If you are a founder of a startup, you have a journey that demands grit, ingenuity, and courage. When you want that your startup survives the journey and scale, you need a clear map to get past common, often unseen, risks.
A useful navigation tool is a framework that evaluates how different components of a startup function and where pressure points lie. Such a model identifies six core reasons why even the most or best startups can fail even with experienced founders. Using can keep your startup on a pathway to success.
How to avoid Startup failure?
Professor Tom Eisenmann from Harvard Business, an expert on startups, had after 20 years of research, a huge wake-up call. When he looked at ventures founded by former students one, he had that so much faith he became an investor. Still, both startups failed, which he couldn't really understand.
So he started analyzing why startups fail by looking beyond typical excuses like blaming the economy. His research made him create a framework that identifies four crucial opportunities every startup has. A startup needs to capitalize on these opportunities and ensure they are working together to archive success.
This framework can also be used to check the health of your own venture and correct the course when necessary. The opportunities Eisenmann identified are your startup resources that work together to create, build, manage, and see a product or service profitable.
1. Your brilliant idea. As a founder, you have to come up with a unique solution that needs customers' specific needs. It should effectively solve an important problem that consumers face and be different from anything on the market.
2. Technology and operations. The system you need to build your product and deliver it to your customers and maintain products after the sale. It includes ways you manage your inventory and shipping as well as sales and booking platforms for your customers.
3. Profit formula. It projects the revenue you will earn through sales as well as the cost of earning that revenue, including operational costs. With a solid profit formula, you can confidently manage your cash flow.
4. Marketing on how you will communicate with potential customers and entice them to buy your product. Your marketing strategies need to be effective so your customers will become loyal brand ambassadors to get repeat sales.
These four opportunities are supported by all people involved in your startup. You, your cofounders, the hardworking team, the investors are providing you capital, and any partner offering guidance or expertise.
To win the race, you need to complement each other and the startup as a whole.
Why experience matters
2012 Harvard Business graduates Alexandra Nelson and Christina Wallace launched Quincy Apparel, a company that promised a unique sizing system that would provide women with business clothes that fit well.
While the founder had recruited some fashion experts, they didn't have industry knowledge. This ultimately let the collapse of the company in less than a year. Even with the $ 950.000 seed capital, they raise the business could've saved.
On paper, Nelson and Wallace were a perfect pairing. Wallace was charismatic and could sell Qunicy's vision. Nelson was a trained engineer, a person to manage strategy and operation. She even spends after graduation working for Hermes on inventory optimization.
But neither Nelson nor Wallace understood the specialized roles that garment manufacturing requires, like pattern, sample making, and technical design. In fact, they managed garment design themselves and hired just one production manager to oversee manufacturing.
The lack of knowledge created a range of operational issues, from wondering about unsuitable fabric to not knowing sizing conventions. The garment return rate of Quincy was 15 percent higher than Nelson projected, and 68 percent of customers returned items because of poor fit.
It means that Quincy had failed to deliver that core promise of business attire that fits well, and all those returns hurt the profit margin.
Quincy had three core opportunities a great idea, solid marketing, and viable profit formula. But its operation wasn't sound due to its founder's lack of knowledge. This weakness led to its downfall.
If your startup belongs to an industry outside your expertise, put some measures to complement your lack of knowledge. Bring a cofounder with the right experience, or develop a partnership with an expert who can give you advice. Also, you can equip yourself with enough industry knowledge to guide your recruitment strategy.
This way, you have a clear picture of how to build the team you need and avoid fatal mistakes.
Don't create your prototype too early
Sunil Nagaraj had an idea when he studied at Harvard Business School, which was creating software that matched potential compatible singles based on behavior from their internet use like the TV shows they watched or music they listen to. He licensed this software called Triangulate to dating companions who would offer it as a premium form of advanced matching.
To find out if behavioral data could indicate romantic compatibility, he ran a test with 100 volunteers. But the software didn't work on most of the volunteer computers, so the results were wrong. Without market insight, he was blind.
Nagaraj was impatient to build his matching software. It let him make a common mistake, the false start. He invested money and time into his product before knowing if there even was consumer interest. Instead of doing market research, he made assumptions about his customer, like that they are willing to pay to be triangulated.
In reality, most people don't find the algorithms useful when they decide which dating profile they like. It is not like a design what investing provider to choose where a person doesn't have the knowledge or experience to guide them,
He also failed to consider if people were OK with their internet usage being tracked to be triangulated. Many would consider it a breach of privacy. So crucial opportunities for his startup were flawed. If Nagarji had surveyed people using online dating services, he would have realized this much earlier. Armed with that information, he might have reconsidered his product before investing in it.
To avoid a false start, it's important to resist acting prematurely. It is easy for a founder to rush into making their fire minimal viable product (MVP)before they have done their homework.
An MVP is a functional prototype that gives investors and potential customers a feel of the final product. But creating one is the second to last step before you make a fully realized product. It can only happen once you have understood everything about your targeted customer so you can workshop ideas and design with their need and preferences in mind.
What happens when you scale to quickly
Lindsay Hyde, 2014 launched a pet care company called Baroo. It was located in a basement of a residential building in South Boston. It offered pet owners services like grooming, dog walking, play dates, and feeding. It became an instant hit 70 percent of the pet owners used the service in the building.
Excited by the success, they stand to make four more apartment buildings sign up. But despite the expansion, Baroos financial health wasn't just poor; it was terminally ill, so in February 2018, Hyde had to pull the plug.
