KFA Writes

Startups Fail! Here’s how you can make sure yours doesn’t

2018-11-21

Startups Fail! Whether its 7 or 9 out of every 10, one thing is for sure, startups have horrible success rates. This does not bode well for the economy as SMEs are what drive an economy forward and indeed less so for the entrepreneurs who see their hard work, dedication, and effort go to waste as a result. But why do so many startups fail and what can they do to ensure that they have the best chance of succeeding. In this piece we’ll talk about a few basics every startup needs to cover if it wants to increase its chances of succeeding:

  1. Understand the market you’re operating in: This one seems simple, just find out what kind of business environment your business will be operating in. However, far too often entrepreneurs fail to grasp this fundamental tenet of doing business as they rely more on their own intuition and belief of how the market works rather than doing some actual research, talking to prospective customers and analyzing the social cultural complexities of their market.  This means that once they are doing business. They are ill prepared to handle unfavorable circumstances which ultimately leads them to failure. On the other hand taking your time to research how the market works might have initial cost implications but will provide much greater rewards in the long term.
  2. Vet your idea and embrace feedback: So, you have now understood the business environment you will be operating in. The next stage is to vet your idea extensively to find out whether it is worth converting into a product or service. You do this by looking at the current market, possible competitors and asking for and embracing feedback from prospective customers. You must also seek advice from domain experts if possible to make sure your idea is worth implementing. Not all great ideas translate to great products and it is better to leave an unfeasible idea behind than it is to carry it forward. Not all ideas matter! Learn to distinguish between good ones and bad ones.
  3. Hire the best people through stock options and performance based pay: As a startup you are strapped for cash and cannot afford to spend a lot of money for HR and yet you need the best people possible to carry your business forward or to even convert your idea into a product/service. This is where you can use stock options wherein you offer someone you will require extensively a percentage of your business alongside an affordable salary to work with you. This makes the other person much more likely to accept your offer and also perform very well as the growth of the company will lead to direct financial rewards for them. Similarly, you can apply the pay for performance model where a substantial part of employee remuneration is tied to their actual performance which makes sure you have much less recurring costs to worry about.  
  4. Build a product/service that people want and can use: This ties again to doing ample research beforehand and during the conception of the product and its iterations. The first idea is to build a product that people want by actually interacting with prospective customer every step of the way while designing the product and making sure its solves their problems and they are willing to pay to have the problem solved, the other part comes in to make sure that the product/service only has features that people want and can utilize easily as opposed to have a large number of advanced functions that neither people want or have any idea how to use. Doing this ensures that your product will penetrate the market much more quickly and have less complaints from the first day.
  5. Don’t try to create a highly formal structure from day one: The beauty of startups is that they are very flexible in nature and nimble enough to change course very quickly if things are not working the way they are supposed to. A formal structure hinders these abilities as there will be much more overhead to deal with when changing course as startups often do. Also, a formal structure means things will not get done initially as startups contrary to established organizations do not have fixed functions and need every employee to be able to multitask and work beyond their job descriptions. However, startup must have a delegation of responsibilities and roles nonetheless.
  6. Don’t sink a lot of capital into the business initially: Startups are volatile and have a high chance of failure which means that if you have a lot of sunk capital you’re burn rate will be too high from day one. This makes it a race against the clock to reach BEP or you will see your money run out. This is less prominent in case of established industries with high penetration from day one but for startups who intend to gain traction (a large majority) after launching their product this will be akin to a ticking time bomb. To avoid falling in this trap investments must be made only after considering market penetration and traction of the product a reasonable time after its launch.
  7. Use social media and viral marketing to market yourself: We have already established that startups have limited money and so cannot afford to market traditionally. They must use social media extensively to improve brand recall and run viral marketing campaigns akin to what one plus did initially with its invite only system to improve brand value and overall sales. However, they must be willing to open their purses from time to time for bigger outlays to capture newer opportunities which requires them parting with a good chunk of their cash to grow the business substantially.
  8. Stand by your vision and listen to customers: Even if a startup has good traction and is profitable there is always a chance that complacency kicks in and we stop listening to what our customers are saying and how the market is changing. This means you are ill equipped to deal with any changes that will come your way in the future. Similarly, not listening to customers regularly means that we will lose goodwill and business to competitors who are listening and providing product/services that are in line with the customer expectations at that time. Similarly, losing the vision for which the business had started will mean that we cannot focus on our competencies which means we are always open for attack. Hence a founder must stand by their vision and always be willing to listen to customers if they want their business to remain in good health.

If a startup were to follow these basics properly they will only have to deal with external circumstances to save or grow their business rather than succumbing to their own inefficiencies.

- Nimesh Adhikary

The Author is Research Officer of KFA Business School.

 

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