Why Startups Fail

Sep 10, 2019 by Roger Scherping

In 2018 CB Insights published the top 20 reasons why startups fail. They said there is rarely just one reason for startup failure, but they found the 20 most common reasons that startups don't make it. At ProjectionSmart we reviewed that list to determine how many of these reasons are addressed when the entrepreneur uses the Startup financial model and the Proof Plan.

What we found was that the top nine most common reasons why startups fail are all addressed in the the Startup financial model and the Proof Plan. Our tools force the entrepreneur to think through their business in detail and ensure that he or she focuses on what's important. Thorough planning increases your chance of succeeding. That's what we're all about at ProjectionSmart.


Reason #8 was Poor Marketing. Startups that did not have -- from day one -- a defined plan for marketing their products were less likely to succeed. You need to know from the beginning how to generate interest in your product and turn leads into customers. The Proof Plan forces you to think through and document your marketing plan before you launch your business. Question 11 asks who exactly your target customer is, as that's the foundation of a marketing plan. Questions 13 and 14 then ask what tactics you will use to reach them and what your top marketing messages to them will be. The lesson here is don't start without a clear marketing plan!

Reason #7 was Product Without a Business Model, and reason #5 was Pricing/Cost Issues. An entrepreneur needs to have a solid understanding of the numbers of their business before they launch. To that end, the Startup financial model leads the entrepreneur through creating a complete 2-year financial model for their business. By using Startup they will understand how the business will grow and at what point it will begin to make money. They will understand what their pricing needs to be to cover their overhead and enable them to make a profit. If you start your business without understanding your numbers, then you're just hoping that it all works out.

Reason #4 was Get Outcompeted. As a new entrant in the market, startups need to be very well aware of their competition. Question 12 of the Proof Plan asks the entrepreneur to name their main competition and list what they know about them. What are their strengths? What are their weaknesses that can be exploited? How do your products differ from theirs? Your business planning must include a thorough look at your competition and a plan to beat them, and the Proof Plan forces you to confront this critical question.

Reason #3 was Not the Right Team. It is critical that a team consist of individuals who together have all of the skills necessary for success and that this team be in place right from the start. Questions 18-21 of the Proof Plan are all about your team. You need to document who on your team will handle marketing, finance, management, and any other critical roles, and then list their qualifications for those roles. These team question force you to address your team makeup right from the start.

Reason #2 was Ran Out of Cash. This one is no surprise. Startups may run out of money because they didn't plan for a ramp up in sales or for the period of time before they reach positive cash flow. The Startup financial model is the best way to ensure you don't run out of money. As a part of your 2-year financial model, Startup will calculate your startup costs and your anticipated negative cash flow and won't let you continue until you say where your working capital will come from and show that you will have enough to be successful. Startup will help you assess just how much cash you will need so that you don't quickly run out of cash.

We'll combine the last three reasons. Reason #1 was No Market Need, reason #6 was User Unfriendly Product, and reason #9 was Ignore Customers. These concerns are all addressed by the Proof Plan. In fact, they are in the very name Proof Plan. No one should start a business until they have PROOF that their business will succeed. Question 5 asks you to provide proof of your sales projections. Question 11 asks for proof that you understand who your target customer is. Question 14 asks for proof that your marketing messages will be effective. Question 15 asks for proof that your customer acquisition plan will work. Question 17 is about collecting proof from your satisfied customers in the form of reviews, references and referrals. And the questions about your team ask for proof that they can successfully handle their roles. The Proof Plan continually pushes you to not just state what you believe, but to PROVE it. This proof can come from actual sales, prior experience, customer interviews, market studies, purchase orders, customer testimonials, etc.

The Startup financial model and the Proof Plan will ensure that you're ready to start your business. These simple-to-use tools will ensure that your numbers are sound, your team is solid, and that you have PROOF that your new business will succeed.

If you have any questions, email me. I'd love to hear from you.

 

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