By Scott Meacham
Copyright © 2017, The Oklahoma Publishing Co.
CB Insights, the research company that zeros in on private company data and analysis, has an interesting stream of reports about why startup companies fail.
They began gathering postmortem information back in 2014 with information from about 100 failed firms; most of the stories were supplied by company founders and a few were from investors and other sources. In seven subsequent updates (the most recent was last month), CB Insights has collected and analyzed the experience of 232 failed startups.
While a sample size of 232 isn’t close to being statistically valid, the fact that this qualitative reporting comes directly from entrepreneurs and founding teams makes it very valuable to investors and entrepreneurs alike.
The No. 1 reason among these startups for failure was that there was “no market need.” That resonates for us. As counterintuitive as that might sound, after investing in more than 675 startups and working with hundreds more, we know firsthand just how easy it is for enthusiastic entrepreneurs to shortcut market validation.
We help our portfolio companies resist that danger with our three-week Venture Assessment Program (VAP), which is specifically designed to help entrepreneurs validate the product market fit and business opportunity of their startup.
The second reason for failure that startup founders (nearly one-third of them) shared in the CB Insights study was that they ran out of cash. Some founders are spenders. These entrepreneurs are the first ones to rent offices or to purchase state-of-the art technology as soon as it comes out when shared equipment and older servers serve the business perfectly well.
Other founders don’t recognize that financial management of a startup likely requires skills that they don’t have. They tell themselves that they can manage finances themselves until they have the budget to hire a CFO or to spend more on professional services when what they really need is experienced guidance to put a cash management process in place on Day One.
Then there are the entrepreneurs who understand the never-ending pressure to conserve cash. These entrepreneurs are good at bootstrapping — using their personal assets and revenue from early customers to cover expenses. These entrepreneurs are adept at holding fixed costs to a minimum by delaying capital purchases and negotiating fees and terms; they keep variable costs under control with teleconferencing instead of travel, and internships to supplement hires.
But even with entrepreneurs who are among the best at stretching cash, there is a strong tendency to underestimate how much operating capital is needed and for how long or not take capital when it could accelerate their business and get them through the window of opportunity before it closes.
The good news is that programs like the VAP help entrepreneurs determine the market need for their concept while the Oklahoma Seed Capital Fund and other resources managed by i2E help them determine their funding needs and maximize the impact of their cash.
Successful entrepreneurs tap into these sources before the fireworks start.
Scott Meacham is president and CEO of i2E Inc., a nonprofit corporation that mentors many of the state’s technology-based startup companies. i2E receives state support from the Oklahoma Center for the Advancement of Science and Technology and is an integral part of Oklahoma’s Innovation Model. Contact Meacham at [email protected].