An Impactful Guide on How to Rise Up from Common Startup Failures
A New-York based company CB Insights came up with an interesting research on why startups failed to take off. The report claimed —
- 42% of startups failed due to zero market demand,
- 29% ran out of funds even though they were in a profitable state,
- 23% failed to build the right team to oversee operations
- 17% of them didn’t have an existing business model.
As seen above, all reasons are due to the extremely bad decision-making process by entrepreneurs on their part. They failed to do their homework before executing a specific operation and ended up under the rubble.
Today, we’ll provide you with information on basic startup traps and how to combat them.
REASONS WHY STARTUPS FAIL SO OFTEN
For every 10,000 startups, only one ends up becoming a billion-dollar company. And for every 1000 startups, only one receives funding from an angel investor. These statistics itself demonstrate how scary numbers can be and it’s no wonder why startups fail so often.
But you don’t have to repeat the common mistakes that many startups do. In fact, we give you our word, by the time you’ve finished this guide, you’ll have a better sense of judgment that will push you towards a successful path.
Reason #1: Business Model Failure
Optimistic entrepreneurs usually end up launching their brand with a positive idea that their service or product will undoubtedly do well as there is a demand for it. Sadly, this isn’t how it works in the real world.
Even if you’ve got a great idea, customer acquisition is an expensive and time-consuming process. To understand the customer acquisition formula, we invite you to learn about two important terms — CAC and CLV.
What is CAC?
CAC stands for Customer Acquisition Cost. It’s a critical metric used by investors and companies to determine the value of each customer in comparison to their advertising costs.
This metric also tells us how to optimize the return on advertising investments and where to focus the total cost to gain customers in the long run. With CAC a company can easily understand if they stand to make a huge profit in a given timeframe or not.
Examples of CAC —
- Any form of advertisements
- In-store displays and promotions
- Digital marketing advertisements
- Social-media costs
- Upfront discount coupons
- Proposal costs
- Any market research and data analysis conducted
Here’s a real-time example to help you understand CAC better.
Imagine an electronics company wants to sell its products to consumers and decides to adopt digital marketing campaigns and brochures to sell to its customers. So, let’s do the calculation as follows.
Price of 1 Brochure = $1
Total Brochures Printed = 10,000
Price of Digital Marketing Campaign on annual basis = $1000
Total Cost on Advertising (Brochure + Digital Marketing) = $11000
Total Customers generated in that year = $1100
(Total Cost on Advertising divided by Total Customers generated) = CAC
The total CAC per customer is = $10
In the above example, acquiring a customer for $10 is an extremely low price and the company will completely profit from this venture. Every customer must make a purchase of $10 every year for the company to break even with their advertising campaign.
What is CLV?
CLV stands for Customer Lifetime Value. It’s a metric that demonstrates how much a customer adds to the net worth of the company in a lifetime.
This metric is crucial to a company to understand if customers are long-term based and are worth spending money into advertising campaigns. It allows companies to understand how many “repeat purchases” a customer is likely to make ensuring profits in the long run.
Here are some factors to calculate CLV
Cohort analysis — In this analysis, the company takes data from the behaviors of different customers and checks to see if they match a type of pattern.
Once it finds a matching pattern, it puts all the customers with similar buying styles into one group to better understand how to increase a relationship with them to increase purchases.
Example — If Jenny and Claire both buy women shoes 90% of the time, then both will be put into one single group and monitored until their buying trends change.
Average revenue — Another important factor to determine CLV is by analyzing the spending patterns of all users and taking the average of it. This approach doesn’t take the behavioral aspect of the customer and simply analyzes the purchases of the customer.
Example — If Tom, Sam, and Peter spend $100-$300 dollars every month on products, then the average value will be calculated at $150 for all three of them.
Now that we understand both the terms, we can see why they play an important role in helping an entrepreneur set up his business and assess his risks beforehand.
While advertising is a great way to attract customers, it doesn’t necessarily secure the profits of the company if the customers aren’t making any purchases.
These two metrics help in calculating the costs it takes to run a company while acquiring customers and how much a customer is likely to spend in a year.
Reason #2: Running Out of Funds
Running out of liquid cash is quite common for many startups. Entrepreneurs spend so much time focusing on the product and service that they never stop to look at how to recover the capital or raise enough funding from other sources.
The biggest reason many entrepreneurs don’t pay attention to their funds is a lack of a business education. Plain and simple.
