This probably won’t be the first time you hear the depressing statistics that four out of ten start-ups reportedly don’t make it to their fifth birthday. However, failure is not always a catastrophe – you can learn from your mistakes, if nothing else.  In a recent report by CBInsights ‘298 Start-up Failure Post-Mortems’, founders – whose businesses failed – have shared their crucial tips on how to avoid failing the second time round.

There can be dozens of factors as to why a start-up flops and naturally these differ from case to case.  We have summarised those that we think of as the most important to any entrepreneur launching a start-up:

Market

CBInsights reports that as many as 42% of failed start-ups, concede that the lack of an actual market requirement for their product as the number one reason for their collapse. In that this would appear to be plain common sense, why is that so many founders fall into this trap?  One possible answer is many entrepreneurs will launch their start-up to solve an issue or problem that THEY have, without properly ensuring if this is a problem relevant to anybody else.  Even the most basic market research could help you figure out how relevant the issue you are trying to address really is, although in practice this is pretty difficult to carry out: Henry Ford identified this perfectly, saying ‘sometimes the customer doesn’t know what they want until you’ve shown them’.  As if this wasn’t difficult enough, you also have to think about timing: in 13% of the cases studied, it was demonstrated to be a significant factor in determining whether a start-up fails or succeeds.  Occasionally you might launch too soon – think Sega’s Dreamcast, with technology that was too advanced for their core customers in 1999 – or sometimes you have an breath taking product, such as Microsoft’s Zune, that launched five years after Apple’s iPod had already become the go-to source for portable entertainment.

Cash

Among failed start-ups, three out of ten founders mentioned “lack of cash” as the main reason for their collapse. There are a number of issues faced by all start-ups, lacking in capital – primarily, a lot of small businesses struggle to get their core customers to settle invoices on time. This, of course, is also a matter of bargaining power – it’s hard to negotiate when you’re the new kid on the block – but a solid credit check of your main clients can make your business a whopping 30% more likely to survive through that tricky first year.  According to 19% of failed founders, pricing and rate structure are also significant factors that contribute to poor cash flow, the result of two dissimilar – though sometimes avoidable – mistakes.   The first lesson is that when writing your business model, ensure that your business is not a cash burner. It is reasonable to rely on investment at the pre-revenue stage, but it is also vital to keep in mind that investment is ambiguous and extra incidentals can arise at any time.  On the other hand, when working out the pricing structure for your product, always start with how valuable it is to your customers and never solely from what your company needs to make money.  Finally, 8% of failed start-ups attributed substantial responsibility to a lack of continued funding from investors, mostly at the seed follow-on stage (also known as The Series A Crunch).

Team

We can’t emphasise this too much: start-ups are only as valuable as their talent: one in four founders said their business went bust due to a lack of crucial skills and expertise in the founding management team.  A good example is the statement put out by recruitment portal Standout Jobs, who folded after only three years. “…

…the founding team couldn’t build an mvp on its own. That was a mistake. If the founding team can’t put out product on its own (or with a small amount of external help from freelancers) they shouldn’t be founding a startup. We could have brought on additional co-founders, who would have been compensated primarily with equity versus cash, but we didn’t.” – Ben Yoskovitz, Standout.

Of particular note is the point about bringing in early-stage talent in exchange for equity rather than cash – think EMI Share Options – which can make the difference between a winning and a losing team.  Other common, workforce-related reasons for collapse is ‘disharmony’ among the shareholders; this can also include co-founders with conflicting visions or a different way of working.  Then again, others say that had they been able to rely on somebody with a different point of view for a ‘sanity-check’, the destiny of their business would have been luckier.  Finally, 8% of founders conceded they’d failed as a direct lack of passion towards their business vision or sector.  Although this sounds counter-intuitive, it’s important to remember that start-ups often use their expertise in a specific sector – such as engineering, software or branding – to solve an issue in an entirely different market.  Ultimately, the founding team have to be passionate about the purpose of their company – it’s not just about their product.

4. Customers

In 1999, Amazon founder Jeff Bezos notoriously wrote to his shareholders, that he liked to remind his employees to be constantly frightened of their customers.  He was certainly proven correct – almost one founder in five reported they folded because their product wasn’t user-friendly enough.  A further 14% regretted not listening to their customers – in particular, comments from early prospects – meaning they kept their focus on a favoured product, leading to ignoring the actual requirements of their target market.  Finally, 14% said that despite having a great offering that could solve a real issue, they were unable to deliver it to the best targets as their marketing channels precluded sufficient means of communication. Many of them suggested hiring a marketing team at the earliest stage of the company’s development, crucial when preparing to bring your product to a bigger market and thus to scale.

5. Business Model

Lack of an adequate business model and the inability to pivot and scale are the final big factors when it comes to start-ups failing.  It doesn’t matter how great your product is; without a solid and scalable business model to support it, it won’t succeed.  Potential problems include volumes outgrowing suppliers or capacity, inadequate revenue streams, being overly reliant on a single delivery channel or failing to expand geographically are all mistakes that can be avoided with a solid business model.  Moreover, a successful model needs to be flexible and ready to adapt when needed. Focusing on a company’s resources and activities that add value – rather than on one single value proposition – is crucial to adapt to a shifting environment. As many as 17% of founders said their business failed because they didn’t manage to adapt to changes quickly enough to survive.

It may make for terrifying reading and we’re not trying to scare you!

Some frequently cited ones are competition (you need to do a thorough market analysis and gage your competitors), legal issues and consequential expenses (which can be quite tricky to predict), failure to leverage your network or simply working too hard and burning out.

Ultimately, it’s tough to make it as a start-up founder. It can be a lonely, ambiguous and often exasperating journey. However, we are here to help.

Emanuele DiAmico, Ignition Financial

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Or contact Agne Pakalniskyte at [email protected] or on 020 7240 0202.