As they prepare to start out, all entrepreneurs are sure that they are on to the next big thing since sliced bread. They are also equally sure that their venture would become really huge in no time and that they themselves would be the next Warren Buffet (in case you did not notice, investment guru Buffet has replaced Bill Gates at the top of the list of the wealthy).
Unfortunately, nine out of ten startups fail to make it big. They close down, get bought out, or remain really small forever. Getting bought out is okay in many cases, and remaining small is also not a bad deal. The real show-stopper, then, is the prospect of closing down. What are the most common reasons for startups closing down, and how can you circumvent them?
1 Your idea is stolen
Ask anyone wanting to start out and they are sure to tell you that the key to their success is their idea. All of them believe that their idea is so unique and so ground-breaking that many are afraid to discuss the idea with anyone, least it is stolen. In essence, they fear failure from someone stealing their idea.
You only need to look around to understand that this is one of the biggest misnomers about entrepreneurship. Let us, for the moment, accept that your idea is indeed ground-breaking. Assume that you have also kept it a grand secret and have come out with your product or service. What next? How much time will it take for a competitor to come up with a better product, learning from the mistakes you made? If your product is hot, how much time will it take for someone in China to mass-produce it? If you product is a medicine, how many months before someone right here in India comes out with a generic?DARE/
It is not the idea, but the execution that makes the difference
Being a first-mover is not always the best. Learning from others who went before you helps
If you look around, you will find enough evidence that the first-mover or original inventor advantage does not always work out the way it has been advertised. Consider the GUI for today’s computer. It was created at Xerox Corporation’s Palo Alto Research Centre, but was made popular by Apple in their Lisas and Macs. But who really made money out of the GUI? Microsoft, many years later with Windows, and that too after many attempts! While on the topic of technology products, let us look at a few more examples. Who came up with the idea of a portable music player? Who created the first portable music player? Who cares? But who made the most money off portable music players? One of the last entrants in the field—Apple. Who came up with the first cellphone? Motorola. Who is lord of the cellphone business? Nokia. Or is that Apple? Where is Motorola now? Struggling.
The often held belief that letting your idea out is a stepping stone to failure is wrong. It is not the idea, but the execution that matters. And there, you need to learn from the successes and mistakes, particularly the mistakes of others who went before you. Nanos gigantium humeris insidentes (Successful ones are dwarfs standing on the shoulders of giants).
2 You got it wrong
This one is a serious issue and is faced by many startups. You start off with a wonderful idea and after turning your blood to sweat and vapor, realize that things did not quite work out as planned. The limitations could be simple, like you are not able to get components of the exact precision that you want, or staggering, if, for instance, you made a basic blunder in your calculations or assumptions that was revealed only in the later stages. I know of this Indian company that set up a huge manufacturing facility based on published figures of market size. They wanted a 10% market share. A year later, the publisher issued an erratum. There was a mistake in their figures; there was an extra zero! So, here was the company, saddled with a plant that virtually doubled the world’s production capacity! That plant could never produce good results. Luckily, the company has other product lines and has survived. You may not be so lucky.
There could also be market readiness issues or limitations in delivery mechanisms. The entire dotcom bust of the two thousands can be attributed to Internet technologies and bandwidth at the customer end not being ready.
Transporting fresh vegetables used to be a nightmare till a few years back. But with better roads, many businesses are now coming up around the concept of transporting fresh fruits and vegetables across the country.
What is the way out of getting trapped here? Stringent and frequent reality checks are the only answer. At the concept stage, do not make sweeping assumptions. Get your basic figures of market size, technology availability and costs right within reasonable limits (plus or minus fifteen to twenty percent). Cross-check these numbers thoroughly, and more importantly, recheck them frequently.
Remember the fable about the team that drowned because the person who estimated the depth of the river they had to cross measured only along the edges and not at the middle. If your business has come about as a result of some market feedback, like, for example, from a market survey, recheck to ensure that the sampling and the interpretation is correct.
