Do 8 out of 10 start-ups really fail? And how do I know if I am failing too?

(My response below, to the above question on Quora)

Failure has many dimensions in the context of a startup and the founder of the startup.

For example: Failure could mean that you have not been able to achieve the numbers (revenues, or customers/users). However, it can still be a fairly profitable business at a lower scale than what you had estimated. If you have raised capital from investors, they may see a venture that does not scale as a failure. The founder may not.

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Likewise, failure could mean that while the concept was good, the team was not able to execute well, or they ran out of money because they were not able to raise capital. In this case, the startup SHOULD NOT have failed, but it did not work out because of inexperience or lack of execution capabilities.

So, when people generalise that 8 out of 10 startups fail, it generally means that 8 out of 10 startups are not able to go to the scale or in the direction they assumed it would. It MAY or MAY NOT be a failure for the founders.

Also, it is important to recognize that very few startups fail because their product was bad. They usually flounder because of issues on areas like execution, processes, capital, etc. I have seen many, many founders start off without even talking to potential customers. This is usually a recipe for a disaster as your own views may or may not hold good in the market.

My belief is that while the number of unsuccessful attempts are quite high from among the ones that started off, the percentage of failures comes down significantly among those who had put good thought into their concept and business around the concept BEFORE starting off.

If your question was out of fear of failure, I would urge you to think again. Plan your venture well, understand the market and then take the leap of faith. Check the LinkedIn status of failed entrepreneurs. They either get started again (and investors like to back them) or they get good jobs (corporates like failed entrepreneurs because of the enterprising spirit and the learnings they bring with them). So, while your venture may not succeed, you are unlikely to fail if you pursue the path of entrepreneurship.

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Guest Post – Team, the most important ingredient in a startup

Ask any investor or successful entrepreneur, and they will reiterate that the most important factor in a start-up is the quality of its founding team. A team is more important than the idea or the size of the market or the technology or the business case, or indeed any other factor that investors will review to check the investment-worthiness of a venture.

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Even if  – the product is great; the technology is cutting-edge; the market is large and the company has a strong chance to be a dominant player in that large market – investors will hesitate to invest in the venture if they do not get the confidence that the founding team can deliver in the market.

What investors seek is a team that is passionate about the subject, is enthusiastic about the opportunity, has a good grasp on the dynamics of ‘business’ and not just the product/service, and who can demonstrate commitment to fight it out in the market.

While it is good to have experience in the domain, that is not a must, as that will exclude a number of bright people who either do not have work experience or are from a different domain than the concept they are pursuing. However, what is important is that even without experience in the sector, the team should have studied the sector enough to understand it very well. In fact, that is also why passion and interest in the sector is critical, because that makes it easier for a person to study the sector well.

Continue reading “Guest Post – Team, the most important ingredient in a startup”

All successful startups are great examples of learning from failures.

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Ask any investor who has engaged with 100s of companies, and they will tell you that the plans they begin with, are almost always never the exact plans that they eventually build their successful businesses on.

Failure is not a negative in the ‘Startup scenario.’ It merely means that some of the assumptions did not hold true in the marketplace, and hence we dumped it and we did something else. In that sense, the earlier conceived model failed, and we pivoted to a different concept;  product;  value proposition; customer segment; price-point; marketing plan;  business model; sales plan; team or whatever it is that failed.

I therefore advice entrepreneurs to not fall in love with ideas but to fall in love with a problem. When you look at ‘owning the problem’ to solve, you can think of many different ways of solving it and try what seems to be the most suitable way, given your circumstances and the market. Then it doesn’t matter if a few ideas don’t work and you eventually have to try a different approach to solve the problem. Since the goal was defined as ‘solving the problem’, it is still a victory even if a few initial ideas fail.

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What are the most common reasons for startups to fail?

In my observation startups fail because of any one, or a combination of some of the factors below:

  • Poor implementation (usually due to poor planning of operational aspects of converting the idea into a business on the ground)
  • Assumptions on costs, adoption rates, revenues, operational efficienc, etc. prove to be wrong
  • Value proposition not as meaningful to users as hoped by the founders
  • Founder disagreements
  • Company running out of money… or founders unable to sustain low take home for much longer than they had estimated
  • Failure to get funding or follow-on funding
  • Poor product-market fit
  • Poor product / service (though I have rarely seen companies die because the product or service was bad)
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More often than not, it is either because of poor quality implementation or because the team’s assumptions on costs and revenues and other factors were inaccurate, which meant that they either run of out money a lot quicker, or the business case becomes weaker and as a result they run out of energy, enthusiasm… and eventually capital to sustain the operations.
I therefore always recommend to teams to overestimate on costs and underestimate on revenues in their excel sheets. When working on your excel sheets, try to work out the worst case scenarios (as those may turn out to be true as well) and build your foundation to deal with the worst case scenarios too. Think of what your response and plan is going to be in different scenarios – the very optimistic, optimal as well as the very worst case. Either of these scenarios could play out, and if you are not adequately prepared for any one of them, the end result will be a disaster. (Even if you have planned for sub-optimal scenario, and the in-market response is phenomenal, unless you are able to quickly adjust your plans and create resources, infrastructure, processes and people to deal with the growth, the business will flounder).
Entrepreneurs tend to be unrealistically optimistic on their own and their team’s implementation capabilities and often tend to understaff and underestimate the time and costs required to make the business work. (At least that’s my observation from the Indian startup eco-system). And that’s why I recommend to startups to talk to a lot of people. Advisors, mentors, investors, customers, other entrepreneurs… anyone with a more experienced perspective on that subject. Get a realistic view of how things work and what challenges you are likely to face as you start implementing your concept in the market.

