The data miners at CB Insights (CBI) have made a business out of failure. Several times a year, the research and consulting firm publishes a list of promising entrepreneurial ventures that have flatlined, along with detailed forensics on the cause of death.
This year, its analysts took the additional steps of looking for patterns across the flameouts. The focus was on tech startups. But the factors highlighted in the 2018 report are as applicable to restaurant entrepreneurs as they are to the dreamers in any field.
Here, in reverse order, are what the company found to be the top nine reasons startups flop, based on a review of several hundred failures.
9. Customers are ignored
Entrepreneurs strive to realize their dreams, forgetting that a business has to fulfill customers’ needs. “Tunnel vision and not gathering user feedback are fatal flaws for most startups,” notes CBI. One of the participants in CBI’s research suggested that the planning of a venture run no longer than two months without a reality check from potential customers to verify the idea is on target.
8. Weak marketing
Founders tend to get lost in the day-to-day details of the business, forgetting they need to trumpet its merits if they want their clientele to grow, says CBI. In the tech world, that means tinkering with code instead of being a front man, a situation comparable to the restaurant founder who wants to work the dining room instead of serving as the outside pitchman.
7. Weak scalability
Even if a prototype’s economics are outstanding, can the business scale up without losing the distinctions that made it a success on a limited basis? Otherwise, its growth prospects are nil, says CBI. The key is finding a business model that nurtures growth, it advises.
6. Consumer acceptance
Are potential customers truly hungering for what the startup provides? And are there enough of them with that unfulfilled need to provide a mass market? CBI’s finding is a caution against me-too ventures.
5. Bad pricing
CBI calls pricing for startups “a dark art,” an assessment based on the number of ventures it’s declared DOA because they got the ratio to costs wrong.
“Startup post-mortems highlight the difficulty in pricing a product high enough to eventually cover costs but low enough to bring in customers,” it says. It seems to acknowledge that’s easier said than done.
4. Underestimating the competition
“Despite the platitudes that startups shouldn’t pay attention to the competition, the reality is that once an idea gets hot or gets market validation, there may be many entrants in a space,” notes CBI. Ignoring that reality led to the demise of 19% of the casualties studied by the company; they simply underestimated the benefits that competitors could tout.
3. Wrong management team
Assembling a leadership team with diverse skills is essential to a venture’s success, says CBI. Those talents should range from a mastery of technology to understanding the fundamentals of the business model, it notes. And the mix should naturally provide a system of checks and balances. As the CEO of one failed venture told CBI, “I didn’t have a partner to balance me out and provide sanity checks” on key decisions.
2. Running out of cash
Nearly a third (29%) of the failures studied by CBI met their demise because they lacked enough working capital to keep going, the company says. Part of the problem was a slower-than-expected climb in sales. In other instances, the business refused to pivot, leaving its sales weak and potential investors skeptical of providing more money.
1. A market isn’t there
In 42% of the failures studied by CBI, the venture never found traction because there was no pronounced need for what it sold. The startup team fell in love with an idea, in part because it was fresh and intriguing, without realizing admiration and demand aren’t the same. As the CEO of one wreck told CBI, “We had no customers because no one was really interested in the model we were pitching.”
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