If you have just founded a startup or are planning to do so then you have some exciting days ahead! Here we will talk about winning or losing of startups, but start with ‘losing’ first.

Most Startups Fail, But Some Make It Very Big

Are you scared of the thought that over 90% of the startups shut down within a few years or even months? This is very true. But then, most also start without knowing much about business, customers, people, and finances. Most don’t have guidance. Many don’t even realize they need guidance and are unwilling to take any. Big mistake!

Why startups fail?

The primary reason of failure of startups is overconfidence and limited knowledge. Most reasons eventually end up at these two.

Let’s Summarize the Major Reasons

• Unmarketable product/service (overconfidence)
• Poor financial understanding (limited knowledge)
• Poor understanding of consumer behavior (limited knowledge)
• Haste to become rich fast (overconfidence)
• No professional experience (limited knowledge)
• Poor people skills (limited knowledge)

Some startups become successful despite the above shortcomings, just by luck. Depending on luck isn’t the wisest thing to do, isn’t it? Luck isn’t 50-50. I, this case it is more like 99-1!

How has luck worked?

Luck is not something that just happens. You need to grab your chances when luck offers them. Some startups were at the right place at the right time. Some found the right guidance at the right time. Some founders found the right co-founders. Some found customers even before they had a business. Some opportunities fell in their laps because if socio-economic-political situations.

The same reasons could have worked against them if there were minor differences in what happened, or due to missed opportunities.

A startup in Pune has a lot of successes by accident. Of course, the founder took up the opportunities that came her way. She started pottery as a hobby, for her own needs and interest, after returning from abroad. Soon she had opportunities to start selling her creations. Being hand-made, ecofriendly, and empowering local women, her pottery attracted lot of interest from corporate and upmarket buyers. Now they have a large factory and export.

What’s in an idea?

Do you have a wow idea for your startups? Sorry to disappoint you, but most ideas are not enough to become big business. It’s all about how you execute the idea. There was a time when investors were so eager to invest in startups that ideas were shared on any piece of paper available (aptly called the paper-napkin idea). That isn’t true anymore. Many startups that looked promising to investors failed miserably, putting pressure on the Venture Capitalists (VCs) to play it safe. They are now so paranoid that they hardly have patience for any business that doesn’t already have ‘traction’.

Traction: Traction is a term used in business to say in one word that the business has started selling or has credible interest from buyers to prove that the product is sellable and possibly even profitable.

What after the idea? People

The idea for startups is nothing without the means to execute it effectively. The means is not finance, primarily. It is people. While you may start a business on your own, most require strong specialized skills in one or more of the key business areas: product, operations, marketing, and finance. It is very unlikely that one person will have all these skills to a level that is required for a large company. Nevertheless, more people in the top management (co-founders) are good for thrashing out ideas and strategies, where one may get stuck or have limited options.

Beware, there’s also a problem of ‘too many’ at the top. As a thumb rule, more than three founders can cause too many divergent views and so make it difficult to take decisions fast. The opportunities of serious disputes also grow with more in such key positions, which can cause a quick collapse. So, two or three founders is considered to be fair.

More on Startup Founders in another post. Keep coming back for more and subscribe to our Newsletter.

Finance, Investment, Rokda, Runway

While finance is not everything, at the start, it is certainly very important. Its importance is different for the type of startups and team. The money in the bank gives you the runway to burn some until you become profitable.

Runway: The time you have left to keep spending on the startup until the money reserves run out. You would need to infuse more funds or become profitable before that to keep afloat.
For example, “8 months”.

Burn Rate: The amount of money that is reducing periodically from your money reserves.
For example, “Rs. 5 lakhs per month”.

So, if your startup has Rs. 40 lakhs in the bank and are burning Rs. 5 lakhs per month, then you have a runway of 8 months.

Almost nothing starts with zero investment, unless you are earning brokerage and already have potential customers. However, whether finance is the highest priority or not depends on the kind of business of the startups. Some startups can be started with only the ‘opportunity cost’ of the founders, such as local/digital services or software development, while some may require a fair amount of upfront investment, such as businesses that require machines or research. What type is your business?

Opportunity Cost: The money you are losing by doing one work instead of another.
For example: You may not be investing cash into your business but giving your time to develop it. If you were not doing this business but some other business or earning a salary, then that potential income you are foregoing by giving your time to the startup. If you could earn Rs 1 lakh as salary but are not earning it as all your time goes to the startup, then virtually you are investing Rs. 1 lakh in the startup.

