The early years of a business are often its most important. During this time, it has to develop a product, establish a market and retain customers – all while generating repeated revenue to power future growth.
But many young businesses don’t make it past the start-up phase. They trip and fall, failing before they are able to realise their potential.
In this article, I, explore three of the biggest reasons why early stage companies fail, and what start-ups can do to avoid falling victim to the same pitfalls.
Reason 1: There wasn’t demand for the product
Looking at many companies, “lack of demand” was the main reason why most failed. In fact, over 40% of all start-ups analysed by CB Insights and Autopsy failed for this reason. Talented teams work hard, round-the-clock, to create a product which isn’t wanted in the end.
Start-ups are keen to solve this problem. A global following has sprung up to do just this – the “Lean Startup” movement. Taken from the book of the same name by Eric Ries, the movement is most famous for advocating the use of an MVP – a minimum viable product – to test market demand before too much time and money is lost. Then, once market fit is established, rapid innovation improves a product until it becomes a potential market leader.
But despite this process, many businesses continue to stumble at the “market fit” hurdle. Even with innovation, creativity and great teams, it is still hard for young companies to judge a market before they enter it.
Venture capital investors suffer from this trend as well, investing in many companies who are working on a product the market doesn’t need. We took this into account when designing our new Venture Fund’s investment strategy.
While early-stage venture capital often invests in companies with only an idea of demand, the Triple Point Venture Fund focuses on market demand as a core foundation for investment.
To help reduce the likelihood that an investee company has no market for its products, we work with partners and corporates who identify issues needing a solution. We call this a “challenge-led” investment strategy.
We then work with early-stage businesses that have products able to overcome these identified business challenges, investing in those with market validation from the established corporate. This, in turn, can decrease the risk of young business failure and increase the returns available to our investors.
Reason 2: The team wasn’t right
Finding the right talent to boost a company’s growth can give any executive a headache. It’s hard enough trying to find and keep talent if you’re Google or Netflix, let alone if you’re bootstrapping your first business before you’ve gained significant traction.
But it’s important to understand that finding the right team doesn’t start with money. To forge a team, a good founder must articulate a strong vision – one that gives everyone a common purpose and makes people want to join. Founders must shape their company’s culture.
In 1997, Steve Bezos wrote to his company, explaining what Amazon stood for. He stated clearly that Amazon will “Obsess Over Customers”, and he explained how. Even today his letter is referred to by industry veterans as an example for how to articulate a company’s mission.
When a business spells out a vision, it becomes clear to employees what the goal is, and what is expected of them. This often brings out the best in people.
And with vision, expanding a team with quality people is vital. It’s often one of the main reasons businesses raise funds from VCs or angel investors. A good VC, like Triple Point, will actively help with the recruitment of talent.
And how do you keep team members, after they’re on board and bought into the vision?
One effective way is for a founder to care more about their employees than they care about themselves. Put simply, they must show an active interest in employee welfare and skill development. A founder shapes company culture: they make it a good place to work.
When somewhere is a good place to work, employees work harder, and they even act as quality control with other employees. When you add an employee’s opportunity to earn equity to this, which is something Triple Point looks for in investee companies, you have the potent mixture of a hard-working, driven and incentivised team.
Reason 3: We were outcompeted
Competition is fierce, and it stays that way for most companies, regardless of size. Seen positively, competition can be a vital fuel for growth – looking over your shoulder can often help you run faster.
Avoiding competition is often not possible. What can you do to outcompete, rather than become the outcompeted?
The key to outcompeting is promoting experimentation and failure. Ensure there is a sandbox in which product developers can play. Let them come up with new ideas. From Google’s “20% free time on personal projects”, to Facebook’s “Move Fast and Break Things” mantra, spending some time each week on new, crazy ideas will help you stay ahead of the competition. If a company’s culture is not afraid of a crazy idea, innovation will come by default. Did you know that Intel’s current core business (microprocessors) was once less than 20% of its revenues? Some of the ideas that seem most crazy will be the gem that a growing business needs to outcompete its peers.
Through understanding these pitfalls, commonly affecting early-stage businesses, Triple Point’s Venture Fund looks to mitigate some of the risk by proactively working with high-potential businesses that are actively solving problems for large corporates, increasing their chances of success and growing Britain’s economy.
Written by Seb Wallace from Triple Point
The Hunt for Predictable Income - The Case for Direct Lending
A challenging investment environment is driving many UK investors beyond conventional routes in sear...
Putting your eggs in the right basket
Investors naturally seek the best of both worlds: a high, predictable return on their money, combine...
Addressing the critical obstacle for venture capital investing
The formative years in a business’s life and journey are often it’s most fragile and cri...