3 Takes longer than planned
Yet another regular in the list of show-stoppers. This happens because of a number of reasons including that the complexities were not fully understood in the beginning. But an even bigger problem is when the founders fall in love with the product and tinker around for ages trying to add one more cool feature or trying to make it perfect.DARE/
Work with a clear road map
Budget for extra time right at the planning stage
Drop features that will throw the whole schedule out of sync
The first problem is easy to manage. First of all, budget for more time than you think it will take. But how much do you overbudget? Those who have been there and lived through that say that it would be wise to budget for anywhere from 25 to 50% more time than you originally thought it will take, depending on the scope and complexity.
The second part, of going on and on has a very difficult solution. Do not fall in Love with your idea or product. I know that this is easier said than done. But that is what happens. We get so enamored by our own idea that we refuse to let it go. We become its muse and forget the passage of time even as we contemplate ever-so-minor changes to it.
Perhaps we need to learn from Google, which releases its products for use with a beta tag. Google continues these beta runs for ages. For example, Gmail ran as beta for three years from 2004 to 2007! Think of what would have happened if the engineers and founders at Google had waited till all aspects of the product were final?
The way to handle this is to break down your project into clear activities and milestones and (particularly if you have some project management exposure) work out how much slack you can afford to take at each point. Having someone else (a co-founder or even an employee) sound alarm bells on slippages is a good idea.
4 Competitor releases free equivalent
Some time back I was talking to the CEO of a successful IT company. One thing led to the other and I asked him about his past. Suddenly, he went all nostalgic; turns out that this was not his first venture. The original effort died a brutal death when the large competitor he was going to take aim at released a software similar to his for free, just weeks before his planned launch. He was lucky in being able to pick up the threads and start afresh and make a success out of the second attempt.
This is a problem that many think is unique to the software industry. But it can happen in various forms in other industries also, where the competitor reduces prices to rock bottom just before you launch.
So, how do you handle this situation if it happens?
Frankly, this is a tough one. The best recommendation we came across was to cut your losses immediately and move on to a plan B, if you have one.
5 One-man-shows don’t work
The other day, a budding entrepreneur was discussing his project. He had his idea and product architecture ready. He even knew what components he needed. About a year back, he started working on it even as he kept his day job. Very soon he figured out that he could not do the full thing himself. So, he broke the components into different contracts and handed them out to various sub-contractors—other individuals like him.
Great way to get started off, but no way will he be able to sustain it. Very soon he will find out that managing these contractors is a full-time job in itself. Then he will find out that combining all these parts into the product; making them work with each other is yet another full- time job. And then he will have to go looking for more contractors, he will have to search for funding, he will have to work on marketing plans and so on and so forth.
There are very few businesses where a one-man-show can pull along and grow for long and they are either in the show business or in sports. If you are not an ace actor or a sportsman, and in most cases even if you are one, you will need a team that will help you to achieve your goals, and to grow big.
One-man-shows usually collapse from sheer exhaustion. So the faster you get a team in place, the better it is for your dreams.
Another version of the one-man-show is where the team is kept too small, because the founder does not want to give up control or because of fears of quality being compromised. While this does not lead to the business closing down, it does curtail its ability to scale.
6 Co-founders fail to get along
This one is deadly. You have a brilliant idea, you have a solid business plan, you even have a brilliant team. The only problem is that the top team can’t get along. Too many ego clashes, too many instances of my-way-or-the-highway!
Some differences of opinion are bound to happen as people come together to work. An occasional spat is also not a bad thing, as long as all of you can put it behind you once the steam has been let out and you get back to work. But if these get too frequent or irreparable, then it is better to part ways than to continue. Before things get too bad, maybe you can even opt for professional help to get the interpersonal issues sorted out. A clear exit plan for the co-founders is a good thing to have as part of your agreement so that such an exit, where unavoidable, is as painless as possible.
Worst of the worst is when the leader—you—are the cause for all the trouble. Like in the kids’ teams, where the owner of the cricket bat gets away with tantrums, you may get away with a few extra ones, but it is best if you do not push your luck all that hard.
7 Can’t afford key skills
Misery. You need a specific niche skill without which your offering is incomplete and that particular skill is not available to you or is too costly to afford.
