Why start-up fail ?

Reason 1: Market Problems

A major reason why companies fail, is that they run into the problem of their being little or no market for the product that they have built. Here are some common symptoms:

    There is not a compelling enough value proposition, or compelling event, to cause the buyer to actually commit to purchasing. Good sales reps will tell you that to get an order in today’s tough conditions, you have to find buyers that have their “hair on fire”, or are “in extreme pain”.   You also hear people talking about whether a product is a Vitamin (nice to have), or an Aspirin (must have).
    The market timing is wrong. You could be ahead of your market by a few years, and they are not ready for your particular solution at this stage. For example when EqualLogic first launched their product, iSCSI was still very early, and it needed the arrival of VMWare which required a storage area network to do VMotion to really kick their market into gear. Fortunately they had the funding to last through the early years.
    The market size of people that have pain, and have funds is simply not large enough


Reason 2: Business Model Failure
As outlined in the introduction to Business Models section, after spending time with hundreds of start ups, I realized that one of the most common causes of failure in the start up world is that entrepreneurs are too optimistic about how easy it will be to acquire customers. They assume that because they will build an interesting web site, product, or service, that customers will beat a path to their door. That may happen with the first few customers, but after that, it rapidly becomes an expensive task to attract and win customers, and in many cases the cost of acquiring the customer (CAC) is actually higher than the lifetime value of that customer (LTV).

The observation that you have to be able to acquire your customers for less money than they will generate in value of the lifetime of your relationship with them is stunningly obvious. Yet despite that, I see the vast majority of entrepreneurs failing to pay adequate attention to figuring out a realistic cost of customer acquisition. A very large number of the business plans that I see as a venture capitalist have no thought given to this critical number, and as I work through the topic with the entrepreneur, they often begin to realize that their business model may not work because CAC will be greater than LTV.

The Essence of a Business Model
As outlined in the Business Models introduction, a simple way to focus on what matters in your business model is look at these two questions:

1.     Can you find a scalable way to acquire customers
2.     Can you then monetize those customers at a significantly higher level than your cost of acquisition

Thinking about things in such simple terms can be very helpful. I have also developed two “rules” around the business model, which are less hard and fast “rules, but more guidelines. These are outlined below:
The CAC / LTV “Rule”

The rule is extremely simple:

    CAC must be less than LTV

    CAC = Cost of Acquiring a Customer
    LTV = Lifetime Value of a Customer

To compute CAC, you should take the entire cost of your sales and marketing functions, (including salaries, marketing programs, lead generation, travel, etc.) and divide it by the number of customers that you closed during that period of time. So for example, if your total sales and marketing spend in Q1 was $1m, and you closed 1000 customers, then your average cost to acquire a customer (CAC) is $1,000.

To compute LTV, you will want to look at the gross margin associated with the customer (net of all installation, support, and operational expenses) over their lifetime. For businesses with one time fees, this is pretty simple. For businesses that have recurring subscription revenue, this is computed by taking the monthly recurring revenue, and dividing that by the monthly churn rate.


Because most businesses have a series of other functions such as G&A, and Product Development that are additional expenses beyond sales and marketing, and delivering the product, for a profitable business, you will want CAC to be less than LTV by some significant multiple. For SaaS businesses, it seems that to break even, that multiple is around three, and that to be really profitable and generate the cash needed to grow, the number may need to be closer to five. But here I am interested in getting feedback from the community on their experiences to test these numbers.
The Capital Efficiency “Rule”

If you would like to have a capital efficient business, I believe it is also important to recover the cost of acquiring your customers in under 12 months. Wireless carriers and banks break this rule, but they have the luxury of access to cheap capital. So stated simply, the “rule” is:

    Recover CAC in less than 12 months


Reason 3: Poor Management Team

An incredibly common problem that causes startups to fail is a weak management team. A good management team will be smart enough to avoid Reasons 2, 4, and 5.  Weak management teams make mistakes in multiple areas:

    They are often weak on strategy, building a product that no-one wants to buy as they failed to do enough work to validate the ideas before and during development. This can carry through to poorly thought through go-to-market strategies.
    They are usually poor at execution, which leads to issues with the product not getting built correctly or on time, and the go-to market execution will be poorly implemented.
    They will build weak teams below them. There is the well proven saying: A players hire A players, and B players only get to hire C players (because B players don’t want to work for other B players). So the rest of the company will end up as weak, and poor execution will be rampant.
    etc.