Milestones that a company should focus on to increase valuation are as follows —
- A working business model needs to be proven. If it proves it can acquire customers on a regular basis then funding from investors isn’t a major concern
- Accelerating expansion is another way a company can hit rock bottom without accurate numbers to assess a sustainable timeframe. It’s best to expand only after a large funding or after raising enough capital
- After a product has passed its beta test, it still needs to be a proven success with the customer before the company gains valuation.
- Another milestone is when the product is being shipped and the customer is providing positive feedback
- Solve issues of risk within the 1st phase of launching your company. It’s best to hire a risk management officer to check for loose ends
Every day in the United States alone, 8000 business loans are turned down. This creates a lot of opportunities for alternative funders to provide loans to small startups at exorbitant rates. In desperate times, many entrepreneurs seek the help of these loan providers and accept their hefty interest rates without thinking about it.
Most starting entrepreneurs will be looking for information to help them with their current situation.
Here are 8 frequently asked questions that will help you decide whether an alternative lender is the best choice.
1. How much capital are you looking for?
Don’t just guess these important numbers, hire an accountant and have a word on the options available to you. A loan is granted based on your revenue amount. 10-15% of your gross avenue is the best you can secure unless you can procure a signed contract.
2. What will the capital be used for?
Come up with a strategic plan and note down where the cash will be used and how likely are you to make profits with the loan amount. Always calculate the profits to match the repayable amount.
3. Do you have an idea on the cost of the capital?
You could be charged anywhere from a low 15% interest to a hefty 70% percent interest over a 6-12-month duration. Not many private lenders extend their loan amount beyond a year for the sake of risk.
4. What are the current biggest challenges in the company?
List down every little issue that you have with the current company. Don’t be scared. If you don’t fix the leaks now, they will come back to haunt you in the future. You’ll have to understand that your revenue model needs to be as tight as possible before securing a loan.
5. What works well in your business that promotes growth?
Surely, you believe your startup has enough juice in it to run itself after a loan is secured, right? Are there particular problems that you’re facing like inventory management? Or procuring raw materials? Or logistics? Don’t use alternative funds to fix a hole but focus on the best your company can churn out.
6. Have you tried the bank?
Conventional bank interest should always be sought out first before alternative lenders. Depending on your personal line of credit, most banks release loans if there is a good working business model.
7. How will you pay your loans?
Most loans will be paid directly from your checking account. Depending on your loan contract, the loans will be collected either monthly, quarterly, or annually.
8. Have you checked for closing costs and other penalties?
Most commonly, there are hidden fees and cash advances that aren’t visible when signing for the loan with alternative lenders. The higher the loan amount the more the hidden cost charges. Always ensure you ask your loan provider about these costs and read all documents carefully before signing the dotted lines.
Reason #3: Lack of Passion for the Market
If you’re starting your business for the sole reason of rolling in profits. Save yourself precious time and quit now. No business has ever gotten successful with the primary motive being profitmaking. It comes down to your level of passion and how interested you’re in the market.
Let’s say you have no interest in manufacturing jewelry but you’re in it because there’s a demand for it. You’ll lose interest the moment you start to mount up losses as your heart doesn’t feel strongly about running a jewelry business as much as it’s about seeing the money.
Another factor is entrepreneurs looking for profit often tend to sideline many launch issues that passionate entrepreneurs usually solve before their launch. There’s also the issue that you didn’t read the market well enough.
Checklist to find your passion before launching your startup
- First, ensure you have 2-3 hours of alone time with no distractions. This is important to build concentration.
- Take a white sheet of paper and start doodling away ideas that appeal to you or something that you’re passionate about. (E.g. Photography, Programming, Cooking, Carpentry, Cosmetics, etc.
- Don’t worry about the money side of things. We’ll get there eventually.
- Once you’ve set up a list of 3-5 things that you’re passionate about, ask yourself “Will you be doing this work for 10 years from now?”
- Narrow down your list to one passion that you feel will do well in the local market scene.
- Search for seed funding companies in your city and get in touch with them.
- Ask your friends and family about their interest in your product and services on a scale of 1 – 10.
- Then conduct a local survey in your neighborhood by visiting door-to-door asking people for 2 minutes of their time and allow them to rate your product on a scale of 1 – 10.
- Come up with a secret sauce for your business. (Unique Selling Proposition)
- Spend several days and months in complete research time to understand your product better. Seek out local mentorship programs in your area.
- Learn about your local competition. Buy a product or two from them and understand what makes their product so good.
- Finally, take the leap of faith and launch your startup but this time you’ll have a business with your passion embedded in it. Profit will remain a secondary motive.