In 1983, Apple, which was looking for someone with a good marketing background, made an offer to John Scully, who was then the President of Pepsi-Cola USA. The legendary offer had two parts—the first and the often-quoted one is the challenge from Steve Jobs, the co-founder—“Do you want to spend the rest of your life selling sugared water or do you want a chance to change the world?” The not-so-famous part is the pay package that was on offer. A million dollars a year—in 1983—plus a million dollar joining bonus, plus a million dollar golden parachute option (benefits if employment is terminated) plus 3.5 lakh shares in the company, plus the difference in cost to buy a house in California.
Depending on how critical the skill you are looking for is, and how the demand for that skill in the market is, you need to offer a challenging deal to the candidate. And as was the case with Apple, it is not just the money or just the challenge that did the trick. It was the combination.
8 Markets do not accept your product
The idea was yours, the passion was yours, the belief was yours and the execution was yours. What if nobody has any use for it? Sounds crazy? Seriously, more products and companies fail because they have no relevance to the market than for all the other reasons. Another reason is that they are overpriced for what the market can bear.
All that I can say here is that you would be foolish not to adapt to market realities and to create a product in the confines of an ivory tower. One of the reasons startups (and most others) shy away from market research is because of the high costs. Market research need not be all that costly. There are methods that are fairly cheap or even cost less. Methods like Delphi (asking a few experts) or dipstick surveys are fairly quick and easy to execute, while remaining easy on the pocket.
9 Markets change
How many of you remember the medical transcription business? It was the forefather of the current BPO business. In the not-too-distant past, it was growing faster than anything around. And then, one fine morning, poof! It collapsed. What happened? Technology changed. Voice recognition systems became more accurate. Compliance issues changed. New rules like the HIPAA (Health Insurance Portability and Accountability Act of the USA) came into being, market dynamics changed and all these together pulled the plug on the entire business.
Many companies just wound up. And the few that survived today bear no resemblance to the original medical transcription agencies that they once were.
Market changes and technology changes are part of the business cycle and like the buggy whip company immortalized in marketing folklore, you need to change your business to be able to survive and prosper.
The Tabulating Machine Company became Computing Tabulating Recording Corporation in 1911. CTR became International Business Machines and that is now IBM. The PC drove the typewriter companies out of business. Remember Remington Rand that had a 75% market share for typewriters in the country? Remember the song Video Killed The Radio Star?
The lesson is simple. Those who change with times survive and prosper. Those who don’t, become a footnote to history.
10 Money runs out
Money running out is another standard reason for many startups to shut down even before their products have seen the light of the day. Ninety-nine out of every hundred startups get their financial estimates wrong. They usually go conservative in estimating the costs (particularly the marketing and market development costs) and get too aggressive on income figures. As a result, moneys run out way too fast.
Once a business plan is made and approved (by the funding agency) most entrepreneurs would like to forget its very existence and are reluctant to make any changes to it. The business plan is not the Ten Commandments written on stone. As the business environment changes and as you get a better understanding of the business, change the business plan, at least for yourself.
Along with making realistic or even conservative estimates, one should bear in mind Narayana Murthy’s advice in the very first issue of DARE. “In services, two principles are very important. Have an idea which is so good that the customer is willing to pay advances. Secondly, create milestones every month so that there is a steady cash flow. If it is a product idea, then obviously you need venture capital.”
One variant of this is the economy going bad and the promised money not coming in. This is what we are going through right now. Many a startup has had its funding plans deferred or cut down significantly. Good old belt-tightening is the medicine that the doctor ordered.
11 You give up
We started off with the sobering thought that nine out of ten startups will not make it big. What if yours is one of the nine? Do you give up?
It might be worth our while to remind ourselves of those immortal words from the Bhagawad Gita:
Yada yada hi dharmasya, glanir bhavati bharatah
Abhyutthanam adharmasya tadatmanam srijamyaham
Paritranaya saadhunam vinshayacha dushkritam
Dharma sansthapanarthaya sambhavami yuge yuge
(Whenever and wherever righteousness is in danger; and the unjust rises its head; I manifest myself
To protect the right and to destroy the wrong; to reestablish righteousness, I happen millennium after millennium)
If God has to take rebirth again and again to successfully complete his objective, who are we, mere mortals, to give up after one try, or two for that matter? If you happen to fall in the nine that do not make it big, there is no need to lose heart. Try again.
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