The world is buzzing with startup stories. They talk about the mixed share of successes and failures of startup companies and their entrepreneurial pursuits. However, the success of the startups is eclipsed by their global fatality rate, with 90% of startups falling within a few years of their establishment. Considering such a dismal failure rate, investors, entrepreneurs, and many others need a sneak preview of some factors in this state of agony including their complicity in startup failure.
According to my fundamental business belief, for the success of any startup, there are no specific must-dos, like strategic focus, people, operations, marketing, and finances, which are otherwise required for building a successful business model. However, investors should take specific critical additional measures, such as the proper fit of a promoter blend, the right market and product mix, and the team leading the execution strategy.
It is a no-brainer that no enterprise can prosper without a requisite resource capability in relation to people, finance, and support infrastructure; these are the key parameters to lift and sustain the business proposition. Therefore, I would reiterate that a startup should not be handled with kid gloves; generally, it needs the same yardstick that any other successful business needs.
In the context of a deeper diagnostic review of its failures, especially in the case of smaller ventures where the investment size is less than USD 5 million, there are more than a few macro factors to be analyzed that often lead to failures. We know that the startup ecosystem has numerous challenges, and the promotors, because of their experience, are often prone to mistakes that may result in fatal outcomes.
One major mistake startup promotors make while building a business plan without sound market research is failure to thoroughly research its target market sensitivities before launching its product or service. This may not address a real need or problem, leading to poor market fit and low customer adoption. Second is insufficient financial planning, a common pitfall for startups. This includes underestimating expenses, especially meeting the developmental cost of business and managing expenses; it could also be about overestimating revenue and not having a clear plan for managing cash flow.
Running out of funds due to financial mismanagement or inadequate financial knowledge of the team is, in fact, a leading cause of startup failures. There is often the team’s inability to augment resources needed to sustain the business setup and, more specifically, in the early stages to support developmental costs or to achieve a critical mass in terms of revenues to fund the operation and fund the growth capital that may include capital costs in line with business needs.
Last but not the least is poor people’s management. Building a strong, cohesive team is crucial for startup success. Entrepreneurs often neglect hiring the right people or fostering a positive company culture. One common issue I have observed in this context is frequently picking partners or a founding team that may not share the same vision or values, but they jostle in to join the team with a distorted vision, mesmerized by a billion-dollar dream.
How often have I seen them distribute equity like a bounty share with a limited understanding of the sensitivities of shareholders needed chemistry and corporate governance? Analyzing many startup business plans, we found a lack of complementary skills that help team building, ultimately hindering a startup’s growth and ability to meet challenges.
Apart from these, one significant reason I saw in this mayhem is the role and level of collaboration from their investors. Their complicity in startup failures is a pervasive factor in their ordeals. In more than five startup delinquencies that I have witnessed close hand, the investors turn out to be the real villains.
Sometimes, it is their apathy in failing to do proper due diligence at early stages or their lack of proactive engagement at the board level, or at times; it is their board level engagement, what we call board activism, that could lead to problems, often cornering entrepreneurs and choking their needed autonomy. I want to reiterate that investors are crucial in funding startups and providing the necessary resources for their growth. Their role in working with the promoter can bolster its prospects and break the company if they fail to stick to specific investor discipline.
Several reasons exist for concern, particularly regarding non-institutional investors in early startups.
Firstly, investors often fail to conduct proper due diligence on the business plan and the team’s capability, failing to make informed investment decisions; they usually end up supporting startups that are not viable or sustainable in the long run. In these, it is either an emotional decision based on gut feeling or relying on a savvy sales pitch that does not require due diligence. Especially in smaller ventures where the funding is usually lower with a ticket less than USD 5 million, investors’ decisions are made based on high-risk-reward proposals with delinquency expectations, so does it matter if it fails?
Even a fainter success probability can upstage the underlying risk factor. It is not a healthy approach. Sometimes, promoters, some of whom are called angel investors, come in with rushed conclusions. Not all uphold the principles of prudence while making investment decisions. They must adhere to continued guidance and close investment monitoring, not leaving them with quarterly updates. I maintain that they should know that early entrepreneurs who are promoters of these ventures sometimes lack experience and foresight, making them prone to errors in their judgment.
Secondly, sometimes, investors command significant influence and control over startups’ strategic direction. If they prioritize short-term gains or push for aggressive growth strategies without considering the long-term sustainability of the business, this can lead to the startup’s downfall. Additionally, promotors come under undue pressure from startup investors to generate quick returns, leading to decisions prioritizing short-term profitability over long-term success. This can result in startups compromising essential factors such as product quality, customer satisfaction, or ethical practices.
Furthermore, investors sometimes add to promotors’ woes by failing to provide adequate guidance, mentorship, or support to the entrepreneurs. Startups often face challenges and need guidance in navigating the complexities of the market. If investors fail to provide the necessary support or recognize and address issues early on, it can significantly impact the startup’s chances of success.
In conclusion, investors play a crucial role in the success or failure of startups. Their decisions, actions, and level of support can significantly influence the outcome. When investors fail to exercise due diligence, prioritize short-term gains, or neglect their responsibilities, they can be held accountable for their complicity in startup failures.