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.
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Evaluating Competition

Prajakt Raut discusses how you can evaluate your competition and chart out your unique selling point.

What should pre-seed money be spent on?

Generally, the reason for raising funds at any stage is to be able to take the company to the next ‘phase’ of its evolution.

Most startups would go through the following phases in their journey:

  1. Concept stage – i.e. when the idea is not yet developed into a product or service, but the founders may have done a fair bit of thinking on the concept and understanding the business dynamics surrounding that idea. This is the stage where the business case is being evaluated and assumptions are made and validated – hopefully by understanding the market and speaking to customers, etc.
  2. Prototype development stage – when the concept – either a product or service – is ready for testing with a limited audience – the startup may have a few initial employees.
  3. Early-stage – when the product or service has started gaining some traction – there are a few early customers/consumers, the product and processes are being refined and fine-tuned and the building blocks for growth are being built – a small team is getting formed
  4. Growth stage – when the startup has started getting more customers, processes are getting developed, an organization structure is getting into place and the company is in an expansion mode – this is probably the time when most companies would start getting profitable

Pre-seed money would typically be raised at concept stage, and should ideally last a little beyond the prototype stage. In most cases, pre-seed stage money is used for the things that will prepare the company to attract seed capital from angel investors or from early-stage VCs i.e.

  • Understanding the business case by validating assumptions
  • In building the prototype or the first version of the product – what is called the MVP or Minimum Viable Product which will allow you to test your assumptions in the market i.e. check if your customers find the value proposition meaningful, if they feel that this product / service does fulfill their needs, etc.

At pre-seed funding stage, a startup should keep capital expenses very low – i.e. rent ACs, furniture, etc. rather than buying. Operating expenses should also be kept low – take lower salaries, work out of a shared office, multi-task, etc. This is also in your interest because the valuations are likely be very low at this stage, and hence the lower the amount you raise, the lesser your equity dilution at this stge.

 

 

Operations planning for startups

You would have often heard VCs and experienced entrepreneurs say “Ideas don’t mean anything. It is the execution of that plan which makes a good business case.”. Hence, often VCs will be willing to invest in a simple concept with high-quality teams with great implementation plan, rather than weak teams even if they have a great plan.

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Good execution and operations management is a lot about making sure that the many moving parts of the business are in sync with each other.

Most entrepreneurs underestimate the competencies and skill sets required for a venture to be implemented. They detail out the product/concept/service but do not spend adequate time in detailing out the operations plan. It is critical for the entrepreneurs, or the people planning the operations for the startup, identify, discuss and debate every single aspect that will need to be planned for  good implementation.

For example: A startup planning a chain of coffee shops across the country does not need just great coffee and snacks making skills. In fact, that may be the least of the worries in creating a great coffee shops chain.Creating a coffee shops chain will require the following competencies.
  • Real estate management
  • Franchising
  • Brand identity
  • Pricing strategy
  • Marketing
  • Supply chain
  • HR, legal, finance
  • Training
  • MIS
  • Cash management
  • ROI & capacity utilization
  • Facilities management
  • Processes
  • Standardization
  • Org structure
  • Vendors

Admittedly, startups are unlikely to have the full team to manage operations efficiently. However, planning does not require resources…. Investors invest, based on your PLANS for the future, whilst understanding that your current mode of operating is only due to resource constraints.

Especially for startups with a B2C concept, which could have rapid growth, it is important to plan for scale BEFORE the venture is ready for scale. It is almost always impossible to hack together the resources, processes, infrastructure and other elements to scale up quickly… these have to be built well in advance in most cases to be able to scale up smoothly.