The vast majority of startups fail -- that's a given. But what are the top causes of failure among tech startups? Martha Pierce finds out.
Know this: You’re doing it wrong
New York Times bestselling author and star of the reality TV show “Turnaround King” Grant Cardone has some answers. Also the CEO and founder of five ventures, three of which are multi-million dollar companies, Cardone’s ambition is to help people live more successful lives. His company, Cardone Training Technologies, provides consultation services and customized training programs to companies in various markets: automobile, banking and finance, sales and telecommunications industries.
He also advises startups in particular on the question that every investor’s going to want to know: what’s the ROI on this particular venture? “You have to make a profit,” Cardone advises. “All [startup failures] are financial in nature. When you run out of money, no matter how good of an idea you have, it’s over.”
Which then begs the question: why don’t startups generate the revenue stream they need to maintain the business? All of these tech-savvy 25-year-olds can’t get investors to continue emptying their 401Ks – but what’s the issue? “One thing that many people don’t realize is that failure doesn’t happen in a moment,” Cardone says. “If the [startup founder] is honest with himself, he saw failure coming.”
Any small business, "startup" or otherwise, faces the financial walls of revenue at some point or another. In my experience, the most terrifying action plans for any startup regarding revenue is:
- no plan at all (or relying entirely on investment)
- expecting miracles (if we build it, they will come)
Neither of these two options is sufficient, in my opinion.
We don't need revenue, we have investors!
Nope! In almost any case, I truly believe this to be a fallacy for any new business (and an illusion created by the startup craze compared to "normal," new SMBs). Investment monies are fantastic, but almost all investors (unless we're talking Friends and Family rounds) are going to be looking at how THEY can make money--the ROI. Without a proven record for revenue (and, most importantly, profit), it's a huge risk to any potential investor.
For a small business and to all entrepreneurs, please understand. Investments are NOT free monies, but they ARE a debt.
Unless you have a very solid plan on what to do with the investment, how to pay it back (and a timeline), and how it will make the organization better, then remember to seek out sources of revenue before heading over to the local investment group and asking for them to spot you a few million.
We don't need revenue, they'll be pounding on our door!
Nope! Unless you're already connected or have an established target market that is ready to be tapped for revenue, it's RARE to build a "field of dreams." Can it happen? You bet! Will it happen to you? Probably not.
With that, proper marketing, staffing, and timing are required to gain the revenue needed to keep the lights on and be in an appealing fiscal spot.
This viewpoint is not only interesting, it’s alarming: more than 74% of serial entrepreneurs indicated that their desire to build wealth was an important motivating factor when starting a business, according to Onstartups.com.
But how many fail…really?
“Choose your co-founders well,” she urges. “People need to be really passionate about building a company with you, not just building a product.” One major problem she noticed? “You start making excuses for people, like, ‘maybe I’m being too hard on them.’ But they either don’t have the talent, motivation or desire. I needed to focus the business model, to scrap the old team and build a new one. Talking about [this is…] still really raw for me, but you have to have good leadership.”
Leadership is one thing startup founders are either good at, or they miss the mark completely on.
But “moving on” to company status and staying in startup mode is a variable choice that even some monetized products and brands don’t choose to utilize. Sites like Match.com, a fully monetized online dating website that matches daters up based on personality and other selected preferences, are still LLCed up until the very last moment they can’t be. Some startups never even make it to LLC status, which costs a mere $200 in some states like Delaware.
Having a plan
Learn from Abraham’s mistakes, but maintain a sense of optimism: that not every startup is destined to fail. (There isn’t an exact number on how many startups fail each year, or over a five or ten-year span since most go largely undocumented.) Most startups have to learn to change focus – or change their audience entirely – before riding the (elusive) train to success.
Take the case study of Jason Goldberg and Bradford Shellhammer, for instance. The two fashion-savvy Internet moguls created a website they initially called Fabulis, a social networking platform that catered exclusively to the gay male populous. Initially, their revenue stream was fairly steady, but the drop-off was big.
On realizing they had to rapidly shift their idea or lose everything, a 10-person team shrunk down to three, and Goldberg shot into sales mode, landed a seed rounding of funding, and launching Fab.com, a successful flash-deals website now based in Manhattan’s Flatiron District. Fab.com is now growing at a rapid rate and even hiring across its individual business units (business development and editorial gigs are listed on Linkedin). But are Fab.com and sites like it (YouTube was almost a failed venture, too) the exception? “Absolutely, yes,” says Cardone. Without a business plan that spells out your revenue stream, he says, investors aren’t going to shell out. Be prepared to lay it all out there to get some gain.