While most startups sadly fail, these cautionary tales can help the next generation of founders succeed
Powa Technologies’ fall from grace caught many by surprise. The British unicorn had at one point been valued at $2.7bn and had even been hailed by David Cameron as a big contributor to the UK’s recovery after the financial crisis. So when the tech company went into administration in 2016 it stunned entrepreneurs everywhere. “The collapse of Powa Technologies was a wakeup call to UK enterprises [reminding them] that even so-called unicorns can die,” says Marina Nicholas, strategy director of ventures at ThoughtWorks Ventures, the global technology consultancy. It also served as a reminder that launching new enterprises is not for the faint of heart. In fact, research from RSA, the commercial insurer, shows that more than half of British businesses don’t survive into their fifth year. And there are plenty of reasons for founders to pay attention when startups collapse like a house of cards. “Naturally entrepreneurs love to read the success stories of companies like Uber and Airbnb to learn exactly how to succeed,” says Nicholas. “However, the number of startups that fail exceeds those [succeeding and the ones that falter provide a wealth] of insights and knowledge of what not to do.”
But it’s not always easy to pinpoint exactly what sends an organisation tumbling as most businesses fail for a plethora of reasons. That being said, the ultimate responsibility will always lie with the person at the top. “Leadership is everything,” says Royston Guest, founder of Pti Worldwide, the business-growth consultancy. “[There is always inspirational leadership] wherever you see a high-performing business delivering accelerated, sustained and profitable growth.” But it works both ways, which is why head honchos will also receive the brunt of the blame when their startups fail. That was something Dan Wagner, founder and CEO of Powa Technologies, learned when the company collapsed. In the months that followed the fall, his leadership was criticised for being too focused on sales and the upcoming IPO rather than actually making a great product. Others claimed that he surrounded himself with yes-people who didn’t challenge his decisions. Given the responsibility that comes with leading a business, entrepreneurs should think long and hard whether they are the right person for the job. “Great leaders know their strengths and play to them,” says Guest. “However, they also know all the critical success factors required in starting, growing and scaling a business and therefore surround themselves with the people who have the skills in those areas.”
Having the right team isn’t just essential to get a company off the launch pad: it will also enable entrepreneurs to keep things stable as their enterprise leaves the atmosphere. “Without those people, you’re not going to last very long,” says Joel Hughes, head of the UK and Europe at Indiegogo, the crowdfunding platform. And the numbers certainly back him up: according to research from CB Insights, the VC database, 23% of startups fail because they don’t have the right team in place. Not only does a good founding team need someone with a clear vision and an ability to lead, they also require people with the skills to keep the organisation going, bring the product to market and sell it once it’s there. “So don't go it alone,” says Hughes. “Spend time reaching out to people who you feel will genuinely benefit the business.”
And when assembling this A team, it’s vital that entrepreneurs identify a member with a solid understanding of the market or risk having their venture tumble down one of the most common pitfalls startups face. “Entrepreneurs often overestimate their market simply due to their personal belief that they have a great product,” says Nick Thompson, managing director at DCSL Software, the custom-software company. “Sadly, just because they think it’s great doesn’t mean that everyone else will.” In fact, according to CB Insights, not finding a market need for a product was the most common hurdle for new enterprises, with 42% of startups’ post-mortems citing it as a reason for their demise. Fortunately, founders can easily gauge if there is a demand for their products by engaging with their prospective customers early on in their startup journey. “Never underestimate the importance of in-depth market research and testing,” says Thompson. “Without these measures, there is no telling just how positive or profitable the public reaction will be.”
However, customers are by far not the only actors to be aware of in the market. To avoid ending up on the scrapheap of forgotten businesses, founders have to know who their competitors are. “[Don’t] run from competition,” says Thompson. “If there are other startups working on [similar products it shows] that there is a strong market demand for it and [that] should inspire confidence.” But while the existence of rival businesses may be a cause for celebration, it also means that startups face the risk of not coming out on top. And winning this fight for domination may be easier said than done given that 19% of startups failed partly because other companies outmanoeuvred them, according to CB Insights. In other words, founders must pay close attention to what the other players in their field do and respond to their moves. “That being said, entrepreneurs should keep the main focus on their own business,” says Thompson. “Ultimately, if they have a great product or service and a team of people devoted to making it work they should concentrate on that and not get too distracted by everyone else.”
Equally important in avoiding being forced to close shop is making sure the founding team possesses the ability to balance their budget. “Entrepreneurs often stumble when planning their finances,” says Thompson. In fact, it”s so common that running out of cash was the second biggest reason to why startups failed, according to CB Insights. The organisation noted that this was usually due to a combination of problems, such as having failed to find investment. That was certainly the case for Better Place, the electric-car company. After successfully raising $675.3m and having been celebrated for spearheading the automotive revolution, the company suddenly filed for bankruptcy in 2013, making it one of the costliest startup failures of all time. During the fallout that followed, it was revealed that the main reasons for the collapse was that Better Place had failed to acquire enough market penetration and had mismanaged its finances. “To avoid making these mistakes, entrepreneurs should always add a surplus to their estimated costs and have a backup plan for any investments that may not come to fruition,” says Thompson. In other words, if you want to succeed you better keep a close eye on those purse strings.
Closely related to the being able to balance the budget is entrepreneurs’ ability to raise money. However, just like most startups donít fold for one single reason, there are many reasons why investors may be discouraged from opening their pocket books. For instance, if the startup is either unable to demonstrate a viable product, an understanding of the market or keen business acumen, that would give potential investors cause to keep their cash for themselves. “Whether you’re running a crowdfunding campaign or an equity round, you need to be able to check those key ingredients,” says Hughes.
Ultimately, knowing how other businesses fail won’t inoculate new entrepreneurs from making mistakes of their own but paying close attention can help founders avoid following in Powa Technologies’ footsteps. “Essentially startups must become experts in why others have failed and subsequently adjust their own plans to achieve success,” concludes Nicholas. “We all know that success leaves clues but don’t discount the teaching power of failure.”
What is the biggest mistake startups make?
Russ Shaw, founder, Tech London Advocates
All tech products are works in progress, particularly for startups. To develop a successful product, you need to be flexible and to shape your work according to needs of the market; customer insight and competitive intelligence are vital for building a solid product offering. Don’t be afraid to take chances or be bold with vision and forward thinking, especially if it is around a compelling growth story.
Lynn Morrison, marketing director, Opus Energy
We recently spoke to 500 small-business owners about the challenges that they faced when setting up their business. We found that one of the top struggles was the time it took to take the business from plan to reality, with 30% citing this as a difficulty. Therefore, underestimating how long a project might take is a big mistake for a startup, which in turn could lead to cashflow or resource issues.
Phil Blayedes, co-founder, Talentful
It’s important to test and test again that everything is working the way you expect it to before launching. This is particularly imperative when launching your first product as it will set expectations of your company’s capabilities. If you get it wrong, you might not get a second chance. Also, it’s important employees know the product as they will be the ones selling it.
Gurpreet Jagpal, director of research, enterprise and innovation, London South Bank University
The biggest mistake startups can make is to misunderstand the market and what it is that their potential customers need. That’s usually a result of not engaging with customers early on in the development of the business and the business idea. And if you haven’t been engaging with them, how do you know that it is what they want?