Why Startups Fail and How to Succeed
A startup is a new business or project undertaken by an individual entrepreneur with the intent to seek, identify, and validate a viable economic model. Most entrepreneurs will begin with an idea for a product or service but many will also have some entrepreneurial skills. They will seek funding at various methods such as grants, borrowing money from family and friends, seeking private loans, or selling their assets. These entrepreneurs will then enter a series of preparatory steps, which will eventually determine whether the plan has a sufficient likelihood of success. Each step of the plan will be documented in a startup plan.
There are two schools of thought about what qualifies as a startup. The first school contends that startups are not new businesses but are just different manifestations of earlier small businesses that have been superseded or combined. The second school of thought is that startups are new ventures which require major investments. To ascertain the validity of either school of thought, it is necessary to discuss the definition of a startup with a seasoned executive who has completed dozens of business startups.
One of the most common mistakes made by startups is not distinguishing between what they should be primarily focused on and what they should be primarily selling. In our experience, most startups focus primarily on selling their products. This misallocation of resources results in the company wasting precious time and money on activities that yield no results. While startups need to sell products, this focus must be balanced with attention to developing customer service systems, building sales teams, and generating intellectual property.
Another mistake often made by startups is assuming that their “startup expenses” are relatively minor compared to what a large corporation would incur to get its business going. Unfortunately, the reality of business financing is such that many startups find themselves deeply in debt within a year or two. This occurs when startup entrepreneurs assume that their “investors” will provide them with the seed money necessary to launch their operations. While most angel investors require no payment up-front, private investors may require you to provide them with an initial down payment.
One of the primary reasons why startups fail to succeed is because they don’t have a plan. A startup is generally required to draw up a business plan before it receives any venture capital. While many entrepreneurs feel that their “secret sauce” or special sauce will enable them to overcome these difficulties, the reality is that their plan should detail every aspect of the business. For example, a startup might detail the marketing strategy, the sales strategy, the financial strategy, the manufacturing strategy, the distribution strategy, etc. If the company has raised venture capital, the plan should detail the anticipated income from those revenues.
In summary, a startup requires a detailed upfront investment, significant management, and leadership skills, a solid understanding of the global marketplace, a good understanding of your product or service, and a viable plan for executing and growing your business. If you’re planning to invest in a startup, consider two things: do you have the finances to sustain the startup’s growth? Are you willing to provide that funding? If you’re ready to enter the world of entrepreneurship, prepare well for this journey by reading about the startup process, identifying potential funding sources, developing a scalable business model, and hiring the best people for the job. With hard work, dedication, experience, and luck, your new startup could be your pathway to financial freedom.