Why will your company fail?

Overview

  • Most start-ups will fail.
  • Leadership is the underlying cause of start-up failure.
  • Most companies will not survive.
  • The board of directors is weak.
  • Corporate leadership decisions and actions are not fact-based.
  • Corporate leadership has poor decision-making behaviours.
  • Values, morals and ethics are not understood or agreed up.
  • The corporate leader selection and development processes are flawed.
  • Two sets of leaders are critical for success.

Most venture-backed start-ups will fail.1

  • Three quarters of venture backed firms in the U.S. don’t return investors capital.
  • 30-40% of high potential start-ups lose all of the investors money.

Many start-ups do not have any venture-backing.  The overall start-up failure rate is very high.

Leadership is the underlying cause of start-up failure.

The top nine reasons for start-up failures were identified by CB Insights. 2 I’ve shown below my point-of-view as to why leaders and leadership were the root cause.

  • 42% no market need – not obtaining facts as to customers and their needs.
  • 29% ran out of cash – poor management of cash flow and poor reputations with investors.
  • 23% not the right team – unable or unwilling to assemble the right team.
  • 19% get outcompeted – not aware of the competition and customer needs.
  • 18% pricing/cost issues – not aware of customer needs and the competition.
  • 17% poor product – poor ability to design and build a product meeting customer needs.
  • 17% need/lack business model – not understanding that a business model is needed or unable to define one.
  • 14% poor marketing – poor marketing skills.
  • 14% ignore customers – fatal flaw.

 Founders are often the cause of start-up failures3

65% of the failures of high-potential start-ups are due to people problems: relationships, roles and decision-making, and splitting the income. More than 50% of founders are replaced as CEO by the third round of financing.  In 73% of these founder replacements, the CEO is fired rather than voluntarily stepping down. The founder’s passion, confidence and attachment to the start-up is initially a great strength. Founders often refuse to revise their strategy4 and business model underestimate and misjudge the need for additional skills, and make decisions that don’t reflect the current situation.

Narrow focus and too much funding can lead to start-up failure5

“Start-ups often fail because founders and investors neglect to look before they leap, surging forward with plans without taking the time to realize that the base assumption of the business plan is wrong.  They believe they can predict the future, rather than try to create the future with their customer.  Entrepreneurs tend to be single-minded with their strategies – wanting the venture to be all about the technology or all about the sales, without taking time to form a balanced plan.”

“The predominant cause of big failures versus small failures is too much funding. What funding does is cover up all the problems a company has. ….it enables the company and management to focus on things that aren’t important to the company’s success and ignore the things that are important.”

Lack of an advisory board

The above points illustrate the need for an independent advisory board to challenge the thinking of both the CEO and board of directors. Many founders are not willing or able to create and work with a group of challenging advisors.

Most public companies have a short lifespan

Most public companies will not survive.6

  • A Fortune 500 company will survive an average of 16 years.
  • The typical half-life of a North American public company is 10 years.
  • Global public companies with $250 million+ market cap have a typical half-life of 10 years.
  • 50% of all U.S. companies survive for 5 years.

Companies do not recover from crisis.7

  • 20% of companies grow from insurgency to incumbency, but then two-thirds of them stall out and less than 1 in 7 stall-outs recover.
  • At any given moment, 5%-7% of companies are in free fall or about to tip into it. Only10%-15% of companies pull out of free fall.
  • 94% of large company executives site internal dysfunctions as their key barrier to continued profitable growth.

The board of directors is weak.

The board of directors lack the knowledge to make decisions.8 A McKinsey survey of 772 directors revealed a lack of comprehension of their companies. Only 16% said directors strongly understood the dynamics of their industries; 22% said directors were aware of how their firms created value; and 34% said directors fully comprehended their companies’ strategies.

The board of directors lack the background and experience to make strategic decisions. I’ll use a car analogy.

  • People learn to drive cars. People join companies and learn to use processes.
  • People have a problem with the car and go to the mechanic. Management runs into problems and brings in consultants/advisor to fix the problems.
  • A small group of people design cars and figure out how to build cars. People join the board with no experience in designing or figuring out how to build a company, yet make decisions regarding who the CEO should be and what strategy to adopt.