The mistake she made was failing to identify whether those early adopters in South Boston represented the broad market. Baroo's fast scaling led to the breakdown of its operations and technology, the team, and its relationships with partners and customers. But these accelerated scalings weren't the root of the downfall rather. The spark never caught fire because of the false positive.
These false positives occurred when founders misinterpreted their startup's early success. They use the mainstream market to embrace their product or service with the level of enthusiasm the initial customers had. In Hyde's case, she believed that around seventy percent of pet owners in the buildings she expanded would use Baroo´s service. But this was simply not true.
She failed to concise the specific circumstance that led to the initial hype. First, the building in South Boston was new, so few of its pet owners had existing relationships with local pet care services. Also, many residents belonged to a Hollywood film crew that relocated to Boston for a shoot. They brought their pets with them, and they needed help caring for them.
The clients didn't represent the mainstream market at all.
To avoid misinterpreting early analytics if the early adopter represents a mainstream customer or if the instant success resulted from exceptional circumstances. Scaling too quickly can completely ruin your business as it did for Baroo's. So ensure there is a mainstream market demand before you attempt it.
How to do the RAWI Test?
Many startups that fail after a few years become the victim of speed traps that occur when there is strong initial success plus a big investment that finances rapid growth. But sometimes, this initial success represents a saturation of the market.
To avoid the speed trap, you can use the RAWI Test, which stands for Ready, Able, Willing, and Impelled.
1. Evaluate if your startup is Ready to scale. Has it a proven business model, a customer base with scope for growth, and a high enough profit margin when customers' growth rates are lower than expected?
2. Ask if your startup is Able. Can you access the resources to scale quickly, including staff? And can train and manage a larger staff body.
3. Decide if you are Willing to scale. As a founder, scaling will increase your workload and stress levels. Rasing more venture scale will reduce your equity, meaning more pressure for less money.
4. Is the startup Impelled? Do you only scale because your competitor has emerged and you want to win market share? When this is the case, make sure the cost of gaining new customers isn't more than your profit.
By revisiting each of these points every quarter of the year, you can evaluate if it is the right time to scale. Don't initiate it if there is a limited scope of growth.
Why you need to hire the right people
When a business hires, for example, a candidate that had an impressive CV but no expert in e-commerce operations, it can undermine the whole company even when they have a solid customer group.
Let's say the person was VP of Operations with the task to select an enterprise resource planning (ERP system). He manages operations like tracking inventory and deliveries. However, the system the VPO chose couldn't handle the variation between different supplier delivery times.
Because of this problem the customer service team got many complaints about missing or late delivery. They couldn't keep up with rising demand, and email responses took a long time. Even worse the system was a bad designer so the staff often couldn't tell where deliveries were.
To compensate for the delay, the staff shipped express orders, which cut into the profit margin. At the same time, social media hype increases sales. It places even more pressure on operations that were already hanging by there.
While the operational problems could be blamed on technology, it was the VOP's lack of sector experience that to the company's collapse. Someone with specialist knowledge would have chosen a better ERP to cope with the company's complex supplier model.
If you want that your startup survives scaling, you need to hire the right specialist over generalists, even if they have impressive experience.
When you are not at the stage where you can afford a senior specialist, find a mid-level one instead. They will come cheaper while still having the expertise your company needs to support its growth.
Also, work with a professional coach who helps you build awareness about your workplace practices. They assist you by moderating your leadership when you need it so you can productively lead your company
Don´t make changes to fast
Entrepreneurs play an important role in society. Their ability to pursue ambitious projects drives life-changing innovations.
Venturing into uncharted water has always been an element of risk, especially when you are a little too ambitious. If your concept is a high risk, there are steps you can take to mitigate some of that risk.
- Keep in mind that humans are afraid of radical change even when it is good. Moderate your innovation, so customers don't need to go out of their comfort zone to incorporate it into their lives.
- Create functioning prototypes and get feedback from focus groups. This will help you guide through the next stage of design while also getting people interested in the product, always a tricky issue when you bring something completely new to the market.
- Don't fall into the trap of inflating the market just to impress investors. You end up setting sale targets you can't reach. Being honest about your potential customer scope will make it easier to project how long it will take to recoup any investments.
What can you do when your startup fails?
The unfortunate truth is most startups fail, but that doesn't mean that all is lost. A pathway to success might seem hard; however, by following the Three R, you can walk all the way to the finish line.
1. Phase the founder experiences after failure is Recovery. If your startups fail, you likely find yourself in a state of financial ruin. It is common for founders to accurate massive credit car debt when deferring their salary to maximize investment in their company.
At the same time, you find that your personal relationships have suffered after all these long hours at work. This sense of isolation gets compounded by failures and negative emotions like grief, shame, or guilt. To avoid depression, find a way to support yourself during this time. You can implement healthy lifestyle habits, try therapy and reconnect with activities you enjoy.
2. Reflection. In this phase, you will identify what you have learned by exploring your experiences objectively. This can be challenging because our egos often blame someone else for our own mistakes. But if you can overcome this, you will be in a position to gain valuable knowledge.
3. Reentry. Despite the hardship of failure, around fifty percent of unsuccessful entrepreneurs found new startups. You might be concerned about the previous failure that will send potential investors running. To avoid this, what you learned in Phase Two has informed your new business plan.
This way, you can demonstrate to investors that you are starting fresh with more experience and wisdom.
When a startup fails, it will often be oversimplified why it wasn't a success. But these explanations are rarely accurate or insightful. 50 percent of founders who launch another startup are at risk of repeating their mistakes. By using the solid framework regularly to evaluate your startup's health, you can identify where you need to course-correct before it is too late.
In the event of failure, the framework will guide you so you have a better chance of success next time.