If the cofounder can provide the required skills that you don’t have then find one. We will share more about finding cofounders in another post. Subscribe to our newsletter to keep updated.

If upfront investment is necessary, then you would need to either tap into your own savings or find some from your family and friends. While taking funds from family and friends, be very careful of their expectations. Neither should this spoil your relations if the business fails, nor should they start dictating terms to you. Founders often don’t realize this in their hurry or excitement of getting the precious funds. If they don’t communicate their expectations, then you should ask for a clear statement in this regard. It’s even better if the expectation is written, even if that’s informal.

Test the Market

Testing the market, to know the viability of the business, is extremely important for startups. There’s no point in starting a business if the customer is not willing to pay for it, or not paying enough so that a significant profit can be earner.

Some ideas startups are too late, some too soon for the time. Some ideas are unsuitable for the markets you are targeting or have access to. You can’t sell water purifiers or bottled where drinking water is easily available. You can’t sell inverters in places where there are no power cuts. There’s nothing wrong with the product, but the market just doesn’t want to pay for it. Some ideas may be such that they are interesting to you, but nobody wants it; not in one market, not in any market. Some may be useful but not practical or don’t have the potential to generate enough profits. Here are some failed innovations of big brands that failed for various reasons.

How much would you pay for a home nail-cutting service that costs Rs. 500 for delivering each service? How about a petrol-flavored ice cream? While these are extreme examples to illustrate what a failed idea could be, most ideas are not that clearly atrocious. They just look promising to the founders but not to the market (buyers).

Start by developing a Minimum Viable Product (MVP) to test the market. There is no point in developing a full-featured product, with a lot of time, effort, and money invested, if it is going to fail. Interview the potential buyers, especially if there is no product for testing. Be careful while analyzing the collected data, as some data may be skewed. Consider the Survivorship Bias.

MVP: A minimum viable product is a simplified version of the planned full product that has enough features to get buyer interest. MVPs are meant to get maximum data from the market on features, pricing, usability, etc.

Example 1: A popular music TV channel asked a group for their feedback on a new reality TV show they has planned to launch. The show was called ‘Bathrooming’, where participants did various challenges in a bathroom-set, with a lot of water involved. One episode was shot, possible with fewer props and activities than planned for the actual program. While some from the group found the concept good, the overall feedback wasn’t good enough to launch the program. The feedback was being taken in peak Delhi winters. Many felt shivers just by see so much water splashing on people. Some didn’t find the activities entertaining enough.

Example 2: A product may not always fail in a market test. Sometimes it just needs a little tweak but saves a lot of investment in something that is just marginally wrong. A small mistake may not only fail a product but also a brand. Such a mistake was corrected when a newly launching ice-cream brand tested ice-cream flavors with a test group. Their chocolate flavor was unique, and the creators had lots of expectations from it. While many adults loved it, one child made his face and said, “kadwa hai” (it’s bitter).

Don’t Wait Too Long

Launch as soon as you can rather than waiting for something perfect. Perfection never happens. There’s always room for improvement. Waiting too long may mean losing money and using up the runway. The product for startups should be just good enough, or maybe a little more (if your brand positioning requires it). Any major software went through many versions and still continues to improve. The first version was just good enough to make it popular, but it wasn’t perfect.

Brand Positioning: What does a product name say about its quality and desirability? Some names have come to mean luxury, while some mean durability, and in some being cheaper may be a good thing. That’s branding. The name itself is not the brand. The name may convey what the brand wants to be remembered as but eventually brand is the image of that name in the public’s mind.

Example 1: Tata Nano failed only because the company conveyed a message that the buyers didn’t want. The company promoted it as the cheapest car. To the buyer it meant unsafe, poor-man’s, and ‘four-wheeled autorickshaw’. If only Tata has promoted it as ‘an affordable, easy to maintain, smart car for congested roads’.

Example 2: The brand Apple just means ‘high quality’ to most people. High quality in every way: material, design, cutting-edge technology, and features. Their loyal customers look down upon all other brands. Most such buyers will not buy a Windows PC or Android phone. The company positioned itself like that from the start and continues to make products and the message in their marketing to maintain that feeling.

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