The question isn't why they fail so often, more by what miracle any survive!
Written and edited on BA286 flying from San Francisco to London and dispatched from a free wi-fi site in London.
I have been investing in new start-ups since 1998 and, as a result, seem constantly to be addressing problems and/or one crisis after another. Perhaps even worse, I seem to be continuously engaged in conversations with people inside and outside the sector on how and why new start-ups fail. But I actually think it should be more along the lines of how come any survive at all!
On the face of it, the near one in a 100 long-term success/survival rate seems catastrophic - and people look on and discuss it in near disbelief. Well, I just had another conversation that motivated me to blog my thoughts here!
For me the big surprise is that any new ventures make it because the potential points and mechanisms for failure are so very numerous - and almost always human related. So, being an engineer, I look for tools and techniques to minimise and limit failure. And this starts with an initial set of guidelines as follows:
- Identify and quantify an opportunity
- Identify the customer and market
- Search out the competition and assess the risk
- Dig deep and try to understand every aspect
- Locate suitable technology
- Assemble a good team
- Engineer a solution/prototype and check it out with a customer
- Formulate a plan
- Create a funding regime and raise the capital
- Focus on getting the first $$ in the bank
- Spend every $$ as if it were your last
- Create a giant corporation
- Create something a giant corporation will want to buy
Easy enough you might think but you would be amazed at the number of people who don't do even 50 per cent of the above. I reckon it applies to the majority I see. They want to fly when they only have the capability to crawl. As a result they go off half-cocked and die within the first 12 to 36 months. So here is a pictographic assessment tool developed by my friend Gordon Bell:
With thanks to Gordon Bell for all the help and enlightenment
By assessing the strength of each parameter of the start-up at every stage from start to finish it is possible to continuously assess risk and the likelihood of failure. I do this on a scale of zero to 10 on every axis - with 10 being excellent/couldn't be better and zero spelling death.
Now here is the key thing: if any one of the activities is weak and tends toward zero, then failure is approaching fast. If one or more items sit at the zero point for even a short time the whole company is dead in the water. I now have to reveal that this is actually worse than stated! Each axis can be subdivided into large numbers of smaller risk elements. So not getting any zero items often turns out to be quite tough.
And how does the diagram look when populated by data from a successful start-up? Well here is just one example:
The more open the 'eye', the better the chances of success; and the closer to zero of any element, the higher the risk of failure.
Almost without exception, all the failures, near misses and sub-optimal success I have been involved with have been engendered by human failings. You name it, I've seen it: from plain ignorance to stupidity and hubris - believe me 's@!% happens' - and oh so very fast. My only advice is: if you spot a problem or potential problem, then fix it fast!
So how do you get to build an Amazon or a Google? You get it all right and you get lucky! The other key mechanisms of failure are generally under-funding, bad timing and competition. I can't give a comprehensive analysis here but I look at timing as being too early or too late for a market. If the take-up doesn't kick in, or if you miss the window, then you're a gonna:
Getting to market with a great product before there is any company or customer understanding and acceptance really hurts! And arriving after the demand has faded is just as bad if not worse!
Getting the two curves lined up is important, and tracking customer needs and market trends thereafter even more important. In reality the curves are made far more complex by a series of rapid changes invoked by technology change, experience and competition.
Finally of course there is the dual curse of unexpected competition fad and fashion. Staying on top of all of this is quite a challenge and, in my view, most easily achieved by creating something new where there is no competition from the outset.
All in all starting new companies is a tough, risky but really exciting business with the ultimate financial rewards limited by the size of the opportunity, availability and appropriateness of the technology or solution, shared out amount the competitors in the market.