November Question of the Month: What are the biggest reasons why start-up businesses fail?
According to the think tank Centre for Entrepreneurs, in 2016 nearly 660,000 companies were established in the UK, up from 608,000 in 2015. StartUp Britain even calculated this to 80 companies being born an hour! This year it looks likely that the record will be broken again, with the UK second only to the US as the unrivalled place to start and grow a business. But whilst there are many success stories to starting your own business with the potential to disrupt industries and earn big bucks, the reality is that 9 out of 10 of these start-up businesses fail. A government report in August 2017 revealed that less than 10% of companies that obtain seed funding in the UK go on to receive later stage fourth round investment. So statistically rare are the start-ups that truly excel and reach over $1 billion in investments, venture capitalist Aileen Lee even dubbed them 'unicorns' in 2013.
We asked our network what they thought the main factors were when it came to start-ups not making it big. The top three votes went to poor management and leadership, followed by insufficient funds or investment and finally a lack of planning. There's no doubt that these are all crucial for any business but even more so for startups.
Poor management and leadership
There are lots of great ideas that get badly executed. Successful businesses are often not the only ones to have thought of their idea, but the ones that succeed are the ones that have the best execution of the idea (and a little bit of luck thrown in for good measure!)
One example is 'Pay by Touch' which was invented in 2002 to pay for goods with a swipe of the finger. Similar products such as ApplePay and fingerprint ID are used regularly – the problem was not the concept but the extravagance of CEO John Rogers who spent company money badly. By 2007 the company could not pay their employees and the start-up was bust.
The key role of a CEO in a start-up should be to regulate the 'accelerator pedal' of the business. Some very passionate CEOs can often lead to terrible micromanaging and too much enthusiasm. Overexpansion can be a killer, particularly if the product and business model is still being refined. Conserving the cash in the early stages rather than trying to go big too early is something poor leadership teams fail to do.
Insufficient funds or investment
Cash flow is the life or death of small companies. If the funding is insufficient to remain in the market for a considerable period, even if the idea is innovative it will ultimately fail without enough time to gain traction.
One example is visual search engine SearchMe which failed because it raised too much money too fast. Taking on $25 million in venture capital meant that SearchMe had to perform fast, or suffer the consequences.
Of course, the idea in the first place needs to address a market need – if no-one needs the product then you won't get any money for it. Lack of differentiation in the market can lead to insufficient funding being given - even if seed funding is initially invested, the business model needs to show progress and development for the next stage in order to be considered for further funding.
Lack of planning
As start-ups are usually cash-strapped and tight-knit small teams when they begin, poor planning of resources can lead to a quick downfall.
One example is Boo.com, a British online fashion store that decided to launch in multiple currencies and languages from day one, calculated tax incorrectly and used multiple fulfilment partners. All of this speaks of a business model that has not been prepped and planned to refine itself before going big.
Many entrepreneurs base their models on views that are too optimistic about how easy it will be to attract customers based on their product alone. They assume that customers will be flocking to the product but there has to be strategised efforts to attract them. The cost of acquiring the customer (CAC) has to be lower than the lifetime value of that customer (LTV), which seems very obvious but is a miscalculation that many start-ups suffer from and therefore do not reach fourth round investment.
The factors chosen as least important included location, lack of employee engagement and overexpansion. Considering that many new start-ups are often internet-based disruptive technologies, it didn't surprise us too much that location was ranked low, despite the concentration of start-ups in key locations such as London and Silicon Valley. We believe lack of employee engagement ranked low as start-ups often have small dedicated teams that are enthusiastic about the product and want it to grow and succeed. They need to go the extra mile to make the business a success. As our previous article on what people valued for job satisfaction (read it here) indicated, job satisfaction is predominantly based on company culture and start-ups are often driven by a sense of purpose for their innovative idea. Although over expansion is something that start-ups often struggle with, aiming too high and stretching too far too quickly, we believe that this issue essentially comes down to poor leadership and planning which did rank in the top three.
Overall, start-ups must be addressing a real problem, have enough financial backing and a management team that is secure, stable and perceptive to make a thorough and viable business plan that sees the company through to success.