The 10 Reasons Startups Fail

BY ADEOLU ADESANYA||

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As the Business Intelligence Principal at P&D Allianz, I have had exposure to a good number of startups in the last few years.  I have seen really good startups and really bad ones. George Deeb did a summary of the recurring problems he also experiences and I agree with him adding my examples:

1.  Proper Market Research

Often times, entrepreneurs launch businesses they think are good ideas, but they never take time to do a proper market research. What is my business about? How am I going about it? Why am I doing this business? Who are my competitors? Is this a business that is easily accessible for new entrants? These are key questions that must be answered. Are you just replicating another business? Currently in Nigeria everybody wants to setup a retail ecommerce site. Why do they want to rival the big guys in the industry that are already backed by endless finance, even though they haven’t made profit? Investors don’t want to back the 10th startup in a space; they would much rather back one of the first movers.

But if you want to do, you want to make sure you are clearly differentiated from the others (e.g., better product, better value, different target client) and that your plan is defensible against future market entrants who may follow you after your preliminary success.

2.  No Go-To-Market-Strategy

Entrepreneurs are typically so focused on building their product, that they don’t think far enough ahead to their go-to-market strategy, and how that will help them to achieve a proof-of-concept to attract growth capital.  (This is where we have had so many people come to us for help). You always need to raise enough capital upfront to not only build your product, but to effectively test your sales and marketing tactics.  This will allow you to demonstrate your business is seeing nice preliminary growth and traction, and that you have tested and identified a profitable customer acquisition plan with affordable economics.

3.  No Focus

It is hard enough launching one business, let alone try to launch multiple different businesses all at the same time.  I can only say, do not try to be a jack-of-all-trades; you will only end up being a master-of-none. Simply focus on one thing, and get very good at it.

4.  Adapt – Know When to Cut Losses

Many entrepreneurs stay heads-down marching in the same failing direction.  They need to know when a pivot is required, while there is still enough capital in the bank and enough time to implement the changes.  You need to constantly test and tinker with your startup until you land on a winning direction.

Let me tell you a short story. I did a consulting work for a startup that has been in business for a while now, for two years they have been trying to raise finances for a particular product. A year into trying to raise the finance, they came to meet us for solution, we had advised them to change their focus a little bit, Nigeria was not ready for what they were offering, but we were sure if they could scale back just a step, they would get the market and the finance they needed, because Nigeria was ready for that. They refused!

A year after, no progress had been made; another person had entered the business and started offering the service we had told them to scale back to, and those ones were doing very well. They needed our services again, we suggested the same solution, this time they listened, and they got the market and the finance they were looking for, but now had to deal with a rival. If only they had adapted earlier! Be ready to adapt sometimes what is needed might be a small shift, other times it could be a major change.

 5.  No Passion or Persistence

If an entrepreneur does not exude passion about their product, they will never love their startup well-enough to get through the goods times and the bad.  And, they will never attract the best management team or investors, if their passion does not rub off on others too.  Furthermore, even if you have the passion, you need to have a persistent mindset that regardless what hurdles get thrown your way, you are going to figure out a way through them.

6.  No Mentors or Advisors

Entrepreneurs should not be “lone wolves”.  They need to understand they are not in this battle by themselves.  Many cities have established startup ecosystems for them to tap into for mentorship and learnings from battle-tested serial entrepreneurs or venture capitalists.  So, make sure you are well networked and surround yourself by people who are best experienced to pass their relevant learnings on to your business, so you don’t repeat the same mistakes they made before you.

Please don’t ask me, ‘how do I get a mentor?’

7.  No Revenue Model, Ever

OK, I understand many startups may not have a revenue model day one, trying to quickly build up a large audience and monetizing it later. But, there better be a clearly communicated revenue plan for when that day happens down the road.  And, that revenue plan needs to be material enough, based on credible assumptions, to make it enticing for an investor to get excited and to justify your current valuation.  For some products, consumers will never pay for them based on free alternatives available online.  So, if you are hoping for advertising to make up the shortfall, you better have a clear and affordable roadmap to millions of users to get the attention of advertisers.  Otherwise, a “freemium” or e-commerce drive model would be preferred.

8.  Less Capital Than Needed – No VC Experience

First of all, make sure you are raising enough money from the onset.  That means raising enough to build your product, preferably, that amount is large enough to at least carry you 12-18 months.  When you fund your business piecemeal over time, you will never get out of fund raising mode (vs. business building mode) and you risk burning out of money before your business has a reasonable chance for success.  And, whatever capital you think you will need, double it for a cushion, as things always go wrong.  Also, when you first reach out to VC’s (such as Spark and their likes), make sure your team and your business is ready, and is well researched and prepared to walk into that meeting with enough traction and a winning-plan that will get their attention.

9.  No Long Term Roadmap to ROI (Return On Investment)

Whether you are investing in your own business, or raising capital from outside investors, you need a clear roadmap to at least a 10x return on your invested capital. With a one in ten odds of hitting it big in the startup world, investors need lots of 10x opportunities to offset the much larger base of zero returns that will be realized.  So, when pitching investors, put on their hats.  If you are asking for N1 Million for a 20% stake, you need to clearly communicate how your current N5Million post-money valuation is going to become N50Millon over the next five years with the monies raised, based on reasonable assumptions.

10.  Timing or Other Forces

Sometimes, businesses fail for no fault of their own. They may have had a good idea but some external force that was out of their control took them down. Last week I wrote about the gift registry business in Nigeria and how, wrong timing by previous entrepreneurs into the industry made them shut-up shop, due to very low patronage, and I identified MyGiftRegistry NG and how they have come in just at the right time, into the billionaire naira wedding industry.

Other forces like government regulations; imagine someone that maybe just started a used-car importing business or importing of fish products. The latest government regulations in Nigeria will send you out of business for these two businesses.

As an unapologetic Christian, I will gladly add, this is where you need the Lord’s blessing in your handwork.

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2 Comments Add yours

  1. Dami says:

    Fantastic write up, another point to add to the list is NEVER MIX BLOOD WITH BUSINESS
    Some business owners can identify family members who have the right skills to partner in business with, but under no circumstance should any one starting up a business bring an unskilled family member on board just because he is your blood. You are just setting a time bomb waiting to explode.

  2. oluwole says:

    beautiful write up…..very true what dami said above…….but very direct and helpful….

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