Last time we looked at 4 reasons why startups fail. Let’s review:
- Startups fail because they have the wrong people for the job
- Startups fail because they have the wrong place for the business
- Startups fail because they have the wrong product for the market
- Startups fail because they have the wrong plan for the future
These aren’t the only startup failure reasons. I’ve observed four more common ones that can derail a startup incredibly fast.
Startup Failure Reason #5: The Wrong Partnership for the Company
Business partnerships can make or break a startup’s future. Seriously. Partnerships can be a huge (and often necessary) asset to a startup…or they can destroy it. Far too often desperation for funding or other resources leads an entrepreneur to hastily dive into a business partnership that costs them vital control, profit, or integrity of their company.
I helped start a consulting company in Central Asia (a former Soviet-dominated republic). The owner partnered with a national attorney in good faith. After about two years with some good success in the business, and several big international company clients, the national partner absconded with all the money and forced the owner to shut down the company.
In another instance, an English school in central Asia was run by two partners. One brought a lot to the table in terms of the product, but he hated living in the country and wanted to only give a few hours to the business. This left the other partner unexpectedly handicapped and so he closed down the business.
Startup Failure Prevention Tactic #5: Find the Right Partner
Before you dive into a partnership, know who you’re getting into business with. Consider cultural issues that may affect how you view things. Determine if you share the same business and ethical values, social purpose, and overall philosophy. Ask yourself how much control you are willing to give up, and if this is the right person to share it with. Clarify the roles each of each partner, the vision for the company, and what it will take to get there. If you find yourself making a rash partnership decision out of desperation, take a step back before your efforts to save your startup inadvertently fail it.
Startup Failure Reason #6: The Wrong Political Factors
Politics. To many of us, politics seems to be a necessary evil in the world, but political factors have a much greater impact on business success than we’d all like to admit.
I just reviewed a debrief we did of a manufacturing firm on an island in Indonesia. We had helped the owner buy the firm, develop his business model, develop clients, and set up an accounting process. However, after about three years of successful operation, the leased land for the factory was re-called by the owner for the building of a hotel, and despite many efforts, other locations were denied. The company was forced to cease operations because of political cronies who kept other properties tied up. A business that was making a strong social impact on the surrounding community was forced to leave because of politics the owner had no power to change.
One of my most storied successful businesses was in a tour company in a large country in Asia. It was well on its way to clear achievement of the Triple Bottom Line. But legal decisions at the national level made it impossible for the owner to return. A visa for a newborn was refused and increased taxes seemed formidable. While the business still technically exists and may still succeed, this demonstrates the tenuous situation of living and owning a business abroad.
Startup Failure Prevention Tactic #6: Survey the Politics
Global entrepreneurs have little control and ability to predict the political factor. Still, survey the political landscape before launching a startup, particularly overseas. Take a full sweep of the political conditions of the country of business. Contact other expat business owners in the same region and find out what issues they have dealt with. Know the rules and limitations of visas before you or an employee leaves the country. Do the best you can to foresee potential political and governmental issues, and walk in with your eyes wide open.
Startup Failure Reason #7: The Wrong Payment Understanding
Surprisingly, many entrepreneurs do not understand “business math” on a deep enough level. On the TV show “Shark Tank”, one of the top reasons the “sharks” decline investing in a business is that the business plan has the wrong finances– too little margin, too high a price, lack of sustainability, etc. Even the greatest startup ideas will fail with the wrong financial model and without startup funding.
A placement company was set up in Latin America for the purpose of recruiting executives and other high level employees to take jobs in the Middle East. We helped develop the business plan and other startup components. However, although the company started operation and discovered a market for their services, they soon ran out of cash.
Startup Failure Prevention Tactic #7: Understand the Payment Factor
Raise enough capital before starting for all the startup costs plus one year of running costs. If you haven’t had any formal training in business finances, be sure to get some education in this area. Get financial guidance from a financial expert who has experience with. Conduct your own “shark tank” presentation with a group of investors—so that you can both secure capital and get honest advice on the viability of your startup’s finances.
Startup Failure Reason #8: The Wrong Purpose
Every entrepreneur must define a clear business purpose and identity from the start. Some would-be entrepreneurs have plans are more humanitarian or NGO focused. They forget the importance of the Triple Bottom Line or find it impossible to make the business model work. If a person is unsure of the startup’s identity and purpose it can bring confusion to the business, the community and to all involved.
Such was true for a project which started out as an NGO effort to purify drinking water. Because the large Asian country decided they were going to stop visas to NGO practitioners, we tried to help this worthy effort to become a for-profit business. It was very difficult because the owners were trained and prepared for NGO work. They found it hard to identify with the business community, develop business skills, market the product and legitimately qualify for a business visa and achieve the Triple Bottom Line. A startup with great potential could never get off the ground, even though the NGO water company had a viable product, an obvious demand, and the owners were skilled in the product. All because they lacked a clear sense of identity and purpose.
Startup Failure Prevention Tactic #8: Define Your Purpose
Identity shapes everything. Before you even start to formulate a business, sit down and define your corporate identity. What are you trying to do? Do you intend to be a for-profit business with little to no consideration for social purpose? Do you intend to be a nonprofit organization with a sustainable business model? Are you after the Triple Bottom Linehttp://www.amazon.com/The-Triple-Bottom-Line-Environmental/dp/0787979074? Is sustainability and eco-friendliness important to you? Determine what your guiding values, principles, and purpose are, and this will help you define your startup’s identity.
The Hope for Failed Startups
In most of the examples cited in this article and the last one, these startup entrepreneurs are still in the field, learning from the first “failure” and re-building another endeavor. Perhaps success is just around the corner. Being a Kentucky Fried chicken lover, think about this:
Harland David Sanders: Perhaps better known as Colonel Sanders of Kentucky Fried Chicken fame, Sanders had a hard time selling his chicken at first. In fact, his famous secret chicken recipe was rejected 1,009 times before a restaurant accepted it.
And since I am typing this on Microsoft software, how about this?
Bill Gates: Gates didn’t seem like a shoe-in for success after dropping out of Harvard and starting a failed first business with Microsoft co-founder Paul Allen called Traf-O-Data. While this early idea didn’t work, Gates’ later work did, creating the global empire that is Microsoft.
The story of Soichiro Honda also includes many business failures and losses, but with his eventual success he wrote, “To me success can be achieved only through repeated failure and introspection. In fact, success represents 1 percent of your work which results only from the 99 percent that is called failure.” Today Honda has 100,000 employees.
Henry Ford’s many failures are well known but he concluded, “Failure is simply the opportunity to begin again; this time more intelligently.”
The reality is, many if not most entrepreneurs will have a failed startup or two. Do the best you can to be aware of these startup failure reasons and take steps to prevent them. But if you find yourself standing with your business crumbling around you, don’t lose heart. Dust off the pieces, learn from your mistakes, and start again.