Reason 4: Running out of Cash

A second major reason that startups fail is because they ran out of cash. A key job of the CEO is to understand how much cash is left and whether that will carry the company to a milestone that can lead to a successful financing, or to cash flow positive.
Milestones for Raising Cash

The valuations of a start up don’t change in a linear fashion over time. Simply because it was twelve months since you raised your Series A round, does not mean that you are now worth more money. To reach an increase in valuation, a company must achieve certain key milestones. For a software company, these might look something like the following (these are not hard and fast rules):

•     Progress from Seed round valuation: goal is to remove some major element of risk. That could be hiring a key team member, proving that some technical obstacle can be overcome, or building a prototype and getting some customer reaction.

•     Product in Beta test, and have customer validation. Note that if the product is finished, but there is not yet any customer validation, valuation will not likely increase much. The customer validation part is far more important.

•     Product is shipping, and some early customers have paid for it, and are using it in production, and reporting positive feedback.

•     Product/Market fit issues that are normal with a first release (some features are missing that prove to be required in most sales situations, etc.) have been mostly eliminated. There are early indications of the business starting to ramp.

•     Business model is proven. It is now known how to acquire customers, and it has been proven that this process can be scaled. The cost of acquiring customers is acceptably low, and it is clear that the business can be profitable, as monetization from each customer exceeds this cost.

•     Business has scaled well, but needs additional funding to further accelerate expansion. This capital might be to expand internationally, or to accelerate expansion in a land grab market situation, or could be to fund working capital needs as the business grows.

What goes wrong
What frequently goes wrong, and leads to a company running out of cash, and unable to raise more, is that management failed to achieve the next milestone before cash ran out. Many times it is still possible to raise cash, but the valuation will be significantly lower.
When to hit Accelerator Pedal

One of a CEO’s most important jobs is knowing how to regulate the accelerator pedal. In the early stages of a business, while the product is being developed, and the business model refined, the pedal needs to be set very lightly to conserve cash. There is no point hiring lots of sales and marketing people if the company is still in the process of  finishing the product to the point where it really meets the market need. This is a really common mistake, and will just result in a fast burn, and lots of frustration.

However, on the flip side of this coin, there comes a time when it finally becomes apparent that the business model has been proven, and that is the time when the accelerator pedal should be pressed down hard. As hard as the capital resources available to the company permit. By “business model has been proven”, I mean that the data is available that conclusively shows the cost to acquire a customer, (and that this cost can be maintained as you scale), and that you are able to monetize those customers at a rate which is significantly higher than CAC (as a rough starting point, three times higher). And that CAC can be recovered in under 12 months.

For first time CEOs, knowing how to react when they reach this point can be tough. Up until now they have maniacally guarded every penny of the company’s cash, and held back spending. Suddenly they need to throw a switch, and start investing aggressively ahead of revenue. This may involve hiring multiple sales people per month, or spending considerable sums on SEM. That switch can be very counter intuitive.



Reason 5: Product Problems

Another reason that companies fail is because they fail to develop a product that meets the market need. This can either be due to simple execution. Or it can be a far more strategic problem, which is a failure to achieve Product/Market fit.

Most of the time the first product that a start up brings to market won’t meet the market need. In the best cases, it will take a few revisions to get the product/market fit right. In the worst cases, the product will be way off base, and a complete re-think is required. If this happens it is a clear indication of a team that didn’t do the work to get out and validate their ideas with customers before, and during, development.

Why scaling up is tough

Scaling up, or taking a start-up to the next level, is one of the biggest challenges for entrepreneurs. The first hurdle that can hold them back is complacency. When they begin, many entrepreneurs have fire in their bellies that drives them to innovate, aspire and take risks, but as they reach a certain level of success, this fire often dies out. The business fails to move to the next level. It is, therefore, essential for them to rekindle the fire if they want to rise further.


