Everybody knows that most startups fail, but are still shocked when it happens to them. They’re often bitter first and then depressed before eventually having the strength to try again.
The reasons for the failure can be selected from a long list, but usually it boils down to these top three simple lessons.
Limited Ability to Sell
Ask any venture capitalist or active angel who has invested in at least 50 companies this question: “How many companies of those invested actually hit their projections in the first three years?”
The number you’ll hear is so disappointing, let’s just call it a near cross-the-board wipeout. The core of any growth-stage company is simple marketing and sales metrics. How much has to be invested in your identified marketing activities to generate how many qualified leads? What is the cost per lead for each activity? Has your company built an ABC Co sales process that takes over once a lead has been generated by marketing?
If it costs $50,000 to undertake each 90 day marketing cycle which results in leads sufficient to produce $500,000 in sales, you have a 10:1 sales to marketing metric. What is your ratio of closing? What were all the costs borne by this process? Were those $500,000 in sales profitable if you consider all other operational costs during that period? If your company is commercialized and you don’t know these numbers, don’t expect to succeed.
Most entrepreneurs work really hard. They toil relentlessly to get the product right, argue over logos and taglines and then think that they’ll just hire on some sales people (often at under-market salary levels) to ramp things up. Building a sales team is difficult. It takes professional people to lead, planning has to be done, comp levels need to be right, established processes are critical and yet it is usually almost an afterthought in initial planning and projections are built on spreadsheet algorithms that increase over time.
Sales is the single biggest problem facing the startup.
Financial Skills and Attention
“We’ll hire a bookkeeper.” Ouch. The startup world is filled with “I’m a big picture guy” and “I’m just not that detail oriented” people. The truth is that death awaits us in detail.
Get really intimate with your current and forward-looking month by month cash flow statement and understand every assumption that underlies each projected number until it isn’t just numbers anymore. This is the heartbeat of your plan to succeed or fail. If you choose to leave it to someone else in the company, you’d better get really involved. You will be significantly more powerful if you know this stuff cold.
The tired scene goes like this: ABC Co gets a Series A done which is followed by a lot of new hires and costs balloon. Nobody took the time to figure out how much it will cost to maintain this large new staff as they assumed that sales would be escalating to a point and speed that operating costs would be immaterial. But since they hadn’t become a professional selling organization, the sales didn’t happen, monthly burn becomes a problem and then a bunch of staff have to be cut. The energy in the company takes a hit and chatter in the coffee room turns into whispers. The best employees that weren’t cut leave to other opportunities while the founders argue in the boardroom.
It’s okay to for the company vibe to be cool, funny, glib or eccentric, but the product offering better possess tangible value that helps its target customer in an order of magnitude beyond the status quo and other available options. Open any section of Amazon and consider the value proposition of most products you see there.
We are all surrounded by product offerings every day. Most of them won’t be available to you next year because they lack the basic value of being important. If you’re considering a new startup right now, be very, very certain about this. It’s cliché but true that “nice-to-have” and “must-have” are the tea-leaf readings of your startup’s future.
Failure is good. Lessons learned in failure are usually not repeated or forgotten and often result in a better effort next time around. But if you want to avoid the most common points of failure that slit the startup throat, shine a hard light on these three key elements in your company right now.