Passion drives business
Deborah Gage, a renowned reporter, referenced Shikhar Ghosh’s research on start-ups in her article titled The Venture Capital Secret: 3 Out of 4 Start-Ups Fail. The research concluded that three-quarters of venture-backed firms in the U.S. do not return investors’ capital, 30-40% of them have all their assets liquidated with total loss of investors’ funds, and about 95% do not get their forecasted return on investment. The research also revealed that both the self-funded and the venture-backed start-ups with inefficient business models die subsequently from lack of funds. The former fails earlier within their first four years of operation while the latter begins to wither in their fourth years as investible funds shrink.
The U.S. Bureau of Labor Statistics and the Ewing Marion Kauffman Foundation were also cited in Gage’s article to have concluded independently that about 60% of start-ups survive to age three and roughly 35% survive to age ten.
In a similar vein, Nicolás Cerdeira and Kyril Kotashev on Failory summarized that 90% of new businesses wind up sooner or later after getting underway. Suggesting that only about one out of every ten new businesses survives at long last. In general, a sizeable percentage of start-ups (venture-supported or not) and new businesses fail within ten years of their entry; why is that so?
Judging by domain, and industry, do startups all share the same fate?
The Office of Advocacy of the U.S. Small Business Administration (SBA) based on findings of the Bureau of Labor Statistics, Business Employment Dynamics concludes that survival rates are similar across industries.
What is a start-up?
"A Start-up is an organization designed to search for a repeatable and scalable business model."– Steve G. Blank. For Blank, a business model is a description of how an organization creates, delivers, and captures value.
Contributing to Forbes Adviser, Rebecca Baldridge, and Benjamin Curry adds that A start-up aims to build on ideas very quickly through a process called iteration in which it continuously improves products through feedback and usage data. To back their suggestion, The Idea Village, in distinguishing between a small business and a start-up submits that while the former concentrates on creating a steady and consistent growth with limited resources and financiers, the latter zeroes in on rapid innovative growth supported by venture capitalists and angel investors. Invariably, a start-up is an organization that is still in its transition to maturity irrespective of how long it has existed, which could be up to ten years.
Now, the big question - why do most startups and new businesses fail eventually?
Bryant Sean affirmed the aforementioned startup statistics and raised some valid points on Investopedia saying that a business running out of funds, is not a reason for business failure rather the reason for bleeding cash to the point of dryness is. Such reasons include poor financial management practices and loss of stakeholder interest leading to support withdrawal. Targeting the wrong audience, lack of detailed research, bad partnership, ineffective marketing, and lack of expertise were other practices mentioned by Sean that could lead to business failure. Sean concludes that to overcome business failure, entrepreneurs should be passionate about their businesses, set realistic business goals, perform detailed research to understand and satisfy their customer preferences, and never give up when challenged with business uncertainties.
To corroborate Sean’s postulation, Alex Gilev in his article titled 3 Major Mistakes Start-ups Make, started by acknowledging that entrepreneurs make the mistake of designing for themselves instead of their customers. Gilev stressed that start-ups that lack a framework to capture customer requirements adequately could fail. He also stated that the cost of building too much before validating could drain entrepreneurs causing them failures. Instead, they should validate at regular intervals to avoid conflicts that are capable of disrupting success. Gilev concluded with the suggestion that creating prototypes to substantiate customer acceptance can make a difference. Such prototypes according to him should reflect value propositions from designs developed with user-centered processes.
Having established some of the reasons for failure in business, let's identify the success tips.
Just like Paul Allen of Microsoft who saw the need for a BASIC interpreter for the Altair 8800, and Harry Singh, CEO of Bolla Oil Corp, who identified the gap in automobile services when he had to wait for hours to be attended to as a cabman, successful entrepreneurs always start by identifying and validating a need.
Needs assessment and validation determine a perfect market product because they eliminate the chances of failure due to product-market mismatch.
Learn the ropes or hire an expert to acquire the necessary tools, expertise, and statutory requirements needed to succeed. Singh had to obtain the relevant training and certification in automobile repairs and maintenance to qualify as an Auto-mechanic and start his first workshop. Microsoft executives, Gates and Allen, were software enthusiasts already. Therefore, ask lots and lots of questions about every imaginable thing that is needed to succeed. Document your findings, then verify and validate the information you gather before applying them.
According to Wikipedia, a 1963 internal memo at the Stanford Research Institute defined a stakeholder as a member of groups without whose support the organization will cease to exist.
It is essential to identify your stakeholders to create the necessary governance structure and to aid in the planning process. When the stakes of stakeholders are not considered, there could be misplaced priorities leading to a downward slide in progress. Key stakeholders should be identified with their interests and thus prioritized based on their influence, to guide entrepreneurs appropriately during planning and execution.
Plan with a variety of elicitation techniques
Gilev’s suggestion of a user-centered process implies that before resources are assigned to activities, key stakeholders must ask questions to grasp clearly, the requirements they need to succeed on all fronts. Suggesting that only verified and authenticated information should be used to plan, not personal perception or assumption.
Factors to consider during planning include but are not limited to resources, availability (some resources are readily available while others aren’t), business dynamics, regulations, and demand and revenue projections. As the business progresses, other essentials shall become evident, and planning and implementation will need to adapt accordingly to the business requirements.
