What is a startup and why is it fault-prone?
In its broadest sense, a start-up is a new business in the early stages of development.This definition is too general, and as a result - misleading. A newsalon is also a new business in its early developmental stages, but most people in the start-up community would tell you a salon isn’t a start-up.
A start-up usually has two important characteristics:
• Innovation: A start-uptests assumptions that haven’t been tested before – sufficiently new technologies, products & services, or markets.
• Growth: A start-up has the potential to grow exponentially rather than linearly. It is scalable. This typically happens due to the leverage given by technology (with a marginal cost of production nearly 0).
When you put this newrisk on top of the traditional risks of starting a business (finance/cash flow risks, operational risks, team risks, marketing risks, etc.), it’s no surprise that most start-ups fail.
Example: New Start-up vs Non-start-up Projects
Imagine you have a new IT consultancy company that builds software for your clients. Even though the company is a new business and you work with technology, you are not a startup because:
1.It’s not innovative by definition. It’s providing the same service that otherIT consultancies all over the world are providing.
2.You can grow linearly – you are getting paid per hour, so growth would require you to hire new developers, which would increase your costs at a similar rate to your revenues.
One day, you notice that all your clients have a similar problem, so you decide to invest some time in developing your software product aimed at solving that problem.
This is a startup project, because:
1. It’s innovative – it is solving a problem in a new way (your software solution).
2. It’s scalable – gaining new users of the software doesn’t increase the costs of running the software linearly.
The likelihood of your consultancy business failing is lower than the likelihood of your new software product failing because the software project is still trying to find a product-market fit. Once validated, however, the software project could have bigger returns because of its potential for exponential growth through leveraging technology instead of human capital.
Reasons for failure of Start-ups, and How to avoid them?
• Leadership Failure: If you demonstrate poor management skills that can be visible in several ways, and your company can fail. You will fail as a leader if you don't have enough experience in making decisions about management, leading a team, or the ability to lead the organization.
Perhaps your leadership team is not in agreement on how the business should be run. You and your leaders may be arguing with each other publicly, or contradicting each other’s instructions to the staff. When issues are needing strong leadership, you may be hesitant to step over and fix the problems while your company continues to slide into failure.
•Lacking Uniqueness and Value:You may have a fantastic product or service that is highly requested, but your company still fails. Your solution can be weak or you lack a clear value proposition. If there's high competition, you 're likely to have a lot of rivals and not stand out in the crowd.
How to Avoid Value Proposition Failure:- What sets your business apart from competitors? How do you conduct business in a totally unique way? What are your competitors doing better than you are? Create a personalized solution or service plan that is not being used by anyone else in your business to view it as a strong value proposition that attracts attention and interest.
That's the way you create a brand. Your mark is the picture that your clients recognize and associate with your brand. Your brand identity should be sponsored by your value proposition, including your logo, tagline, colors, and all the recognizable aesthetics and business ideologies that reflect your company.This will differentiate you from the pack and give your customers an individual viewpoint.
To publicize your brand and set yourself apart, you will also need to step up your marketing plan and use as many venues as possible to present your brand to the public. You may be far better than your competitors but that won’t make any difference if your prospects don’t even know you’re in the game. Using social media, word of mouth, cold calling, direct mail, and other methods in tried and tested marketing. Ensure that you have a well-optimized web presence, develop lead generation and contact information capture strategies such as offering high-quality content on your site, a subscription newsletter, and giveaways for details.
• Unprofitable Business Model: Leadership failure is building a company on a business model that is not sound, operating without a business plan, and pursuing a business for which there is no proven revenue stream. The business idea may be good but if there are no strategic guidelines in place, failure may occur in the implementation of the idea.
How to Build a Good Business Model: Study how other companies work within the industry. Create a detailed business strategy that provides financial forecasts focused on stable sales, strategic strategies, and approaches for addressing obstacles to resolve potential hurdles and competitive activities.Build a progress map with clear tasks and targets allocated along the timeline so you can assess success, fix challenges, and remain on track. A sound business model that integrates best practices will help prevent failure in your company.
• Poor Financial Management:You have to knowwhere the money in your company comes from and where it is going to go so that your business succeeds. When you do not have a contingency insurance plan, your company will also collapse. Many people start companies with a vision of making money but they don't have the ability or desire to handle cash flow, taxation, expenditures, and other financial problems. Bad accounting practice places an organization on a straight path to failure.
How toAvoid Financial Mismanagement: Using professional accounting softwares like QuickBooks or Xero to maintain a track of all financial transactions, including all expenditures and profits earned, and using this information to produce income statements (profit and loss statements). It is even better if you use a business dashboard tool like LivePlan that makes it easy to monitor your financials. This is valuable knowledge you need to run your business, know where you always stand, and keep it in the black. If you lack financial management experience, consider hiring a small business manager and professional bookkeeper or a certified public officer to assist in handling your financial affairs.
• Rapid Growth and Over-expansion: Every now and then we find a company is rising much faster than it can keep pace with. You open a website with a trendy product and you are immediately inundated with orders that you can't carry out. Or maybe, the opposite is real. You are so convinced that your company will take the world by storm that you spend heavily and buy way too much inventory. All of these are more routes to company failure.
How to Avoid Growth and Expansion Problems: Business development and expansion require as much thought, strategic planning as day-to-day operations management. Also, well-established and popular commercial franchises including fast-food restaurants and convenience stores are carry out careful research and preparation before opening a new location.
1. Neil Patel, ‘90% Of Startups Fail: Here's What You Need To Know About The 10%’ (Forbes, 16 January 2015) <https://www.forbes.com/sites/neilpatel/2015/01/16/90-of-startups-will-fail-heres-what-you-need-to-know-about-the-10/#599fe5636679>
2. Patric Henry, ‘Why Some Startups Succeed (and Why Most Fail)’ Entrepreneur.com (India, 18 February 2017)