Why Startup Companies Fail – How to Win
As a critical thinker, Dr. Peter Drucker left a giant legacy of thought leadership. For my money, the world’s foremost business philosopher left us with timeless teachings.
A personal favorite of mine is one of his lesser known quotes: “Arrogance is being proud of ignorance.”
The quote is applicable in a myriad of ways – whether it pertains to professionals’ careers or the companies for whom they work. As Biz Coach, I strongly recommend self-assessments for careers and a business-performance analysis for companies.
It’s vital to conduct a thorough needs-assessment of strengths, weaknesses, opportunities and threats – followed by development and implementation of a strategic action plan.
Of course, Dr. Drucker’s quote is also applicable in understanding the No. 1 reason why startups fail. Such companies don’t have a clear picture of their situations. They complacently assume that they do, but most don’t.
Consequently, nine out of 10 fail because they self destruct – not because they’re defeated by competitors. This is true in any sector.
Now, there’s informative confirmation about the reasons for startup failures from another source, Genome.
A Genome report on 3,200+ tech firms cites what it calls “premature scaling.” The startup Genome report concluded that too many early-stage companies try to grow at a pace inconsistent with their capabilities.
Among the Genome-study authors’ conclusions:
- No startup that scaled prematurely passed the 100,000 user mark.
- Ninety-three percent of startups that scale prematurely never break the $100k revenue per month threshold.
- Startups that scale properly grow about 20 times faster than startups that scale prematurely.
“A startup can maximize its speed of progress by keeping the five core dimensions of a startup Customer, Product, Team, Business Model and Financials in balance,” write the study’s authors. “The art of high growth entrepreneurship is to master the chaos of getting each of these five dimensions to move in time and concert with one another.
“Most startup failures can be explained by one or more of these dimensions falling out of tune with the others,” assert the researchers. “In our dataset we found that 70 percent of startups scaled prematurely along some dimension.”
Inefficiency causes failure
My sense is that such new entrepreneurs’ behavior fails to match their goals for success. Too often, they lack cohesive-business behavior. The study appears to confirm this point.
“Every startup has an actual stage and a behavioral stage,” assert the authors. “Actual stage is measured by customer response to a product. A startup is classified as inconsistent when any behavioral dimension is at a stage that is different than the actual stage.”
Hence, they call it premature scaling.
Conversely, the study points out that some companies behave in inferior proportion to their actual situation. For example, they’re not expanding fast enough or they fail to add enough of the right employee skills when they are needed.
Candidly, I love startups, but for the above reasons I don’t work with most of them. It’s one thing for new entrepreneurs to have great ideas, but it’s another when they fail because they don’t understand and implement best practices in management. As a result, they don’t properly manage financials and there are too many unnecessary opportunity costs.
Often, new entrepreneurs simply aren’t good at what they do because they don’t have enough practical management experience, so they insist on charging ahead too fast or they head in the wrong directions. Ultimately, they errantly burn capital.
Bottom-line: The solutions lie in avoiding the pitfalls implied in Dr. Drucker’s quote: “Arrogance is being proud of ignorance.”
New entrepreneurs need to temper their approach and be pragmatic – don’t allow conviction and passion to lead to unproductive exuberance. That’s what leads to chasing ill-health and results in failure.
Instead, seek Drucker-like expertise to fully understand your situation and to guide you. Then, you’ll be in a position to hire the right people at the right time, objectively calculate risk management, optimize processes for critical performance improvements, and adroitly fill the needs of customers for acceptance in the marketplace.
From the Coach’s Corner, a successful angel investor shares his insights: Tips for Increasing Cash Flow, Profits.
Here are two other resource links – my startup strategies published by The New York Times:
Been There… Done That… Here’s How – New York Times
Advice on Taking an Entrepreneurial Leap – New York Times
“When you play solitaire, you can only beat yourself.”
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Columnist Terry Corbell is also a business-performance consultant and profit professional. Click here to see his management services (many are available online). For a complimentary chat about your business situation or to schedule Terry Corbell as a speaker, why don’t you contact him today?
Keys to Economic Development: Managing Ignorance
Here’s a premise on which most businesspeople and educators probably can agree: the legendary Dr. Peter Drucker – as a writer, teacher and consultant – was the ultimate as a business-role model. He surprisingly had some periodic critics in education. He preferred Claremont Graduate University, www.cgu.edu, and reportedly turned down four professorship offers from Harvard.
At the age of 95 in a published interview in 2004, he was asked if he had any regrets about his work.
His response:
“There are many books I could have written that are better than the ones I actually wrote. My best book would have been “Managing Ignorance,” and I’m very sorry I didn’t write it.”
He was a voracious reader, wonderful inspiration to millions, and he lived a long, rich life. As one of my heroes, I selfishly wish he lived longer – he passed away Nov. 11, 2005. His teachings have particular significance for me.
If given the opportunity for an interview, with great delectation I would have relished the visionary’s analysis on numerous fronts regarding the economy.
That includes these four developments:
No. 1: Decrease in educated Americans. The National Center for Public Policy and Higher Education has issued some disturbing news in its policy alert, which is entitled, “Income of U.S. Workforce Projected to Decline if Education Doesn’t Improve.” It calls on the 50 states to do a better job in education to prevent a projected decline in worker skills in order to brighten the future of America’s economy.
