Why is the rate of successful startups so low?

The reasons that startups fail are numerous. The interest in listing them lies in their popularization in order to bring startup leaders to be aware.

  1. The absence of a product-market fit

The first reason for failure of entrepreneurial projects is the poor taking into account of market expectations. What we call lack of product-market fit.

The vitamin effect instead of the aspirin effect!

This gap between the product and the market for which it is intended is caused by the well-known phenomenon of start-up coaches, the vitamin effect instead of the aspirin effect. Indeed, if the product you bring to the market is perceived as an excellent vitamin (it’s always good to have some) instead of being perceived as an aspirin (it is essential), there is a good chance that it be not plebiscite.

It is sometimes being wrong rather than being right too soon!

The second aspect of this non-conformity is to look for the timing. Your product is sometimes early. Or it is the popular good sense that gives the word enigma: “It is sometimes wrong to be right too soon”! If your product, however useful it may be, is ahead of the needs of the target market, its adoption will be mixed. The number of customers will therefore be relatively few. Sometimes this parameter also explains why entrepreneurs consider that the narrowness of the market is a cause, or in case of cash, it is a consequence

2. The tricky question of the profitability of the acquisition – customer

The second reason for the failure of so many startups is to look for the choice of the business model and the smug optimism of entrepreneurs about customer acquisition. Most startuppers imagine that customers will struggle to get their product, and therefore, underestimate the difficulty of the step of acquiring new customers. For the surplus, they have some difficulty in determining their actual acquisition cost, on the one hand, and on ensuring that it is covered by the lifetime value.

 

This aspect of CLC coverage by the LTV, apparently obvious, is not sufficiently taken into account by the entrepreneurs of the new economy who should strive, throughout their quest for the right business model, ensure to answer 2 key questions:

 

  • Can I find a client acquisition method that is scalable?

  • Can I monetize the activity of these clients at a level that is higher than the costs of the previous question?

3. The quality of execution by the team

The weakness of the team in terms of management and strategy is the third determinant of the bankruptcy of startups. This factor generally explains the inability of startups to overcome the two previous pitfalls (poor market risk management and economic model selection) as well as the bumpy management of cash flow problems.

For this reason, it is generally accepted that team-inducing symptoms are:

 The construction of a product which obviously the market does not want, without it being perceptible by the team. Neither does this lead to corrective actions.

In addition, the go-to-market strategy is poorly designed and / or poorly executed.

It is therefore at the execution that the big teams are recognized.

Cash flow problems

On the fourth step of the podium reasons for the failure of startups include cash flow problems. This is where the good CEO comes in. Indeed , one of the most important tasks of the leader is to manage the tempo of the use of cash.

In the early stages of the life of the startup, while the product is being developed and the business model is being adjusted, the good manager must preserve the resources of the startup. From this perspective, it would be a good idea not to hedge new commercial or marketing resources inconsiderately until it is absolutely certain that the product fits perfectly with market expectations. This type of error, commonly encountered at this stage, is committed by the poor quality teams, and results in a rapid consumption of cash and generates a lot of frustration among staff.

As soon as it becomes clear that the business model is found, it is necessary to accelerate! By business model found, it must be understood that the available data make it possible to demonstrate that the cost of customer acquisition is far below the LTV (ideally the LTV must be greater than at least 3 times the CAC) and this equation will not vary with the change of scale. Finally, it must be verified that the costs induced by the ACC can be recovered within a horizon of less than 12 months.

At this stage, the CEO must use all his strengths during the battle, that is to say that all the cash he strove to save, he must use it to recruit sales people and invest in communication.

It is understood that all the causes that cause startups in the abyss of entrepreneurial failure are not exhaustively listed in this article. Our editorial bias is to list only those that have the greatest impact on the startup and which, in fine, and this is a good news, are perfectly manageable.

 

 

Maurice Coulibaly

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