Singapore is recognized as one of the most entrepreneur friendly countries in the world. However, if you are among those aspiring to start a business, here are some worrying statistics on start-up failures. A 2012 study conducted by the Harvard Business School on more than 2,000 start-up companies revealed that 75% start-up businesses fail. A 2014 CB insights report on ‘start up deaths’ indicates similar start-up failure rates.
You don’t start a business thinking that it is going to fail. However, it is important to understand factors that put your business at risk of failure.
1. Lack of a strong product proposition
Businesses sell products and services that meet customer needs. Most businesses fail because they simply do not offer a compelling value proposition. In today’s tough economic conditions, your product needs to be something that is substantially superior to an existing offering, or something that is radically new.
2. High cost of customer acquisition
One of the most common causes of start-up failures is that the cost of customer acquisition (CCA) exceeds the lifetime value of the customer. Failing to pay attention to CCA makes the business model unsustainable. A growing business should ideally recover CCA within 12 months.
3. Ineffective management
Lack of decision-making and an unrealistic management strategy leads to delays in getting the product to market. If you want your management team to be as motivated as you are in running the company, give them 15 – 20% equity ownership. Hire a team that is experienced in working on a shoestring budget.
4. Run out of cash
Companies in the start-up stages are most likely to run out of capital. The valuation of your start-up will increase only if you meet the milestones of the business plan. Inexperience in knowing when to spend or how much to spend, often lead to the company running out of cash before it reaches planned milestones, making it difficult to attract fresh investments. When starting your business, plan to raise enough capital for making the product and test your sales and marketing tactics.
5. Lack of flexibility
Things may not go as planned. Yet many business owners keep heading in the same failing direction. You need to change the business strategy while you still have the money in the bank. For example, instead of selling to individuals, you may need to shift focus to selling to companies.
6. Bad timing
Sometimes it’s not your team, strategy, or product that is the problem. Factors beyond your control, such as a change in government regulations or a banking crisis, may affect your business. It is best to wait for conditions to improve before you go down the entrepreneurial road again.
If your start-up fail does fail, spend time analyzing what went wrong. That is the only way you are going to improve your chances of success the next time, and yes there will be a next time!