A number of start-ups are also unable to make the transition because of differences between partners who initiated them. Partners are usually people with much in common, who developed strong bonds while at a campus together, or at an earlier workplace where they were employees. Yet, once the business reaches a certain level, there is often a diversion of goals.


One partner may want to sell the business and keep the cash, another may want to remain at the same level, while a third may want to grow. It is essential for partners in a start-up to have congruity of purpose. Another bottleneck is absence of delegation. When a company starts, the entrepreneur behind it often performs multiple roles, from chairman to caretaker. He takes a wide range of decisions from technical ones to marketing, from production to administration. His team too depends on the entrepreneur for every kind of decision. At a later stage, this hampers growth. The entrepreneur soon finds his knowledge inadequate to tackle challenges, or faces time management problems, which hold back the company.


To achieve genuine delegation of responsibility, a second rung of leadership has to be created and empowered. Till this is done, businesses cannot scale up. Entrepreneurs often feel that by delegating they are giving up control. In reality, they are helping the business to bloom.



There are three more challenges. When a small number of people are involved, as is usually the case with start-ups, they all share the same vision, beliefs and goals. But once a company starts growing, a proper system needs to be worked out so that everyone working for it remains on the same page. Defining a clear vision and mission becomes very important, but this is often not done.


There is also the pitfall of execution. In entrepreneurial companies, much work gets done without being formally recorded. Inherently, a small group shares more information and has greater clarity about the company's plans than the rest. But as the company grows, such informality has to be replaced by processes, technology and internal communication.


Resources - both money and people - present their own challenges. Entrepreneurs often bootstrap their companies and use the same philosophy for scaling up. This needs to change. Execution plans must be adequately funded for people to execute and deliver as expected. The key to scaling up is to scale up the organization's capabilities. Once this is done, the scaling up in terms of performance, revenue and profitability will automatically follow.

Common Challenges Entrepreneurs Face and How to Prepare For Them

The road to entrepreneurial success can be a long and daunting one. In this article I’m going to share with you four challenges you’re likely to face so that you can be prepared for them, and can even embrace them, if they show their heads during your journey.


Challenge: Down in the Doldrums

According to several studies, entrepreneurs are more prone to depression and anxiety than the average company employee

Rob Emrich in response to a Brad Feld blog post wrote: “I think there is correlation between the type of people who become entrepreneurs and those prone to depression. I also think most entrepreneurs know that the daily ups and downs and constant uncertainty can easily cause and reinforce a tendency toward depression.”

When you ask most seasoned entrepreneurs how to deal with this the response is almost always the same, “make sure you surround yourself with supportive people that will be there for you and can help you get to where you want to go.”


Challenge: Overestimating

Another challenge entrepreneurs face is overestimating their initial success. You might read an article about another entrepreneur and believe that just because they sold their company in 1 year and made millions that you can do the same. When I first started FreshGigs.ca I overestimated what our sales would be in the initial months. Only after I spoke with a mentor at that had worked in the same industry did I get a realistic view of how to think about our sales growth.


Challenge: Focus

One of the biggest mistakes entrepreneurs make in their early days is trying to be all things to all people. They attempt to sell their product or service to too wide of a market. When you’re building your business, especially early on, it’s important that your marketing is grounded in a strong foundation with a clear focus on who your ideal clients are; and that you establish and work towards dominating that marketplace before moving on to others.

Entrepreneurs also face another challenge in this area. They focus on the wrong things. They spend too much time building their product without validating that the marketplace wants, needs and will actually pay for it.


Challenge: Passion and Purpose

Many entrepreneurs choose an oxymoronic approach to business. They decide to start their own company because they want unlimited income potential, to be their own boss and holder of their own destiny. Yet as they work on building their business they realize they lack passion for what they’re doing. If you’re going to be spending 10+ hours a day building your business, writing articles, doing research, and attending trade shows in the industry you’ve chosen, you’d be well served to ensure it’s one that you’re passionate about.


