Insights

Revising Expectations – Why Some Start-ups Succeed and Others Fail, Some fascinating Harvard Findings

During the Internet boom, companies armed with nothing more than a PowerPoint presentation of a lousy idea could secure tens of millions of dollars in funding – which sometimes gave them enough time to figure out a viable business plan through trial and error. But the opposite was true after the boom; a company could have a great idea and a great team, but still fail to achieve traction due to lack of funding, and consequently, lack of time to let a good model mature. Consequently, Shikhar Ghosh, Senior Lecturer in the Entrepreneurial Management Unit at Harvard Business School says, “these days, start-ups often manage to secure a good team and good financing but still manage to fail.....”

Before we begin to unfurl unsettling facts for bright-eyed entrepreneurs, let’s take a look on how an entrepreneur defines failure.

01

What is an Entrepreneurial Failure?

The statistics are disheartening no matter how an entrepreneur defines failure. Shikhar Ghosh terms failure rate for start-ups as 30 to 40% with investors losing most or all the money they put in the company. Similarly if failure refers to failing to see the projected return on investment, then the failure rate is 70 to 80 percent. And if failure is defined as declaring a projection and then failing short of meeting it, then the failure rate is a whopping 90-95%.

“Very few companies achieve their initial projections,” says Ghosh. “Failure is the norm.”

Why Start-Ups Fail

Here are some fascinating insights gathered by Harvard to answer why start-ups fails, while others succeed ---

Is Funding the Problem?

Yep! In fact these days, too much funding has the potential to turn a little failure into an enormous one. What funding does is cover up all the problems that a company has. It covers up all the mistakes, enables the co. and management to focus on things that aren’t important to the company’s success and ignore the things that are important. When you don’t have the money you reformulate the cat food so that the cats will eat it. And when you have a lot of money you can afford to argue that the cats should like the cat food because it is nutritious.

Are they jumping in too soon?

Yes, another reason for failure. Entrepreneurs often tend to be single-minded with their strategies, surging forward to climb the beanstalk without taking the time to realize that the base assumption of the business plan is wrong. They are all about the technology or all about the sales, without taking the time to form a balanced plan.

Are they too rigid?

“Instead of going into the venture with a broad hypothesis, they commit in ways that don’t allow them to change,” Ghosh says. He cites an example of the failed dot-com-era grocer Webvan, which bought warehouses all over the US before realizing that there was not enough customer demand for its grocery delivery.

A Matter of Timing?

The matter of timing is a huge issue that can determine whether a company gets funding or whether it achieves the start-ups elusive measure of success.

Do Serial Entrepreneurs have a Leg Up on First timers?

Sad, but true. Serial entrepreneurs are more likely to build successful start-ups. By definition, a VC backed entrepreneur who succeeds in a venture has a 30% chance of succeeding in his next venture.

Can you go back to the same VC again, inspite of one failed venture?

Failed entrepreneurs are more likely to get funding than successful entrepreneurs from the same VC firm. Strange, but true.

Ghosh says boards of successful companies often seek out the founders and CEOs of failed companies because they value experience over a clean slate. After all, Henry Ford, Steve Jobs, and Desh Deshpande experienced multiple failures before achieving success.

Are companies that are funded by top-tier VC firms more likely to succeed?

Yes. The reason being either because top VCs are better at identifying potential success or it’s because they’re able to add more value to companies they fund. The Harvard paper assumes both.

Where do most entrepreneurs get their ideas from?

Simple. From former employers.

In Silicon Valley, the fact that your enterprise has failed can actually be a badge of honor. The more that you can embrace all the little failures you have, and treat them as ways of improving the system, the less likely that the entire system will collapse.

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