The conventional wisdom with entrepreneurship is that you need to be ready to weather tough times. Depending on which numbers you review, you'll find that anywhere up to 75 percent of all startups fail
It's easy to write off of these failures as the work of people who didn't know what they were doing. But when you think about how all of these small company founders thought they had a brilliant idea at the start, the numbers become more troubling. Moreover, in many cases, talented people--investors, coders, designers, experienced executives, and advisors--agreed with them. Perhaps the most sobering thought of all is that sometimes they were right--they did have a very good idea, it just didn't work out.
Unfortunately, a clever idea isn't the only thing you need to start a successful business. Great timing, a stellar management team, and even dumb luck all come into play in determining whether your business will take off or stall out. While there's no one formula for success, taking a look at some past miscues can help give us an insight into why even brilliant ideas can fail as startups.
No matter how revolutionary or disruptive your idea is, you still need a team to execute it. As entrepreneur John Rampton says about his own failed startups, "Every great entrepreneur understands that he or she can't do everything."
No matter how talented you are or diverse your skill set, if you want to start a company, you're going to need some backup. However, putting together the makings of a formidable team is more complex than just finding the most talented people you can get for the money.
A team needs to work together, and different people have vastly different styles of communication. Visual thinkers can only process things if they see them hashed out on a page or whiteboard, whereas someone who is more verbal might think they explained the project perfectly clearly over the phone. These little miscommunications can add up over time, leading to serious dysfunction down the road.
The challenge, of course, is that the people with whom you get along aren't necessarily the people who have the skills necessary to make your idea work. While things at the office might be going well, if you can't turn your idea into something that actually delivers what it promises, you're going to have problems. Working to optimize a team's skills ensure they fit together is a tall order, and it's easy to understand why many people fall short.
This is one of the biggest fears that any entrepreneur has: they have a very good idea, but it solves a problem that people just don't have. Are you barking up the wrong tree? The only way to be sure is to talk to customers and thoroughly validate your market.
The classic Febreze story is perhaps instructive here. When Procter and Gamble researchers found a chemical compound that bonded with strong odors and eliminated them, they figured they had discovered a product that could generate an exciting new revenue stream. The marketers hired to lead the charge had reams of interviews with smokers, pet owners, and even one woman who worked in animal control whose house and car had always reeked of skunk. Time and again, these people told them that Febreze had changed their lives, and so an ad campaign was greenlighted highlighting the product's odor-removing properties. Sales, however, tanked.
As P&G's marketing team scrambled to figure out what was going wrong, they interviewed a woman whose house was clean and organized but reeked of her nine cats. Even though the smell was overpowering, she didn't seem to notice. The researchers came to the horrible realization that the people who needed their product the most couldn't tell they needed it. You get used to the smells around you, even if they're overwhelming to someone else--and nobody wants to admit that their home is smelly.
The marketers' fortunes turned around when they met another woman who used Febreze every day, at the end of her cleaning ritual. They realized that associating the product with the feeling of finishing tidying up, rather than smelling a bad smell, was the key to winning a permanent place on customers' shelves. Febreze sales are now upwards of a billion dollars a year. This just goes to show the importance of listening to the market research that surprises you--not just what confirms your biases.
Since we're in the business of making money, maintaining adequate cash flow would seem like an obvious and avoidable problem. But you don't have to spend long looking up examples of failed startups from the dotcom era to find companies whose marketing strategy outpaced their capacity for growth.
My favorite example is Pets.com, which used investor dollars to make a Super Bowl ad, among many other tactics. The problem, however, was that even though they were correct that there is a huge market of pet owners looking to make their lives easier, the national shipping infrastructure hadn't yet become efficient enough to make money shipping heavy bags of food across the country. No matter what their growth numbers looked like, the basic ROI was going to be bad.
Looking at angel or VC investment numbers in the millions can give you the impression that a great idea is all you need to get off the ground, but the reality is that fundraising is time-consuming. You need to pitch your idea over and over and over and still be ready to pick yourself up off the ground and try again if those pitches don't work out.
While you're waiting to score a big check, it can be tempting to make a marketing splash to feel like you're winning the brand game. Tactics like that can work, but not planning for unforeseen expenses can leave you with an impressive brand image, but not enough cash in the bank to make payroll.
What You Can Do Right Now
Thomas Edison, Henry Ford, Elon Musk--the American dream of the brilliant inventor with a winning idea is alive and well. Unfortunately, a great idea isn't everything, and many startups fail even though their business model is proven to work. There are a few things you can do right now to avoid startup failure:
- Make sure your team has a balance of skills and compatibility.
- Keep talking to customers and look for information that goes against your expectations.
- Be honest about ROI and your potential for growth.
- Plan for the unexpected and manage your cash flow.
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