Friday, October 30, 2009

Why Do Start-Up Small Businesses Fail?

Below will give you an idea of why Start-ups fail a lot of times.

However, the first few points will also give you an idea of what VCs look for in a start-up venture before they consider investing. Apart from the below pointers, VCs also look out for the amount of skin the "owners" have in the start-up.

1. The Idea .... The foremost thing is the idea behind starting the venture (business). The foundation of this idea is of primary importance. If it's not given a comprehensive thought and planning .... then it will only see DOOM's DAY.

2. Execution of this plan .... Execution is critical. If done well then one can sail through with a little less money as well. However, this is where most start-ups are blown off.

3. Management .... Amateurs with lack of experience on planning both actions and money, lose out in the race. Most of the time they are at the losing end simply because they are too early in the business ... often because of ROSY pictures painted in their minds (unrealistic and unsupported expectations). This is still better than another worse condition. That being that too often some management of start-up companies have double standards. The idea shown is different from what they actually want to gain. It could be a short term loss making venture that is planned only for quick personal gains. This is the worst scenario.

4. Run-out of Money ..... It depends where the funding is coming from obviously. Venture capitalists today are known to take more than a year to go through the analysis of profitability of an idea. At the same time they are looking at an investment period of a max of 4-5 years and expect aggressive profits. This is a situation that puts pressures on the very vision and forces of the core management team to look for short term gains.

The consequence is, they lose long term vision and slip into "money drains". If the money is coming from conventional HNI investors, then they start looking for early results since there is no understanding of life cycle and the business both. The situation boils down to .... "You said, this would happen. So why has this not happened?" It generally comes within 3-4 months. Lack of patience and fading trust, stops the committed funds that were needed to survive.

5. Run-out of Commitment .... Usually, markets don't perceive new players as genuine long term players because there is so much generalization. This can be thoroughly demotivating. Pressures mount up and investors ratchet up more pressures. This makes the Management Team lose focus completely. So it also looks like they have lost commitment. However, this is not the case many times. It is just that the conducive environment for SUCCESS is snatched away.

6. Investors are those people who invest money for medium/long term gains. These gains have to be spread over time. The better the support system for any business, the better it performs. But, it is strange that no one understands this when it comes to investing in new ventures.

WHY do people not look at long term investment, when it comes to start-ups? All Fortune companies were also start-ups when they began. It is only over a long period of time that they have become so BIG. People will easily play safe by investing money for 25 years in a Govt. company / Fortune company but not start-ups.

There is lack of a belief system. This is one of the big reasons for dooming start-ups. A full fledged support system should be created to ensure success and over a longer time, not just 3-4 years. If the idea is right, SUCCESS is certain. Usually most ideas are good, if implemented properly and are need based. No doubt the risk is high, but gains are even higher.

7. Due to all these factors and a few others, start-up companies have a huge problem in attracting talent. So a big compromise needs to be made on this account. Also, technology may be a cause of concern since it costs a lot of money and returns are not as quick as one would demand.

So start-ups are constrained by these and several other factors, to ensure FAILURE. That may sound like a pessemisstic view .... but not really. I wanted to hit you between the eyes with some reality so you'll wake-up .... and put in the effort necessary to avoid the above pitfalls. Do that ... and you won't be a failure. You'll be one of the success we celebarte and point to.