Corporate leadership9 decisions and actions are not fact-based.

  • Corporate leadership does not talk about reality.10
  • Leadership cannot learn from other organizations.
  • Leadership is focused on internal vision and metrics rather than customer needs and external benchmarks.
  • There is no questioning of strategies and plans.
  • There is no personal accountability.
  • Crisis decisions are driven by liability lawyers and public relations experts.

Corporate leadership does not have three critical sets of facts, and does not believe they need these facts:

  • Who are the target customers?
  • What are the target customers needs?
  • Why are the target customers buying from the company rather than the competition?

Without facts on the current situation and external trends, corporate leadership cannot define a fact-based strategy.

  • Who will be the target customers?
  • What will be target customers needs?
  • Why will the target customers buy from your company rather than the competition?

Corporate leadership does not understand the difference between risk and uncertainty.11

  • Risk-based decisions are determined by probability determined from analysis of historical facts.
  • With uncertainty, there are no historical facts from which to derive a probability.

The confusion between risk and uncertainty results in leadership believing they are making fact- based analytical decisions when the decisions are actually based on guesses and hopes.

Corporate leadership has poor decision-making behaviours.

Good analysis done by good managers with good judgement produces poor strategic decisions.12

Only 28% of executives thought good strategic decisions were frequently made.  53% of business improvement is due to the quality of the decision-making process, only 8% is due to the quality and detail of the analysis. The strategic decision-making process is much different form the normal day-to-day decision-making process.

Corporate leadership has five biases resulting in poor decision-making.13

  • Insufficient thought before action.
  • Tendency towards inertia, if uncertain.
  • Misaligned incentives, misunderstanding of strategies and objectives, and emotional attachments to personal perspectives.
  • Preference for harmony over conflict, leading to group think.
  • Recognizing patterns that do not exist.

Companies that have financial success develop behaviours leading to their decline.14

  • Success leads to entitlement and arrogance, believing success will occur no matter what happens.
  • Corporate leadership neglects focus, understanding, and renewal of the root causes of success.
  • “What” replaces “Why” (“We’re successful because we do these specific things.” replaces “We’re successful because we understand why we do these specific things and under what conditions they would not longer work”. Corporate leadership is no longer inquisitive and learning.
  • Corporate leadership believes success is entirely due to their superior capabilities, and that luck had no role.

VME (Values, morals, and ethics) are not understood or agreed upon.

  • VME guide corporate leadership decision-making, especially regarding the large number of conflicts of interest within corporate leadership, and with stakeholders15 and third parties.16
  • People do not understand or agree upon the VME, which results in misaligned decision-making.
  • Mergers and acquisitions often fail because the VME of the two organizations are different, with little effort to reconcile the differences. People often refer to this as “culture”, or “the way things are done here”.  Often the underlying reason for the way things are done are VME.

The Corporate Leadership selection and development processes are flawed.

Poor selection of corporate leaderships leads to company failures, as shown above.

Executive leadership development programs are also broken.  A survey of more than 500 global executives showed that only 11% strongly agreed their leadership development programs achieved results. What were the program flaws?17

  • Not specific to the companies’ strategic plans and drivers of business performance (e.g. turnaround, multiple M&As, organic growth, etc.).
  • Not organization-wide and not at all levels within the organization.
  • Not using digital learning embedded in day-to-day work flows (too much use of the old teacher and classroom model).
  • Leaders did not use social media (blogs, video messages, etc. to communicate with staff)
  • Senior leaders did not act as sponsors, mentors, and coaches.

I do not have facts regarding director development programs, but the degree of business failures would indicate director development programs also have issues.

Two sets of leaders are critical for success.

  • In a successful start-up, the founder creates and leads teams (internal and external) with the right sets of skills, experiences, values, morals, and ethics. As the company grows, teams will change and often the founder is not the long-term CEO.
  • In a public company the CEO and board chair create and lead teams with the right sets of skills, experience, values, morals, and ethics. The facts show this is very hard to do.  I believe the board director selection process is often fundamentally flawed.