Failure is a part of the entrepreneurial journey

The general rule is that out of 100 new ventures, perhaps 50-60 will shut down by year 2, may be 20-30 will survive with their heads above water or at a lower scale than the aspiration was. May be 8 – 10 will be reasonably successful and may be 1 or 2 of these 100 startups will be ‘very’ successful.

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Just because a venture is not successful or shuts down does not mean that the entrepreneur has failed. It just means that this particular venture did not succeed. Simple.

Of course, aspire for success. But remember, there is no shame in having tried and not succeeding.Like everyone will advice you not to let success go to your head, remember to not let failure deter you.

Understand and evaluate your appetite for risks. Not just financial risks, but opportunity costs as well. Evaluate what the upside of success is and measure it against the risks. See if it makes sense.

More importantly, DO NOT start up on the basis on just your enthusiasm. Validate the concept with your potential customers/consumers, seek mentors who can guide you, seek advice and guidance in building a good business pan and see if the concept has a good business case.

Remember, entrepreneurs are NOT people who take unnecessary or unplanned risks. Good entrepreneurs make efforts to evaluate all the risks associated with a venture and take necessary steps to mitigate the risks.

Yet, you can fail. And it is all right. Plan for how you will deal with failure too. Failing or shutting down is not the end of your professional or your entrepreneurial journey. It just means that there could be a diversion from the originally intended path.

Does a winning business model guarantee success?

No one thing can guarantee success in a startup. For a startup to succeed, 20 things have to go well. For it to fail, one thing has to break.

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Of course you need a good business model. But that itself will be of no use if the product is not good. The product will not be bought if the communication is not right. The product will not reach the customer if the distribution is not right. And there are a number of such interdependent things that contribute to success.
By the way, there is not one ‘winning business model’. A business model is a strategic choice you make. And strategy is about choosing from the MANY options you have available to choose from, and then aligning the rest of the organization around that decision.

What are the most common mistakes start ups make in the first year of their operations? How can that be avoided?

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Here’s a list from my observations of startups:

Overestimating the meaningfulness of the value-proposition to the intended target audience: Often entrepreneurs assume that customers will line up to buy their product or service. They do NOT foresee challenges in acquiring customers or clients. And going wrong on this front shakes the very foundation as the startup, as the rest of the assumptions (on revenues, captal requirements, etc.) are made on this basis.

The only way to address this is to validate your value proposition and price points, and take a realistic view of how the market will react to your concept. (How the market will react is usually a lot different than the entrepreneur’s assumptions, which is based on enthusiasm about their own idea).
Underestimating costs: How many times have we seen startups run out of funding, simply because they had completely underestimated costs.
The way to address this is to make a very, very, very detailed estimation of MONTH-BY-MONTH costs, categories by ‘capital expenses’ and ‘operating expenses’ (this is further broken down into fixed e.g. rent, electricity and variable  e.g. marketing). Doing an annual cost estimation without drilling down to the month-by-month level usually gives a wrong picture on finances.
Overestimating execution capabilities (we can do this and that… ): While enthusiasm and drive can make you do work that 2-3 people may otherwise do, it is not possible to do everything that is required. Often entrepreneurs, especially in India, assume that they will be able to do a lot more than they actually can.
The way to address this is to clearly break out each activity into smaller tasks and estimate the time for each. E.g. sales process – estimate how much time you will spend in a day in calling customers, how much time will it take to travel to a customer, how much time you may have to wait to get a meeting, how many meeting you would need to do, how much time will the negotiations take, etc., etc.
Underestimating how much time it takes for funding: Often entrepreneurs start looking for funding a month or two before they run out of cash. funding rounds (especially institutional rounds) typically take 3-6 months for the transaction to get completed.
Not recognising that it is not easy to attract and retain talent.. and that a CEO needs to spend a whole lot of time in building a team.
Not having process discipline, including financial discipline: Measuring progress (or lack of it) provides early warning signs.
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