When launching a business, it’s necessary to understand if your product fits the demands of the people for the long-term. If your product is no longer required in 5-years of time, then you’ll end up crashing your business for not reading it well enough.
A good example of this is when floppy drives first came out, they were the rage, but the moment CD-ROMs were introduced, Floppy drives became non-existent, similarly with DVD-ROMs out, CD-ROMs went out of fashion and today we have Blue Ray drives to replace DVD-ROMs. If you had dealt in any of these items, you’d know of their shelf life and would quickly dispose of them before they near their expiry date.
In a study by Statistic Brain, the failure rate of startups after a 5-year period was deduced at 50% and 70% after 10 years. The reasons cited for the failure were:
- No motivation for the entrepreneur
- Unwillingness to change or listen to advice
- Taking advice from unverified sources (bad sources)
- No future goal set at the time of launching
- Raising money too soon
- No mentorship
Reason #4: Poor Leadership/Bad Management Tactics
Leadership is the heart of a company. Look at all the biggest companies in the world — Apple, Facebook, Microsoft, Tesla, Amazon, etc. they are all run by successful leaders who’ve made an impact all over the world.
There isn’t a single company that is successful without its leader out there leading it from the front.
Let’s understand how leadership truly impacts a startup with these startling statistics.
- 9-to-32% of a company’s voluntary turnover can be avoided via better leadership skills
- 3-4% increase in customer satisfaction rates through better leadership
- 5-10% increase in productivity from employees with a better leader
- 7% increase in total profits with an effective leader at the helm
- 60% of IT projects are set to fail with bad leadership skills
- Within the first 18 months, 80% of startups are likely to fail with a bad leader on board
- 95% of all product launches fall flat on their face due to bad management
- In the U.S. alone $450-550 billion dollars are lost because the staff is disengaged from the company’s goals
These numbers are huge in terms of how much profit is being lost and how much loss is being generated by a startup with poor leadership skills. Add to this a bad management on board, the company’s chances of failure are severely high.
Poor leaders are generally oblivious to the fact that they’re the sole reason for the company’s decline and by the time they recognize their fault in the failure of the company, it’s already too late. So, let’s understand the 4 causes behind why a leader makes bad decisions.
1. Unable to manage resources
Allocation of resources is a pivotal part of a successful startup for a leader. If you don’t know how to pool your resources into different sections of your business, you’ll more than likely fail to see success.
While many people confuse themselves that leadership is just about motivating people, leadership isn’t just about people skills and the ability to provide encouragement to his or her team. Effective leadership skills require good decision-making process.
If you were to allocate 45% of the company funds into expanding your company before you’ve even tasted profits. You’ll undoubtedly be found at the receiving end of failure. Utilize statistics of successful leaders, take the insights of other well-known entrepreneurs. The success mantra is quite simple — effectively disperse your funds into your business and you’ll find success in no time.
2. Can’t foresee an opportunity
A bad leader never sees opportunity but waits for it to come knocking at his door. It’s important for leaders to have keen cognitive skills to be able to understand when an opportunity is nearing and how to make the best use of it.
Here’s an example — While recruiting, you come across a valuable recruit with a proven track record of bringing in successful clients for all the companies that he has worked with previously. You are now stuck in the negotiation process where he requests a 40% increase from his past salary and you feel the need to bring down the number to 25%. The negotiation process is a failure as both parties fail to reach a conclusion.
Here’s where you failed to see an opportunity for your company. Valuable recruits with proven track records are hard to come by and when they do, they’re the golden ducks of the company.
You do everything to keep such employees as they raise the valuation of your company to exponential levels when provided the right direction by a leader. But failing to see past the 25% hike has cost your company potential profits in the future. Thus, a lost opportunity.
3. Desperate leadership
Good leaders usually train themselves to remain calm and can absorb a great deal of mental punishment. Desperate leadership is when the leader thinks he can’t lead the company to success.
This type of leader always looks at the negative side of things and wants to see a glass-half-full as half-empty.
Here’s a string of questions to know if you are a desperate leader —
- Do you find yourself wondering if someone else was best-suited for your position?
- Does the idea of a competitive market affect your decision-making ability?
- Are you prepared to take the blame if the company takes a loss at the end of a financial year?
- Do you spend time understanding if your employees are happy with your leadership role?
- Do you often fear to change things even if they aren’t working out for the company?
- Are you afraid of failure and do you remind yourself of it every day of your life?
These questions serve to provide you with an answer that demonstrates a weak-minded leader that’s constantly affected by his internal demons instead of tackling the real-time problems of the company.