In both cases, a founder or CEO should have the self-confidence and learning ability to create an advisory board to challenge and coach the CEO.

What do you do if you are a SME (Small Medium Enterprise)18

All of the points made above apply. A SME will have fewer internal resources and funds to engage external resources.  It is critical to create an advisory board to assist the CEO.

Conclusion

Most start-ups and established companies fail or do not survive.

The CEOs and boards of directors have fatal flaws in terms of customer focus, creating and leading teams, skills, experience, values, morals, ethics, etc.

Competitively differentiated business success requires competitively differentiated corporate leadership, based on competitively differentiated selection, assessment, and development processes.

Your next steps

To enable discussion with your board of directors, CEO, and advisory board download the following one-page slide:

Why will your company fail?

What is your current situation?

  • If you do not have an advisory board, create one.
  • If your are a start-up, collect and analyze facts regarding the nine reasons start-up fail (described above)
  • If you are a public company, assess each individual on your board of directors regarding their knowledge of the company’s strategy, industry dynamics, and how value is created.
  • Appoint potential future directors as board observers for a period of time, and then assess them as to their suitability for nomination to the board.
  • Document and assess whether or not corporate leadership decisions are fact-based, and the decision-making behaviours appropriate.
  • Document and assess VME. (Go to Why are values, morals, and ethics important?)

Footnotes

1 “The venture capital secret : 3 out of 4 start-ups fail”, Deborah Gage, Wall Street Journal Small Business, September 19, 2012  discusses research by Shikhar Ghosh, Harvard Business School

2 “Top 20 reasons start-ups fail”, CB Insights, Oct 7, 2014

3 “The Founder’s Dilemmas”, by Noah Wasserman.

4 Strategy definition: What your successful company will look like in the future. What does future success look like to: customers, shareholders, other stakeholders, third parties, and society? What will be the future business model? What are your facts, assumptions, and scenarios?  An integral part of this strategy definition is: What will be the roles and capabilities of corporate leadership, i.e. board of directors, CEO, advisory board and C-Suite? The CEO and board chair each have a part of the strategy and must co-ordinate their integration.

5 “Why companies fail – and how their founders can bounce back”, Carmen Nobel, Harvard Business School, March 7, 2011

6 “Corporate Longevity”, Credit Suisse, February 7, 2017

7 “The founders mentality”, by Chris Zook and James Allen, 2016

8 “Corporate Boards need a facelift”, Eric Kutcher, (McKinsey Partner) McKinsey website, May 4, 2018

9 Corporate leadership definition: Board of directors, CEO, advisory board, and C-suite.

10 “Why smart executives fail”, by Sidney Finkelstein

11 Adapted from “20/20 foresight: Crafting strategy in uncertain times”, by Hugh Courtney

12 “The case for behavioural strategy”, McKinsey Quarterly, 2010 Number 2

13 “Think again: Why good leaders make bad decisions”, by Sidney Finkelstein, Jo Whitehead, and Andrew Campbell

14 “How the mighty fall”, by Jim Collins

15 Stakeholder definition: Stakeholders have an economic interest in the corporation: shareholders, non-equity capita, customers/ users, employees/unions, suppliers, partners

16 Third-party definition: politicians, regulators, third-party standard setters (e.g. proxy advisory firm, accountants, lawyers), society.

17 “What’s missing in leadership development?”, Claudio Feser, Nicolai Nielson, and Michael Rennie, McKinsey Quarterly, August 2017

18 SME Definition: Industry Canada definitions (2018 May 9): Small business: < $5 million in revenue, < 100 employees; Medium business: between $5 million and $20 million in revenue, 100 to 499 employees.

 

Further reading:

Principles, by Ray Dalio, 2017

“Your company will fail”, koorandassociates.org

“What is the value of a for-profit advisory board?”, koorandassociates.org

“Why are values, morals, and ethics important?”, koorandassociates.org