Start-ups and new businesses must evaluate their capabilities in line with the available, verified, validated, and in-tune with their vision's business opportunities before assigning resources appropriately.
Successful entrepreneurs ensure that they identify and analyze the alternative ways of doing their businesses. A good analysis eliminates the chances of poor partnerships, a cause of business failure.
Writing in Harvard Business Review, Teodoridis et al concludes that generalists are more productive than specialists in slow-moving fields whereas, specialists do better in a fast-moving business environment. This connotes that entrepreneurs are more likely to succeed when they understand their industry and apply the necessary manpower planning technique(s). For instance, businesses that are majorly sales and distribution, purchasing and supply, procurement, marketing, or business development excel better with teams that can wear many hats at the same time than pundits. Whereas, auditing, software development, database management, law, engineering, or medical firms, with more specialists in key positions than Jacks of all trades, will perform better than those with generalists in such positions.
Startups and new businesses need formidable teams to adapt to the demands of their business environment. Neil Patel suggests a more versatile team that is flexible to fill in the gap, and that knows how to recover from a failing business process.
Some businesses fail because they neglect their initial findings during implementation. To succeed businesses must stick to their approved plan, starting from the basics. Start-ups and new businesses are supposed to learn as they progress, avoiding wastage and minimizing cost as much as possible. At the heart of it, is customer satisfaction, the major determinant of overall business success, but success cannot come without discipline. For this reason, monitoring and controlling during implementation are crucial. That is why entrepreneurs are supposed to engage in a rigorous and iterative process of collecting, verifying, and authenticating the business requirements and documenting their findings during initiation to guide them during execution. And to enhance productivity and to avoid or mitigate mistakes.
Initial costs are usually higher than initial benefits prompting the need for more funding until break-even. What if investors can not keep up with the spending? As a result, entrepreneurs should constantly observe their entire value chain (process analysis) to identify areas where they could minimize their costs to bridge the negative cost-benefit gap. This implies that employees may take up multiple roles at different times to save the organization some employment costs, so companies may have to emphasize a trust-based work environment to achieve that and more.
A successful business strategy creates operations that support one another. Businesses that fail due to rising costs do not evaluate their business designs regularly to identify resource optimization opportunities.
Some companies like Nestlé, Philips, Bayer, ABB, SAP, Exxon Mobil, Royal Dutch/Shell, IBM, McDonald’s leveraged expansion to offshore beyond their countries of origin. Like Harry Singh, they started by expanding locally before offshoring, so new businesses and startups should have that in mind. They should observe, learn and grow like Harry Singh who did not mismanage the profit he was making, but saved as much as he could, enough to buy more gas stations(market penetration).
Innovation and Survival
Singh, Gates, and Allen all had something in common-they had the survival mindset. Even after Allen and Gates had sold their code to MITS, plus a percentage of royalty payments, they did not relax as some business owners do. Instead, they officially registered their company for better opportunities like the IBM and OS deals that followed. Successful entrepreneurs think ahead and work towards it. How did Harry Singh survive drought in his business? He started building Convenience stores in gas stations. From there, Harry built his fuel distribution center and was able to operate to date.
Gage D. (2012, September, 20). The Venture Capital Secret: 3 Out of 4 Start-Ups Fail. The Wall Street Journal.https://www.wsj.com/articles/SB10000872396390443720204578004980476429190
Gilev A. (2018, August 02) 3 Major Mistakes Startups Make. Alex Gilev. https://medium.com/@alexgilev/3-major-mistakes-startups-make-8ff5de8ffd96
Vardhman R. (2019, June 23). Startup Failure Rate and 80+ Other Startling Statistics About Startups. Smallbizgenuis. https://www.smallbizgenius.net/by-the-numbers/startup-statistics/
Florenta Teodoridis,Michael Bikard,Keyvan Vakili (2018, July 13) When Generalists Are Better Than Specialists, and Vice Versa. Harvard Business Review. https://hbr.org/2018/07/when-generalists-are-better-than-specialists-and-vice-versa
Patel N. (2015, January 16) 90% Of Startups Fail: Here's What You Need To Know About The 10% https://www.forbes.com/sites/neilpatel/2015/01/16/90-of-startups-will-fail-heres-what-you-need-to-know-about-the-10/?sh=842c50b66792.
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Bryant S. (2020, November 09) How Many Startups Fail and Why? Investopedia https://www.investopedia.com/articles/personal-finance/040915/how-many-startups-fail-and-why.asp
U.S. Small Business Administration (n.d) 10 steps to start your business Retrieved June 05, 2021, from https://www.sba.gov/business-guide/10-steps-start-your-business
Wikipedia. Stakeholder(corporate). Retrieved August 16 2021. https://en.m.wikipedia.org/wiki/Stakeholder_(corporate)
Shah H. (2021)The Most Important Turning Points in Microsoft’s History. Nira blog. https://nira.com/microsoft-history/
CNBC Prime (2020, October 22). THIS BILLIONAIRE OWNS A CHAIN OF GAS STATIONS |Blue Collar Millionaires [video]. YouTube. https://www.youtube.com/watch?v=PgF5FG91s-g
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This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.