Why do Startups Fail?
By Joice Lee
Most startups fail. Only 4% of all startup businesses made it to the second year, according to U.S. Census Bureau's Business Dynamics Statistics database of all companies that started in 2011. A startup is a company that has just begun to develop. The startups discussed in this article are startups that have a new business model and typically has high failure rates. Some people determine failure using the number of years the company survived without getting bankrupt. The leading failure causes are said to be “incompetence” and “lack of managerial experience”. Incompetence though is a very ambiguous word. What exactly is the reason for startup companies to fail? Not incompetence, the main reason is not knowing the steps, the strategies and not learning from other failures.
In startups, the first goal is usually to have a great idea, (refer to diagram 1)which gives you a unique competitive advantage. The next step is to implement those ideas to create a service or a product to a targeted audience group: designing, purchasing material, manufacturing and testing. At this point, startups might or might not have breakeven. The third stage includes finding and reaching customers, transacting, distributing. To grow revenue, marketing techniques need to be used to draw attention of the customer. At this stage, important assumptions are made about the steps taken in the future based on what the company now like sale forecast and personnel plan.
Some might say the startup strategy is to, define your business and vision well, plan short term and long term goals, understanding the customer, obtain information from competitors, make financial plans. But these are only the necessary steps to create a business, not a well-done strategy. No matter what strategy you choose, always exploit the competitor's weakness and improve from it, always reinvent and improve your company. Another issue is the lack of persistence and poor work ethic. People should know how many hours a day they have wasted on things that don't drive revenue. Hard work is not intrinsically worthy of reward; therefore we should work smart.
Different types of Business Strategies
The choice of strategies is important.
Common strategies include stealth mode, which focuses on building a strong product and expanding the basic organizational foundation. Another method is the Lean Startup Method which focuses on short-term profit over growth; go to market, constantly validate and iterate; by keeping costs low, this is a safe way to gain revenue. If more time could be invested in building products, they can reduce market risks and have a competitive advantage. But it is time-costly; some may succeed in spreading their idea, yet some may not while wasting many years when they could invest the money in other areas. The third strategy is to get big fast: raising awareness, generate interest, prompt action, prioritize growth over profitability, dominating the market before competitors (Chan, 2016). This strategy heavily relies on how the customer reacts to it. Focusing on growth can retain customer loyalty, build brand awareness and expand its infrastructure. The majority of companies that uses this strategy ended up failing, as this requires a huge amount of economic support.
Regarding the strategies above, I do not agree with the stealth mode, lean startup method nor the get big fast method. I believe that the strategy between lean startup method and get big fast method is better: go to market, constantly validate and iterate, keep costs low, yet grabbing opportunities, and promote to the customer without spending too much money, this is a safe way to gain revenue slowly. When a huge opportunity is grabbed, for example: when an attention-grabbing customer had bought the product/service or winning in a competition, it\'s time to expand the business. The benefits of this strategy are that it could develop your product to constantly meet the market expectations to have a competitive advantage compared to other competitors. At the same time, taking opportunities also could give you a chance to expand your business to make it stabilized. The only disadvantage is that it is not as quick, and would most likely get less attention compared to the get big fast method. But, the time it consumes depends on the amount and quality of opportunity that you grasp, the time to break even and to become fully established could be easily shortened. A failed example of using the get big fast method is Webvan.
Why did Webvan failed?
Webvan is a commonly investigated example in why startups fail. Webvan was established in 1996, it is a company in Seattle, an online shopping, delivery and retail business that promised delivery of groceries within 30 minutes of ordering online and had 3500 employees at peak. Failure reasons are thought to be:
The most important reason for failure is the aggressive expansion to 26 different cities across the United States, without stabilizing it in its first market, the execution is not adequate and the business model was not well proven before expansion.
The second reason is trying to build its warehouses and infrastructure from scratch, reinventing everything from its system and robots at a tremendous scale.
The third reason is the use of a mass-market strategy. Target customers are a very price-sensitive market, instead of upmarket consumers. The revenue is not stable when the price is increased slightly.
Another reason for failure is the timing of the startup; the business model was ahead of its time; online commerce had not reached the stage as it is now. There are not as many internet users as they are now. Today, Internet users have reached around 3.7 billion, 49.6% of the entire world population as of 31 Mar 2017 (World Internet Users Statistics, n.d.). At the end of 1996, there are 36 million internet users, 0.63% of the world population (University of Virginia, n.d.).
It did implement some strategies correctly though, firstly, the strong business model and the first target group was chosen correctly. The business model of promised delivery within 30 minutes of ordering attracts the customers in the San Francisco Bay Area, its first market; as this group is adaptive and is willing to try new ideas like online shopping. Large e-commerce sites like Amazon have later learned from Webvan, to prevent repeating the same mistake. There are many companies that succeeded using their strategy but there are more that failed using the same strategies. So, using the correct strategy might not necessarily entirely help you, the strategy is not the only factor.
Larry Bossidy, the former AlliedSignal CEO, wrote in his book “Strategies most often fail because they aren't well executed” (Bossidy, 2009). A business model is fundamental to a business, where execution is another important component. Companies usually fail in either one of these: the business model is wrong or the execution is bad. Many problems could happen in the execution stage, including not enough cash flow, inefficient manufacturing, and wrong human resources. In the case of Webvan, the business model is innovative, but the problem is in the execution.
Very few startups succeed, but as you can see there are many reasons for their failure; the wrong strategy, the wrong execution method and the wrong timing of execution.
...(download the rest of the essay above)