Overcoming hurdles to start-up success

March 2020  |  FEATURE  |  BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

March 2020 Issue

Any new venture is generally considered a risk in the world of business – a gamble at the mercy of a range of financial, legal and human factors. Essentially, in the realm of the start-up, failure is the norm.

The majority of studies show that around 90 percent of start-ups fall by the wayside within a few years. Some fail even sooner, often in a matter of months. Much of this failure is due to a misplaced focus during the early stages.

According to Dr Noam Wasserman, dean of the Yeshiva University Sy Syms School, the focus for a fledgling firm should be on the product, people and financing aspects of the new enterprise. “Founders tend to focus on product challenges,” he says. “However, almost two-thirds of the reasons for failures of start-ups are related to ‘people problems’ – the tensions between the co-founders or between them and the other people brought in to help grow the start-up.”

‘People problems’ aside, companies at the earliest stages, those that are most vulnerable due to a limited financial runway, immature products and businesses, as well as general uncertainty, also need to be sure that their prospective market is interested. And even if they are, there are numerous potential missteps along the way, such as running out of cash, poor marketing, ignoring customers or a lax approach toward establishing a business network.

“We find that young companies often forget or fail to build barriers to entry,” observes Antoine Baschiera, chief executive and co-founder of Early Metrics. “Needless to say, entrepreneurs need to keep their ear to the ground to avoid being copied or surpassed by other small and big players. Registering patents and securing strategic supplier partnerships, for instance, can help start-ups protect themselves.”

While, to a large extent, prior start-up experience, product knowledge and industry skills can predict the likely success of a new venture, a better understanding of start-up pitfalls and how to avoid them will increase the chances of creating a successful and sustainable business.

However, it should be noted that not everyone buys into the suggestion that 90 percent of start-ups fail. In the view of the US Small Business Association (SBA), the 9 in 10 failure rate is largely a myth. Acccording to SBA Office of Advocacy figures, four out of five companies that started in 2017 survived until 2018 (79.4 percent) – a percentage similar to the average one-year survival rate from 2008 to 2018 of 78.7 percent.

Furthermore, the SBA found that around half of all companies survive five years or longer. Over the past 10 years, this ranged from a low of 45.4 percent for companies that started in 2006, and a high of 51.1 percent for those that began in 2010. Around a third of companies survive at least 10 years. The SBA also notes that closures are not necessarily failures as businesses can be, and often are, sold. In addition, closures may also be due to personal reasons, for instance health issues or retirement.

Common mistakes

While no legitimate enterprise sets out to fail, and the vast majority of new ventures are entered into with the best of intentions, there are common mistakes that start-up companies tend to make when attempting to access the marketplace.

“Listing all the challenges facing start-ups is itself a challenge, given the numerous obstacles they face,” says Dr Christopher Haley, head of new technology and start-ups at Nesta. “However, they fall into some broad categories, including access to talent and managerial expertise, access to finance and broader ease of doing business, such as regulation and the cost of office space, especially in the likes of London.”

In ‘Top 20 Reasons Why Start-ups Fail’, an analysis of 101 start-up failure post-mortems, CB Insights lists the key reasons why fledgling companies run into trouble and expire. These are: (i) no market need; (ii) ran out of cash; (iii) not the right team; (iv) got outcompeted; (v) pricing/cost issues; (vi) user-unfriendly product; (vii) product without a business model; (viii) poor marketing; (ix) ignored customers; (x) mistimed product; (xi) lost focus; (xii) disharmony among team/investors; (xiii) pivot went bad; (xiv) lacked passion; (xv) failed geographical expansion; (xvi) no financing/investor interest; (xvii) legal challenges; (xviii) did not use network; (xix) burned out; and (xx) failed to pivot.

“To these I would add the question of mindset,” suggests Mr Haley. “Increasingly, we are of the view that motivations to scale matter – and that if we really want to get more firms to start and scale, this is where we should focus more attention. We know how to teach many of the tools of entrepreneurship, but there is much evidence that mindset matters, and that this becomes more difficult to change in adulthood.”

Proactive steps

So what proactive steps can start-ups take to avoid making potential mistakes in the first place? One key is getting the composition of the start-up team right from the outset.