If you don’t enjoy the work you’re doing you’ll find it hard to get up off the ground the first time you get knocked down. And all entrepreneurs get knocked down at one time or another. The more passion and purpose you have for your business, the more motivated and energized you’ll be to work on it.


I can’t think of one entrepreneur that has been immune to these challenges. Know that you know to expect them you’ll be ready to deal with them and well positioned to stay on track and keep growing your business.

Challenges in entrepreneurship

The entrepreneurship landscape in the region is booming. There are bigger investments, more startups, more innovative ideas and more courageous entrepreneurs. “It is an exciting time to be an entrepreneur in the MENA region,” as Mike Butcher, Editor At Large at Tech Crunch, said while moderating the panel on ‘Entrepreneurship and Investing in MENA’ at ArabNet Beirut 2014, Forum Day 1. The panelists included Annie Hazlehurst, Founder and CEO at Faridan; Henri Asseily, technology venture capitalist; Ihab El-Fouly, Co-founder at Tamkeen Capital; Numan Numan, Managing Director at 212; and Stephanie Holden, Head of Strategy and Business Development/Head atMBC Ventures, MBC Group.

The lively discussion on the stage recognized the rapid growth in the entrepreneurship scene and expressed some excitement. However, the seasoned players in the field spoke of difficulties and obstacles that are still holding the market back from reaching its potential.

1. Lack of funds
Despite the notable growth in investments, funds invested in start ups are still small. Talented entrepreneurs still struggle with raising funds and gathering interest in their projects. SME’s have even bigger problems with raising growth funds after starting, having to limit their capacities below their potential.

2. Lack of a robust ecosystem

The ecosystem for entrepreneurship in the region is still struggling. Businesses and entrepreneurs are faced with mundane, unforeseeable obstacles because they don’t have an fully-functioning ecosystem that they could rely on for support of the talent. Almost all the time, there’s a link, or more, missing from the chain.

3. Scale of markets
Start ups in the region operate in relatively small-scale markets. Companies that are looking to monetize on ads, for example, are faced with how narrow the market is. Competition among startups is making the problem even worse, preventing them from expanding to newer markets in the region.

4. Lack of cooperation

Cooperation among start ups and SME’s can provide grounds needed for overcoming many obstacles. It could help with marketing problems, provide larger markets, bridge gaps in the ecosystem, and, more importantly, secure a much better access to information, which would be a huge step forward for entrepreneurship in the region.

5. Regulatory systems
Regulatory systems in MENA are still very from business friendly. Setting up a company in Beirut or Amman might take as long as a month, whereas starting a business in USA could happen in 24 hours. Struggling with regulations, in many cases, drains entrepreneurs’ energy and time, and make investors reluctant to support ventures.

6. Political turmoil
The unstable political situation in the region is a bigger factor in investors’ hesitation to enter the market of entrepreneurship. That only applies, however, to investors who don’t know the market well. Investors with experience in the region trust the ability of entrepreneurs to work around political hardships. The regulatory obstacles mentioned above, according to several panelists, are a bigger problem.

7. Poorly trained entrepreneurs

Entrepreneurs in MENA don’t lack talent or innovation, but they lack training on different aspect of business. Great ideas may not raise funds due to bad pitches. Start ups with huge potential may shut down because of inadequate management. Training and mentoring is a very important component missing from the entrepreneurship ecosystem.

8. Weak planning

Most entrepreneurs in the region make the mistake of raising funds just enough to start, whereas any startup should have enough funds to survive for 18-24 months—the time usually needed for turning up a significant profit. Entrepreneurs in MENA tend to make another big mistake; they raise funds for what they have today when they should raise funds for where they want their start up to be in a year or two.

Solutions

Having these hardships and obstacles, among others, does not mean there is no hope. New initiative, such as circular 331 by the Central Bank of Lebanon and the approval of assigning 7 billion US dollars to invest in start ups in Kuwait, are a great boost to the entrepreneurship landscape in the region.

The panelists stressed on the importance of cooperation among investors, entrepreneurs, start ups and SME’s and called out for transparent co-investments among incubators and accelerators.