How to Prevent Too Many Startups from Failing
The topic is a hot one. Over the past few years we have read, watched and listened to just about everything about startups: articles, books, events, conferences, seminars, university courses. Yet there is one aspect that is still far too often overlooked.
Companies in transition typically experience low success rates, and this is particularly true for startups in the post-incubation/acceleration phase. Ninety percent of startups die precisely at this stage, bringing with them a massive destruction of human, financial and creative resources. Of course, one could say that part of this has been 'invested in building the founders' experience', but the price paid is still very high.
In Italy, formal failure rates are lower because there is a stronger tendency to keep companies alive on paper, but if we include in the definition of failure the inability to achieve the stated objective, then we are back to the global average.
A quick look at existing evidence
- Y Combinator, one of the most important U.S. accelerators, states that the failure rate of the startups it has incubated is 88%.
- The U.S. National Venture Capital Association estimates that 40% of funded companies fail, 40% generate only modest returns and 20% or fewer deliver significant returns.
- Professor Shikhar Ghosh of Harvard analyzed 2,000 startups that received VC funding between 2004 and 2010. Three quarters of those startups failed to return the full amount of capital invested. In more than 30% of cases, the entire capital was lost.
- The Kauffman Foundation, in a 2012 report, argues that over the previous ten years VC funds achieved, on average, lower returns than small companies listed on the stock market.
- According to Infocamere (July 2016), out of 2,860 Italian startups with filed financial statements, half generated just over 20,000 euros in revenue. It is as if for every euro of output, only 15 cents of value added were created. This is lower than the 21 cents generated by limited liability companies. If we then look at the register of 'innovative startups', we realize that many of them have nothing truly innovative about them, as described by Wired (http://www.wired.it/economia/start-up/2016/03/18/startup-innovative-italia/), but as Lucarelli would say, that's another story.
- According to research by the Startup Genome project, a large database of startups, founders and investors around the world, 72% of startup founders discover that their initial intellectual property does not constitute a real competitive advantage, and above all, that startups need two to three times more time than most founders expect in order to validate their market.
- According to the French Agency for Business Creation (APCE), 70% of failures are caused by poor or badly conducted market research, and only 10% of entrepreneurs actually rely on proper market research.
The most discussed piece of research in recent months is the one carried out by CB Insights which, by analyzing 101 failed startups – later extended to a sample of 178 companies – identified the main causes of failure. At the top of the list is precisely the lack of a real market need, cited in 42% of cases.
To give a sense of scale, the second most frequently cited factor is running out of cash, with 29% of mentions, but it goes without saying that if you build something that doesn't sell, you won't generate revenue. Then come other factors such as the team, additional financial issues, and the business model, which is listed separately. But once again, if you are not meeting a real market need, you will not sell; consequently, the business model is pure fantasy.
At one of the many startup events I have attended, I happened to hear the story of a young man in his early twenties who thought he had developed the app of the century, only to liquidate the company within two years. He advised the audience to carry out market research before 'starting a business', but I am not entirely sure he really understood what those words meant.
The moment of truth
After identifying a great business idea, it is essential to find out whether your product or service is able to meet customer needs and support sustainable growth. This process is known as market research.
Market research allows you to really understand your customers, their wants and needs, so that you can satisfy them and grow the business over time.
Some people think that creating a startup simply means turning an idea into an app and seeing if anyone downloads it, while completely ignoring why anyone should download or buy it, where the value proposition lies, who the customers are, what the markets and channels are, which key resources need to be acquired—in short, all questions that can be answered through market research.
Market research offers many benefits, first and foremost increasing revenue together with profitability, and it helps companies to:
- choose which products or services to launch on the market;
- prioritize operational and marketing activities needed to acquire and retain customers;
- deploy the sales force and operations efficiently on the processes that are most critical for the company;
- define the most effective communication to build a positive and consistent image of the company and the brand.
It is also the first step in drafting the document that will allow you to present your project to potential partners and financiers: the business plan.
Only after this step will it be possible to build assumptions about the potential market, revenues and profitability, to make an initial assessment of distribution channels and business strategy and, contrary to what many people think, the rules are exactly the same for those who operate in the digital space as well.
https://www.bloomberg.com/news/articles/2017-03-08/airbnb-explores-expansion-in-long-term-home-rentals
It is worth remembering, especially at a time when so many young people aspire to create the next unicorn, that the market is not built by the entr
It is worth remembering, especially at a time when so many young people aspire to create the next unicorn, that it is not the entrepreneur who builds the market, but the customers, with their needs, desires, expectations and lifestyles.
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