Often great leaders doubt themselves, but they also come up with ways to motivate themselves to achieve the goal that was planned. Desperate leaders, however, are self-obsessed on making everything perfect and how a lack of perfection equals failure.
3 CORE STRATEGIES TO HELP YOU RECOVER FROM A STARTUP FAILURE
By understanding how startups fail, you’ve prepared yourself from some of the greatest obstacles affecting the modern entrepreneur. Let’s begin to map out a plan in achieving success as a startup and how to bounce back from common startup failures.
1. Accept Failure and Begin Rebuilding
There are no secrets to success. It is the result of preparation, hard work, and learning from failure. — Colin Powell
Failure. The word that gets our attention immediately and often causes sleepless nights just by thinking of it. If you’re someone who is afraid of failure, you’ll spend more time thinking of it rather than finding a solution to it. Successful entrepreneurs do fail, the best of them have gone through strings of failure to get to where they are in their life.
Let’s reflect on 3 such lives that have been clutched by failure and have eventually freed their way out to the redeeming doors of success.
Steve Blank, CEO of Rocket Science Games
Steve has had plenty of experience from being a serial entrepreneur spanning a 21-year career. He’s primarily based in Silicon Valley and to Steve, failure was akin to having a bad hangover that happened every Monday morning.
He states “A startup goes from failure to failure. All it does from day one is run a series of experiments and just like in a lab, most of them will fail,”.
He also believes during a failure shutting down the company is one of the worst decisions an entrepreneur can do — “But when it’s complete failure … when you’re shutting the company down, that never feels okay. It feels shitty. If you’re the CEO, you failed your employees. You failed your investors. And after, you either grow or you don’t.”
From raising $35 million and having the hottest company in Silicon Valley, to running out of funds to sustain his company in just 90 days due to a market decline is something that’s straight out of a horror story for Steve Blank.
Steve Blank began to get angry at his decisions and gradually, began to accept failure as a phase of his journey to success. He began to change his behavior and came to terms with his disappointment.
He stopped blaming his employees like he would earlier. He’d take down lessons from other successful entrepreneurs. And finally, he was back to what he does best — becoming a successful chain entrepreneur.
Jeff Bezos — Founder & CEO of Amazon
What does it tell you about failure when the world’s richest man was one of its victims during the start of his career?
Bezos wasn’t always known for his brilliant and genius entrepreneurship that he’s known for today. In fact, during his younger days, he used to aggressively think of expanding the company that cost him dearly.
One of the biggest negatives of his career was when he launched Amazon as an online bookstore and customers would find a way to add books into their cart with a negative number. This oversight allowed his customers to access free credits that they took advantage of.
Another big blunder that Jeff Bozos was famously known for — he acquired over 100-million toys to sell over the Christmas season, but he failed to calculate the demand for his toys and ended up with warehouse issues post the Christmas season from the unsold toys. He donated all the toys away and had acquired a massive loss.
Even with all the setbacks that happened in his life Jeff Bozos today has achieved what few men will ever achieve in their lives. No, we don’t mean his wealth but the clarity from rebounding from a failure and coming back to take success head-on by the horns.
Evan Williams — Twitter’s Co-founder
Jeff Bozos isn’t the only billionaire that reaped success from failure. Evan Williams was initially an angel investor in a startup for a music platform called Odeo. Once iTunes was released by Apple, Evan and his partner, Noah Glass decided to kill the company as there was no way it was going to compete against a colossal giant like Apple.
Days went on and instead of basking in failure, Evan Williams and his team of partners decided to set their minds on a small project that they had on the side — Twitter.
The rest is history.
Many of the ideas that made Twitter a roaring success were provided by his team and Evan Williams was always skeptical about it but nonetheless, he went on with it.
This type of entrepreneurship demonstrates that Evan Williams was ready to risk his wealth on the whims of his team and he believed in them.
In fact, this success story teaches us two things. Not all startups will go on to become a success and it’s time to let go and move on to other projects. Had Evan Williams not moved on from the disappointing failure of Odeo. Who knows, he’d probably never make it to this list.
Now that we see even the most successful entrepreneurs fail, it’s easy to pull ourselves back up from a little fall, right? Dust off the wound, apply a disinfectant and go back to playing outdoors.
That’s the formula our mums gave us when we’d cry after a fall. The same applies to a successful startup, don’t spend time brooding on the failure, instead spend time looking up to what you can achieve for the next day.
2. Identify a Mentor
Starting without a mentor in today’s modern business world is like taking your bike out for a spin without protective gear and a helmet. The crash could be life-threatening. Do you want to risk it all?
