Why do Start-Ups go Bust? by Keith Wilson

     Why do start- ups go bust and how can we try to avoid it happening?

There are a myriad of straws that can break the back of a start-up. Usually these boil down to time and money or more specifically timing and lack of money.  Compounding issues of gaps in the management’s business skill set often also add to a devil’s brew.

 

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Unless a start-up is lucky enough to land with a pocketful of orders from clients of the founders’ previous employments (i.e. they take customers with them when they leave), almost all ventures will have a fallow period without sales while they may still have to:

  • build their infrastructure
  • build up capability
  • build credibility and reputation
  • identify markets and needs
  • identify and attract actual profitable paying customers

Almost all the above normally take longer and cost more than the enthusiastic entrepreneur anticipates and can combine to create a perfect storm of start-up pressures to quickly jeopardise the very existence of the entity.

Even when a way is found past the start-up drains on time and cost resources, ongoing operation heaps additional pressures on the young business.  Issues like:

  • complying with bureaucracy
  • funding necessary, though unproductive day to day activities

all need to be factored into the decision for the start-up.  The burning constant question before and after start-up rapidly becomes ..

“Have we got enough cash”?

Clearly the only way to answer this question is to use a crystal ball to factor in known or likely expenditures and timings then compare these with predicted income and timings. 

THE DIFFERENCE NEEDS TO BE FUNDED

OR THE START-UP WILL GO BROKE.

Costs are usually easier to predict than sales but to minimise horrible surprises it is prudent to adopt a very cautious state of mind throughout this exercise.  i.e. predicted costs are likely to be higher than hoped while sales are lower and/or slower than we would like.

If we look at the various stages already identified, we can consider some of the major start-up issues as well as try to look at options to mitigate risks downwards.

 

Build infrastructure

Start-up Issues to think about

The nature of the start-up business will dictate the necessary infrastructure.  If manufacturing or delivering products we need to get the right equipment, warehouse, logistics fleet etc. set up or perhaps, if selling to the public, source a shop in the right location.   If we are offering a service, do we need high profile offices?

 The time taken to find equipment, premises and suitable staff need to be clearly identified and built into our plans including contingencies for project delays. 

  • How long will it take to convert /build the premises?
  • Where can we get equipment and how long before it is operational?
  • Can suitably competent staff be found?  How much training is needed before they become productive?
  • Do we need to build up large stocks of products?

Risk reduction considerations

  • Do we need to do everything ourselves or can we subcontract out activities to get started?
  • Can we stage our business development to avoid some of the major initial high expenditure and defer it until we prove we have a success on our hands, with funds being generated from operations to finance moving to the next level?
  • Start out trying to service lowest risk options.
  • Can we use reconditioned equipment to get going?
  • Do we need to buy everything or can we get access to critical equipment / premises by renting or leasing?
  • Will any suppliers help us get going with helpful stock holding /financing schemes?

Build capability and credibility

Start-up Issues to think about

  • New comers to a market may struggle to convince existing buyers to move away from their tried and tested supply relationships.
  • Will suppliers support us on anything other than high price/short or no credit bases?
  • Do we need to attract experts in our team to be able to deliver on our promises?
  • Do we need expensive prototypes or proof of concepts before there is any hope of selling?
  • Is the basic idea scalable up to commercially viable production levels?
  • Can we satisfy all the regulations surrounding our target markets (certifications, approved ingredients, quality assurance kite marks etc.)?

Start-up Risk reduction considerations

  • Can we excite interest via favourable expert trade or academia comments on our idea?
  • Can we get a key marketplace player to endorse our idea or allow us to partner on a trial project at cost, to prove the concept works?
  • Can we alliance with a complementary business to piggy back onto their industry credibility?
  • Can we begin to get recognition as expert via blogs, articles etc.?

Identify markets and needs

Start-up Issues to think about

  • How big is the marketplace already and how well serviced is it?
  • Is it growing / shrinking /changing ….if so how?
  • How much of the market do you need to capture to make a living?  Is the market there?
  • How easy is it to get into the market?

Risk reduction considerations

  • Speak to potential clients to find what is not being properly offered to them currently.  Focus our efforts there.  Do what the market wants us to do, not what we want to do.
  • Should we only try to target a small niche or are we trying to reach everybody?  What will the impact be on or risk /profit intentions?

Identify and attract actual profitable paying customers

Start-up issues to think about

  • Existing larger competitors may try to squeeze us out at birth.  Can we stand a price war and for how long?
  • Are customers going to expect crazy prices and terms to let us through their doors?
  • Can we identify the key customers and their decision makers?

Risk reduction considerations

  • We need to be special in some way that the market wants or else we are doomed to compete just on price forever.
  • We need to know what prices and volumes are achievable and resist the temptation to sell cheap just to get work. 
  • We do not want to become busy fools so we must walk away from bad business.  We need to know what that looks like to be able to walk away from it.
  • Make sure everybody (inside and out) knows what our key selling points are and keep reinforcing the CLEAR MESSAGE about them at all times.
  • Plan how we can reach and keep reaching the key decision makers.  (E.g. use agents, direct sales, advertising, social media etc.)

Ongoing trading

All the above daunting pre-sales pitfalls for a stafrt-up get compounded by the time and expenses eaten up by just being in existence as a business.  

Complying with the bureaucracy of reporting to all the tax and regulatory authorities places massive demands on the start-up business owners’ time, taking them away from their optimal focus on selling or making and delivering their products or services. 

Limited funds often necessitate the start-up founders to have to cover mandatory areas on a do-it-yourself basis.  Lacking the administrative or management skills to fulfil the roles properly just creates additional strains that make things worse.

On top of this money needs to be found to be able to open the doors in the morning.  The rent, rates and insurance all need paying even when we are struggling to get the sales activity off the ground.

The solution is obvious if not so easily delivered.  Make sure the answer to the repeatedly asked question….

“Have we got enough cash”? ……..is always YES!!   

Going forward

Before setting up, plan and research very carefully to quantify how much is needed to survive the pre-sales period and to understand what it will cost us to run day to day.  Detailed budgets need to pulled together looking at amounts and timings of expenditure.   Remember be cautious.  Plan on the costs being up 50% in the first year while sales drop to 50% of best case forecasts.  Can we fund the predictions ourselves? If not…… source the money or don’t start!

Borrowing may be required as well as a possible willingness to consider handing over some ownership to additional partners in the venture.  As well as a money injection, the new partners should be assessed as what extra skills sets can they bring.  Can they open doors via their sales or supply chain contacts?  Can they handle most of the finance and admin issues to allow the founders to be free to do what they are good at?

Unashamedly take any help available.  Local and national government agencies will almost certainly be available to help offer support to a start-up with advice, research, business skills training and monetary grants (if we are lucky or in strategically key areas).

Running a start-up can be hugely rewarding in all kinds of ways in addition to making lots of money.  Controlling one’s own destiny, the satisfaction of growing something from scratch and directly seeing the fruits of your efforts are massively satisfying. So…

Think it through, cost it out, get it sense checked, go for it!!!

Company Connecting is a platform for individuals and companies to search, find and connect. We regularly publish articles and blogs on a range of IT and Tech related topics, industries and individuals. We are passionate about what we do, and always love hearing from new people. To learn more about how Company Connecting can help you, or if you’d like to be the focus of an article, then click here.

 

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Keith Wilson LinkedIn: https://www.linkedin.com/in/keith-wilson-04186010​

website: http://www.pearlonion.co.uk/​

 

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"Why do Start-Ups go Bust? by Keith Wilson" First published on Company Connecting December 2016

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