What Makes So Many Startups Fail

According to the Small Business Administration, fewer than 30 percent of startups are still in business after 10 years. This is a pretty startling failure rate — over 70 percent.

Let’s take a look at some of the causes of startup failure and what can be done to improve your chances of making your new business a long-term success.

An Adequate Business Model

In a recent article for the E-Commerce Times, I discuss what I see are the essential elements of a business model and how it can protect your business from failure. As most seasoned businesspeople know, a well-crafted business model can make the difference between success and failure.

The businessperson must constantly be asking him or herself why the business is unique. In other words, why would a customer buy your goods or services as opposed to going to the competition? What makes your product or service so unique? What differentiates you from the competition?

The previous questions must be asked several times over the course of the year. If you are fortunate enough to have created a successful startup, I’m sure that your competition is “nipping at your heals” in order to emulate your success. The need to constantly reinvent yourself is absolutely critical. I give high marks to Google in that regard. They are constantly testing new waters and pushing the envelope. Apple is another such company. We never know what new product Apple is going to come up with next.

Google’s and Apple’s businesses are successful because they are constantly tinkering with their business models. They are asking themselves the right questions vis-a-vis customers’ needs and are responding to what they perceive the market wants. Obviously, they aren’t sitting on their laurels and just reaping in the revenue. That approach would be a formula for long-term failure.

Financing Your Startup

There is no question that working capital is the lifeblood of any business. Many companies have failed because they paid inadequate attention to working capital.

One of the companies that I’ve owned had a payroll well in excess of US$100,000 per week. We also had a militant union. If I were ever unfortunate enough to come up short on payday, I would have had a very serious personnel problem on my hands. What I did to ensure that my employees would always be paid on a timely basis was to have my CFO create a rolling weekly cash flow statement that conservatively predicted where we would stand each upcoming week, extending to a 90-day period. My CFO was very competent, and although my business had the usual monthly dips and troughs in cash flow, she was smart enough to anticipate those upcoming periodic shortfalls of cash and put off certain bills until we passed through those tight times of low cash flow. I never missed a payroll.

To whom does one turn when a business is short of cash? Actually, the ideal situation would be never to be caught in a tight cash flow position. However, another past article that I wrote addresses possible sources of working capital that would put your business on the right track.

Obtaining Sound Advice and Counsel

There is no question in my mind that today’s businessperson needs sound outside advice on a permanent basis. The temptation is strong to go it alone and not seek outside advice until the company finds itself in extremis. This is understandable because entrepreneurs tend to have a high degree of self-confidence. They wouldn’t be entrepreneurs without feeling confident about their abilities.

However, when self-confidence turns to hubris, as it often does, the company could be headed for disaster. That’s why it’s so important to have ongoing input and advice from competent outside sources. In many cases, it may also be important to have a board of directors, even though the company might be closely held.

I know a businessman who has been outlandishly successful. One might think that such a successful person wouldn’t dream of having an independent board of directors, given that he holds the majority of his company’s stock. But this man is rather unique and quite forward-thinking. He realizes that a properly constituted board of directors can safely guide him through his journey. And in his case, it has.

Most private companies that I’m familiar with do not have a “real” board of directors. The board oftentimes consists of a spouse, children, and some close friends who will always do the owner’s bidding. But there are many small, closely held companies that do have an independent and well-functioning board of directors.

Therefore, any entrepreneur involved in a startup should look closely at having an independent board to guide him/her and to provide counsel and guidance for the long-term success of the business. This brings me to a question which I attempt to answer in yet another article.

In that article I attempt to point out the benefits of a privately held company having a board of directors. There are few absolutes in business, but I do strongly recommend that any new entrepreneur seriously consider having an independent board of directors which will dispense objective and unvarnished advise.

The risks to starting a company on your own can be mitigated through sound planning and strategic thinking. Based on my experience, the risk is worthwhile if a good business model that is frequently updated precedes it. Success can be at your doorstep with the proper planning.

Good luck!

Theodore F. di Stefano is a founder and managing partner at Capital Source Partners, which provides a wide range of investment banking services to the small and medium-sized business. He is also a frequent speaker to business groups on financial and corporate governance matters. He can be contacted at [email protected].

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