energy and resources get disrupted and refunnelled to fund raising. Instead of focusing on the core business and developing their product, startups spiral into channeling limited resources toward the next round of funding – and then wind up without a business on the other side.
Take a brave, hard look at your finances and ask: Is this a sustainable financial plan?
Is our process of budgeting sound enough to keep us afloat until after the next round of funding?
If the answer is no, there are a number of things you can do. Identify problem areas in your finances and the changes you can make to correct it. Do not overlook spending habits and practices, as well, that eventually led to this outcome.
Question 3: Do we have the right team in place?
Many early-stage startups – startups in their concept phase – are formed by two to three people, often with the same business or engineering background. This makes it virtually impossible to cover all aspects necessary to running a healthy, growing business, including operations, finances, and marketing.
For some startups, the problem also lay in making the wrong hire – hiring friends and family, hiring people with mismatched skillsets, hiring somebody underqualified and giving them an inflated title.
It goes without saying, but getting the right people for your team is imperative to determining your startup’s survival. A wrong hire is more costly for your startup in the long run, regardless of how convenient and efficient it appears at the beginning.
Do you have the right people to execute your vision? Do you have the people required to bring your product to market with skill and efficiency?
There’s an adage that goes, ‘hire slow, fire fast.’ If this needs to be done to get your startup back on track, do not wait a moment longer to rid your team of players that hold you back. Likewise, take adequate time to find, meet and make the right hire.
A good alternative solution is to invest in a senior or a more experienced team member. Depending on your resources, this member may be part of your startup’s long-term organisational structure, or a temporal hire to help get your business back on track. The key is to seek someone with far more experience – and success – in the startup journey, who can cover your existing blind spots while ultimately helping you get your business off the ground.
Question 4: Do we have the right business model?
So your product offers a solution that makes your market’s lives better, and they’re ready to embrace it with open arms. You have the right team to follow through on your product promise, and your finances are on track.
At least, so far.
Six months from now, how much do you expect your business to have profited?
And in a year? Two years?
Many startup founders overestimate two things: their ability to acquire customers, and the value these customers bring to their company before they go - Life Time Value (LTV). The truth is, it becomes increasingly expensive to acquire new customers – and so it is important to ensure their acquisition value is less than LTV.
Ask yourself whether your business model is viable for the product you are offering and the market base you are serving. If the answer is no, refer to the advise in the point above and consider a business consultant to help pinpoint trouble areas and a potential solution.
It’s not over for your startup just yet – but it may as well be if there is no way to make it profitable in the long run.
There is a time to quit and there is a way to quit well.
But there is also a time to make considerable changes for your startup’s survival.
These changes are often small, yet they are massively impactful. Ultimately, they can result in getting your product, finally, off the ground.
About White Knight Group
White Knight Group is a revolutionary investor dedicated to partnering with startups and helping them succeed. Get in touch with the White Knight Group at whiteknight.asia.