Why Startups fail?

The Number one problem why startups fail in the early stage despite having an incredible idea and passionate promoters is lack of coordination among the team/promoters. It is most essential for a startup to start with a team which will prevail through all the hardships in the beginning and will stay committed to the sole objective even when the startup succeeds and huge cash flows start flowing in.

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.

One of the most common causes of failure in the startup 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

A simple way to focus on what matters in your business model is look at these two questions:

· Can you find a scalable way to acquire customers

· 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

Knowing your target audience and knowing how to get their attention and convert them to leads and ultimately customers is one of the most important skills of a successful business. But an inability to market was a common failure especially among founders who liked to code or build product but who didn’t relish the idea of promoting the product.

What we see too often in the startup scene is that a number of companies believe their invention is so appealing that the market will beg for it and money will begin to flow in. Most startup founders do not fully understand what their product might be able to achieve in the market — especially in the early stages. That is the reason for many pivots — when a company changes its course and product to satisfy another market. If they could validate their product in pilot projects before launching, or even beta-testing instead, those entrepreneurs might reduce significantly their failure and market rejection risk.

Noise matters and no matter how great your product may be, it’s going down if no one knows about it. Poorly managed marketing (or sales) is a major reason for the failure of many startups. You don’t necessarily need a professional PR team at the beginning, but you need to create buzz in social media and in the press about your company and products. Also, be sure that when you get published in the magazines and websites — that they are authoritative and popular for your audience. If your company cannot manage marketing properly, no one will know about your product, therefore no one will buy it. Spreading the word may seem a waste of time for some founders and more technical teams, but it is fundamental for a business to survive.

Many startup founders are technicians and engineers at heart — meaning that they want to build the perfect product or solution to one problem and only launch after that. That can become a major problem when you must be cashing in the earliest possible for your company to keep the doors open. Important signals to identify in order to prevent cashflow problems are usually low profit margin, high payroll costs, small recurrence purchases, clients delaying payments and high churn rates. The more your startup’s cashflow see those situations, the closer you are to stretching the treasury and having the need of more cash, because of big distances between paying suppliers and getting paid by customers. Always try to negotiate terms with your suppliers that are longer than the payment terms you give to your customers. Spend only on essentials and do not be extravagant on your company spending in that phase. Ask yourself if that exhibition or that fancy office is really a mandatory piece for your puzzle and if that will bring the ROI you and your colleagues expect.

People may always be surprised by the time and number of rejections required before they succeed in raising capital for their startup. Too often this process is started too late and the entrepreneur goes to the rescue with the wrong group of investors — the first ones. Fundraising in a startup environment is something that needs at least 6 months of active prospection, meetings, calls and visits. The more you are in the routine of fundraising, the more precise you are about what you need as a company and what investors who are looking for your profile want. Make a committee responsible for this and name at least two people who will be responsible for raising funds and report to the team every 2 weeks.

Pricing is a dark art when it comes to startup success, and startup post-mortems highlight the difficulty in pricing a product high enough to eventually cover costs but low enough to bring in customers.

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