Entrepreneurs tend to be people who can be characterized as being rather enthusiastic. They also tend to be people who come up with creative ideas. Put those two together and you will find that entrepreneurs can get very excited about their next, life-changing idea. The startup is born, the promised land awaits.
The harsh truth, however, reveals that roughly 90% of startups fail. The only life the startup often ends up changing, is the founder’s life who has to watch his baby die. Entrepreneurs are people too, so yes, that hurts. The struggle is real.
Time to reassess why failure rates are so shockingly high. First, let us see where things go wrong. Then, we can examine why they go wrong.
Where Things Go Wrong: The Startup Lifecycle
The internet seems to have mixed ideas about what today’s startup lifecycle looks like. Perhaps it can be summed up best according to Ganesaraman Kalyanasundaram’s model (and you thought you had difficulties explaining your name to strangers on the phone?). Anyhow, the guy believes the startup lifecycle consists of three stages.
Stage One: Emergence
Here the product focus is high as the entrepreneur actually tries to prove that his product makes sense. The market is explored, marketing efforts are made, funding is mostly arranged through the entrepreneur’s own wallet.
Stage Two: Survival & Stability
By now the entrepreneur should understand the fit between his product and the market. This will allow for new market segments to be captured in order to extend the customer base. Naturally, this requires new sources of (external) funding. Yay, money.
Stage Three: Succes & Accelerated Growth
At this stage the product has matured quite a bit. Revenue streams are up and running. When you reach this stage you can consider yourself one of the lucky ones.
The three stages build on one another like a Jenga game. If the Emergence stage is unstable, the next stages will be trickier to establish, increasing your anxiety for the Jenga tower to collapse. So, unsurprisingly, most failures originate in stage 1 (and sometimes 2).
Why Things Go Wrong: Reasons For Failure
Now that we know where things go wrong, it is time to sort out why things go wrong. There are two common reasons for failure.
Reason One: Timing Is Everything
According to Bill Gross, there are five factors that influence the startup and its lifecycle. With his company, Gross built over 100 startups so the guy seems to know what he is talking about. He found that timing is the most important factor and accounts for 42% of the difference between success and failure. Think of ride-sharing companies that capitalized on the 2009 recession. For them the timing was right because their model allowed their price-conscious customers to save for a rainy day. However, many entrepreneurs try to solve a problem that they personally encounter without realizing that the market is not looking for the solution at that point in time. So, they did not properly do their market research.
Reason Two: A Lack of Good People
The team has been identified as the second reason why startups have to pull the plug. Probably we have all heard of the golden formula consisting of the hipster, the hacker and the hustler. Practically, this translates into diverse teams. So, depending on the business area, you will need a team consisting of people that are highly skilled in different areas. Teamwork actually makes the dream work. So cheesy, so true.
The other factors that Gross considered were the business idea, the business model and funding. Although many entrepreneurs believe the idea is key, the idea only turned out to be the third important differentiator between success and failure, followed by the business model and lastly the funding.
The two most important factors that distinguish success from failure (timing and people) should be addressed in lifecycle stage one.
So Speaking In Practical Terms, What Does This All Mean?
When merging Kalyanasundaram’s and Gross’ concepts, we can see something interesting happening. What? Well, the two most important factors that distinguish success from failure (timing and people) should be addressed in lifecycle stage one. The stage where most startups fail, remember? This means that when market research is performed poorly, if the timing is assessed wrongly or if the right people are not on board, the startup is likely to exit the lifecycle. The startup fails, the dream shatters, the baby dies.
Do you have a great idea and want to belong to the 10% of startups that succeed? We would be happy to help out.
About Amstel Lab
Amstel Lab partners with start-ups and scale-ups to commercialize your business. On the back of our experience, we have developed the unique Amstel Lab method: a tailor-made approach to maximize success. We test your markets, refine your product, innovate your commercial approach and execute your strategies. Any good idea is worth seeing through.
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