In the previous blog post, we explored some of the typical reasons that a startup fails (as originally featured in a post by David Skok from Matrix Partners). The second part of this series will help you to understand some of the reasons for startup failure, bringing a more complete understanding about the nature of failure and things to do to avoid it.
Running Out of Cash
It is important for the upper-level management to know how much cash the company has and if it is enough to take the business to the next milestone. With simply the passing of time, you don’t increase the valuation of your company. To increase the valuation, you have meet certain goals.
For example, if you owned a software company, the goals/milestones might look like the following:
- Progress from seed round valuation – remove major risk elements, such as removing technical obstacles, hiring a key team member, building a prototype and getting customer feedback.
- Once the product is finished, get customer validation.
- The product is shipping; some customers have positive feedback and have already paid for it.
- Product and/or market fit issues are mostly taken care of after the first release.
- The business model has been proven – it can acquire customers and the process can be scaled.
- The cost of customer acquisition is low and monetization of each customer exceeds the costs.
- Business has scaled but is in need of additional funding.
A common reason for startup failure due to lack of cash is that once management realizes the problem, it is already too late. The company most likely would not have reached the milestones outlined above and the company’s valuation is still low to plan for next round of funding.
It is important that management realizes when to hit the accelerator pedal on the business. When the business is still taking root, go slow on the cash expenditures—you can do this by not hiring too many new employees while you are still working on finishing the product. Make sure you have enough data to prove that business model is working and you can monetize customer at a rate significantly higher than CAC and CAC can be covered in 12 months.
It is not easy for CEOs to transition to this state in business – from counting every penny to investing aggressively ahead of revenue.
An obvious reason for a company’s failure is the mismatch between the product itself and the needs of the market. It could be an execution problem or a strategic problem – in other words it might be easier to solve or might turn out to be more complex depending on the stage of your business. It is not unusual that some iterations are required before you get a product which addresses market needs. The worst-case scenario would be that a complete revamp is required because the team did not validate the requirements from customers before building the product.
For more information, please visit: http://www.forentrepreneurs.com/business-models/why-startups-fail/
Thanks for reading, and until next time… stay WISE!
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