“Across the 3000 start-up ratings we have conducted, we found that in the early years of a business, the quality of the team is crucial to its survival,” says Mr Baschiera. “It is important for a founder to find team members that complement his or her own skills and who have a strong academic or professional background-fit with the project. The time and financial commitment of the founding members is also a big factor, as execution speed in product development is essential for growth.”

In the view of Dr Wasserman, in order to avoid pitfalls, companies need to understand two roadmaps: the roadmap of the upcoming decisions that will later cause problems, and the roadmap of themselves. “The roadmap of themselves includes what decision-biases – the bias toward overconfidence and against having difficult conversations, as well as the bias of feeling more comfortable with those who are most like us – will heighten the chances of failure, and what personal motivations will be in sync with their decisions and which will conflict,” he says. “There may not be any universally-correct decisions, but there are many wrong decisions you can make if you are following your gut rather than understanding both roadmaps.”

Another proactive step that start-ups may wish to consider is to take part in an accelerator programme, or possibly even to relocate near one. “Our recent research has shown that accelerators can have a positive impact, not only on start-ups inside the programme but, interestingly, also on those located nearby,” explains Dr Haley. “Accelerator programmes are not necessarily suitable for all start-ups, and there is significant variability between programmes, meaning that entrepreneurs should undertake their own due diligence before joining one. However, even those companies that do not fit might benefit from being located near to an accelerator. This is likely because the accelerator serves some kind of ecosystem coordinating function.”

Industry to industry

Start-up failure, of course, spans sectors and industries. That said, some sectors, such as technology, appear to have a greater proportion of misfiring companies, although many of these failures go under the radar due to survivor bias – wherein important failures are glossed over in favour of successful outliers.

“While start-ups from all industries face very similar challenges, highly-regulated sectors, such as healthcare, energy and banking, can be more difficult to succeed in than others,” says Mr Baschiera. “Making sure a business is compliant and a product is safe for consumers can be an expensive and time-consuming process, resulting in a longer time to market (TTM) and more chances for a young business to fail.”

When it comes to technology, there are also greater risks associated with pioneering new products or use cases. “Machine learning (ML) is an interesting example as, despite the hype generated, it is still a novel, poorly-understood technology and successful real-world applications are rare,” explains Mr Baschiera. “This can make both potential clients and investors wary of the legitimacy of the company and their product. Finding the talent with the right expertise to develop cutting-edge tech can also be challenging. Moreover, complex products imply longer research and development (R&D) periods and a greater dependency on external funding. So new tech businesses can easily be tanked by lack of specialised talent, early stage funding or market readiness.”

Future growth

The extent to which the modern business environment is conducive to a start-up’s success is difficult to determine. That said, there are signs that greater collaboration with established businesses is helping new enterprises gain traction. In time, perhaps, a new spirit of openness may improve the high start-up failure rate and help alleviate a potential psychological burden.

“Starting a business will always be a risky endeavour, so we do not expect the start-up failure rate to improve significantly,” says Mr Baschiera. “However, we can see that the European ecosystem is getting increasingly mature, structured and naturally more competitive. This means entrepreneurs can expect to have access to a greater variety of funding options, as well as more opportunities to connect with each other and investors.

“With greater knowledge sharing, business owners will hopefully also learn faster and avoid pitfalls,” he continues. Moreover, large corporates are becoming more open to collaborating with start-ups, notably through corporate venture capital (CVC) investment, which is a positive development. It will also be interesting to observe how freedom of movement in the EU will evolve in a post-Brexit environment and whether this will have an impact on start-up success.”

In Dr Haley’s experience, failure is not always a bad thing, his belief being that there is generally a relationship between failure rate and the overall productivity of remaining companies. “In other words, more business dynamism, or churn, is a good thing overall, with less productive firms taken over or outcompeted by more productive ones,” he suggests. “However, this does not mean abandoning startups. Rather, we need to support startups through the fragile early stages until the point where they can compete with established companies on their own merit, and encourage the best businesses to grow. Mere survival is not enough.”

Ultimately, despite all the challenges a start-up entails, those with an entrepreneurial bent and the drive to succeed will continue to raise funding, monitor the marketplace and challenge the status quo.

© Financier Worldwide

BY

Fraser Tennant