We believe you don’t. Every successful entrepreneur needs a mentor and a role model to provide them the way to success. Don’t believe us? Here are 3 examples:
- Steve Jobs mentored Mark Zuckerberg and advised him in building high-quality teams and how to maintain a sharp focus on the products that come out.
- Steve Jobs was guided by Mike Markkula, an Apple investor. He was given important points on how to shape the company during a critical time at Apple.
- Bill Campbell was a profound influence on Larry Page, the founder of Google, during the early days.
Well, are you still contemplating on whether a mentor is a necessity in today’s fast-paced business world?
Here’s why mentors play such an important part of an entrepreneur’s life.
Experience received from a biography or from written text is good, but you know what’s better? Learning from the greats themselves. Working or discussing with a mentor allows you to gain successful formulas that aren’t shared in books. Not all entrepreneurs like to give out their success mantra to the entire world. When mentoring, they prefer to share these formulas to their students in learning.
Starting with a list of high-valued individuals is significantly better for a new entrepreneur than having to start from scratch. Mentors introduce you to the network of individuals that have a keen sense of learning and insight the same way you do. Together, you can discuss ideas and bounce off brainstorming sessions to come up with the perfect plan to counter a problem and execute the startup in the best way possible.
Listening to a mentor speak about their drawbacks and success is enlightening. It’s a different kind of excitement than reading words from a book. Having someone to guide you when you goof up is the best part of having a mentor. They’ll also share your pain and guide you in the right way when you need the help.
Learning directly from a successful mentor improves the way you behave with your employees and have a self-control over your emotions. It brings out the mature side in you that you didn’t know existed. A young entrepreneur with a successful mentor is more likely to have a control on the run of things than someone without.
A mentor is someone who has already experienced your share of life. He understands failure better than you do at this moment and can offer the right advice to point you in the direction of success. One day, when you’ve achieved success and plan to mentor a young student to build a billion-dollar company, you too will have tears welling up your eyes when you see your advice has been taken seriously.
3. Get used to being uncomfortable
If you go to bed and have a good night’s rest with everything running as they should. Well, that’s just one way to live your entrepreneurial dream but is it a successful dream? Many billionaires today would disagree with you on that. In fact, many successful entrepreneurs believe in being uncomfortable to be comfortable in their business.
What does our comfort level have anything to do with our startup’s success rate? Great question.
To answer this, we’ll have to point out important features that come with stress and an uncomfortable life.
The chance of you trying out new things in a company when you’re reasonably comfortable with the way things are is next to nil. People, that innovate have this longing sensation that burns within their minds with one question — How do I improve this idea further?
This burning question leads them to discover success formulas and potential partnerships that aren’t otherwise revealed to you when you’re in your comfort zone. Stepping out of the zone allows you to venture into unchartered territories to bring back new ideas and some new milestones to your goal.
For E.g. Do you feel the same rush of adrenaline when sitting at home and watching a football match as compared to watching one from a stadium filled with screaming fans? Obviously, no. Similarly, getting out of your comfort zone will test how inventive your mind truly is and how you can innovate newer possibilities into your business.
Some risk is necessary to achieve a fair share of the reward. You can’t expect to build a successful company playing a safe hand. It’s just not possible.
The average business owner is mostly content with his life and rarely decides to venture out of his comfort zone. But let’s say you had to put in 50% of your total funds into an investment that could potentially raise the valuation of your company up by 500%.
Would you do it? Or would you prefer staying where you are?
Yes, being in an uncomfortable state of mind can teach you fearlessness. And fearlessness is necessary to take decisions on the spot.
You’ll be tried and tested, and you may even lose a good fraction of your business funds but the satisfaction of achieving success at the end of it is truly worth every risk that you take today. And a calculated risk can only be taken if you’re fearless. Taking a risk with fear is called gambling.
And there you have it. You now understand why it’s important to embrace discomfort at times and why it’s necessary to push challenges into your life, willingly. We don’t mean just go throw out all your finances on a calculated risk in one go, no. That would be foolish!
What we mean is to take baby steps towards achieving a life where you’re always innovating and never satisfied with your current efforts. This is the only way to achieve the best version of your company.
If you’ve reached the end of it and read every word carefully, we congratulate you. Not everyone is willing to change their attitude based on the words written in an article but with this information, you’ll provide your startup with a barrier to protect you from all the common problems affecting startups during the start of your illustrious career and the strategies will provide you with a solution to move past your current situation.
Always pay heed to your failures, they are the biggest stepping stones of your life that’ll lead you to success.
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