The public policy group, www.highereducation.org, contends the American workforce is undergoing major change; especially the core of workers, age 25 to 64. Until at least 2020, the study shows worker wages will continue to decrease. Simultaneously, the number of workers with high school and college diplomas will decline exponentially.
Why? The number of educated white workers will drop from 82 percent to 63 percent while the number of less educated minorities will increase from 18 percent to 37 percent. (The center’s study is available at http://www.highereducation.org/reports/pa_decline/index.shtml)
No. 2: Decline in math and science. America’s expertise in science and technology is fast deteriorating, according to a study by the National Academy of Sciences, www.nationalacademies.org. The report was written by a group of top corporate executives, educators and scientists and is entitled, “Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future.”
In essence, the panel of experts set four goals:
- Improve math and science education in grades K-12.
- A more cordial milieu for science for college and post graduate studies.
- Increase federal funding for scientific research.
- Encourage the growth of family-wage jobs in evolving industries with tax incentives and other fiscal tools.
It wasn’t surprising that the report identified two Asian countries, India and China, as among the nations that will surpass the U.S. in job creation and innovation. (The report is available in a PDF file at http://www.nap.edu/catalog/11463.html.)
No. 3: The quandary over China. The U.S. is appeasing China to excess, according to economist and professor of international business at the University of Maryland, Peter Morici.
“These policies impose huge trade deficits and unemployment on the United States, create enormous imbalances in the global economy, and contribute importantly to the Great Recession,” he wrote in a commentary Oct. 8, 2005.
He is on a quest to educate America about China’s approach, as evidenced in this 2005 e-mail to me: “To secure its supply of oil, extend its influence and solidify internal security, the Chinese government is building a blue-water navy and spending massively to modernize its army
By even us advocates of free trade, it is hard to ignore the professor’s conclusions.
“That means targeted trade sanctions if China does not revalue its yuan and does not respect intellectual property, and if it exploits worker rights to achieve export advantages or otherwise breaks the norms and rules it acknowledged by joining the World Trade Organization, International Labor Organization and other international organizations,” he said.
“It’s time to face up to the fact that China, rather than evolving into a democratic society with a market economy, could just as easily morph into a fascist menace with global reach,” he said. “Appeasement didn’t work for Britain dealing with Germany in the 1930s, and it is not working for America with China now.”
Could Dr. Drucker have related to Dr. Morici’s analogy? Who knows? But when the Nazis banned and burned one of his essays in the 1930s, Dr. Drucker fled to England. He argued against the appeasement of Germany by England.
No. 4: Creation of jobs. Three-fourths of all the planet’s new jobs will be generated by just 9.8 percent of new businesses, according to a research organization, Global Entrepreneurship Monitor (GEM), in its assessment of entrepreneurship in 39 countries.
While women entrepreneurs are a major force in America, most of these anticipated startups are to be launched by well-educated men aged 25-34 years with high incomes in the U.S., Canada, Australia and New Zealand.
Ostensibly, monetary trade issues and the pressures of an uneducated workforce will apparently vex a major economic engine – the world’s startup entrepreneurs. (GEM entrepreneurship reports are available at www.gemconsortium.org.)
So, how would Dr. Drucker analyze such developments? Good question. For clues, I’ll re-read his books in my office.
For starters, consider:
In his book, “Managing for results,” he wrote: “Waste runs high in any business. Man, after all, is not very efficient. Special efforts to find waste are therefore always necessary.”
And while training the board of directors of an organization, I was reminded once again that his writings are a great resource. In answering a question about how I continually evaluate my efficiency, I told the audience that I never end my day’s work until I assess my activities. That is one of my daily efforts thanks, in part, to the management pioneer.
In “Management Challenges for the 21st Century,” Dr. Drucker suggested that it is important for a manager to know the answer the question, “Where do I belong?”
But to answer that career dilemma, he pointed out it is actually necessary for a person to know the answers to three questions:
- What are my strengths?
- How do I perform?
- What are my values?
What a wonderful scholar. In my experience as a business practitioner, I know he was right.
Candidly, as a management consultant, I meet few managers and staff in the workplace who innately know to ask and answer such questions. But after they’re trained in how to accurately assess their strengths and weaknesses, they benefit from an average 30 percent increase in self esteem. As a result, organizations progress nicely as their managers and workers perform much better.
By the way, for many years in HR training classes, I’ve quoted this Dr. Drucker statement: “Arrogance is being proud of ignorance.”
In other words, continual study and evaluation will help a person to avert complacency.
If every businessperson practiced these principles, promoted education and focused on managing ignorance, the economic outlook would be brighter.
From the Coach’s Corner, 58 percent of small business managers and owners believe the economic climate will worsen according to an Aug. 2009 study by Small Business Research Board (SBRB).
Salient SBRB conclusions include:
- Fifty percent of businesspeople in the northeastern part of the nation believe the worst is over.
- The least confident – 62 percent of respondents in the western U.S. fear the worst is ahead.
To read more, visit www.ipasbrb.com.
