How will startups destroy you company?

What is the purpose of this article?

  • Help startup founders understand what’s necessary to destroy incumbents.
  • Help incumbent board of directors, CEO, C-Suite, and investors to understand what must change to both survive attacks by startups and to destroy established competitors.

You can download a PDF of this article from:  How will startups destroy your company

What are the critical learnings?

  • Founders have current and relevant knowledge and experience vs your company leaders having obsolete knowledge and experience.
  • Founders learn and unlearn faster than your company’s leaders.
  • Founders have a better ongoing understanding of customers (what their urgent problems and needs are, how they perceive value, how they make buying decisions, etc.) than your company’s leaders.
  • Founders make quicker decisions with better decision making processes than your company’s leaders.
  • Capital is unlimited these days. What is extremely scarce is leadership talent able to identify large numbers of customers with urgent problems they are willing and able to pay for.

Where is your company today?

  • Your company is a large, well established incumbent.
  • Your company is not in crisis.
  • Revenues and sales have been growing yearly and are forecast to continue to grow.
  • Your board of directors is well compensated.
  • Your C-Suite is well compensated.
  • Your board of directors and C-Suite agree that everything is going well and that there is no need to make any major changes to the board, the C-Suite, or the company’s business model.

How fast can your company end up in crisis?

  • Your company can go from double digit CAGR to negative CAGR within 3 years.1
  • Even country empires can fall within 5 years e.g. France in 1700, The Ottaman Empire in early 1900’s,. the Soviet Union in the late 1900s. 2
  • Blackberry was the cell phone leader in 2007. The iPhone was announced in 2007.  In 2008, the iPhone unit sales already exceeded Blackberry unit sales.

Will your company survive crisis?

At any given moment, 5-7% of incumbents are in free fall.  Free fall occurs when a mature incumbent comes under severe attack by new insurgents.  Only 10%-15% of companies ever pull out of free fall. 3

What’s the approach used by startups to attack your company?

Focus on creating value for C&U (Cash paying customers and users)

  • Develop deep and ongoing understanding of C&U problems and needs.
  • Develop deep and ongoing understanding of the value C&U obtain from addressing each component of their problem.
  • Focus on determining and identifying large numbers of customers with problems they are willing and able to address.
  • Constantly monitor whether or not customers and users perceive that they are obtaining value.
  • Understand why existing C&U are recommending or not recommending the startup.
  • Understand how C&U perceive the startup relative to your company.
  • Understand how C&U perceive the startup through the entire life item of the C&U relationship: marketing, sales, onboarding, product and service delivery, CU& support, and exiting.
  • Understand how and why customers decide to purchase or to exit. Understand how customers assess potential suppliers.

CEO and C-Suite Talent

  • Clear about the purpose of the startup – why does and must the startup exist. Understanding why now is the right time.
  • Each startup employee has a major impact on value creation.
  • Able to learn and unlearn quickly. E.g. The founders of the majority of unicorns (startups which achieved a $1billion valuation) had no previous domain experience.4 Roche paid $1.9 billion US for Flatiron Health, a cancer electronic records company. The Flatiron founders (Nad Turner and Zach Weinberg ) had no background in cancer. They came from advertising.5
  • Constantly experimenting with customers and creating new business models ahead of your company.
  • Able to fundamentally change direction based on solving urgent problems of customers willing and able to spend money. g. YouTube started as an online dating site, and Slack started out as an online gaming platform.6
  • Able to attract and create ongoing relationships with a broad range of talent: cash paying customers, employees, advisors, investors, etc.
  • Faster decision making than your company and better decision making processes.
  • Quickly re-allocating people and capital to what most impacts value creation.

The availability of unlimited capital and global talent.

  • Once a startup demonstrates that there are a large number of customers with urgent problems they are willing and able to pay for – there is unlimited global capital to fund rapid growth as long as the long term profitability of customers exceeds customer acquisition costs. Growth is not constrained by short-term profits.
  • The startup can from day one draw upon talent on a global basis. Even in the pre-COVID days, I was surprised that startups with a handful of staff were already operating globally with global staff.

The behaviour of everyone in the company

  • Everyone in your company can understand and relate to the purpose of the company. I love the story of when President Kennedy visited NASA and asked a janitor sweeping the floor why the janitor was working so late.  The janitor supposedly said: “I’m helping put a man on the moon.”
  • Leaders never criticize those who bring forth unpleasant realities.
  • People bring data, evidence, logic, and analysis to discussion.
  • Think and act with calm determination.
  • Leaders have a high question to answers ratio, challenging people and pushing for insight.
  • Team members unite behind a decision, even if they disagree with it.
  • Team members credit others for success yet also has the confidence and admiration of peers.
  • Team members argue and debate to find the best overall answers.

What are your next steps?

  • Assess and improve the ongoing process for your leaders to understand your customers and users.
  • Ensure your leaders are aware of global startups which could threaten your company.
  • Define the requirements for your leaders current, relevant knowledge, experience, skills, and networks. Assess your leaders relative to requirements and the competition. Begin this assess with the board of directors and C-Suite.

Footnotes

1 Chris Zook and Charles Allen, The founders mentality, 2016, Page 52

2 Chris Zook and Charles Allen, The founders mentality, 2016, Page 106

3 Chris Zook and Charles Allen, The founders mentality, 2016, Page 51

4 Ali Tamaseb, Super Founders, New York, New York , Hatchette Book Group, 2021, page 267

5 Ali Tamaseb, Super Founders, New York, New York , Hatchette Book Group, 2021, page 252

6 Ali Tamaseb, Super Founders, New York, New York , Hatchette Book Group, 2021, page 267

What further reading should you do?

Do you understand your customers?

https://koorandassociates.org/understanding-customers/do-you-understand-your-customers/

Why is learning critical for your company’s success?

https://koorandassociates.org/avoiding-business-failure/why-is-learning-critical-for-your-companys-success/

What are the three types of talent successful company’s require?

https://koorandassociates.org/creating-business-value/what-are-the-three-types-of-talent-successful-companies-require/

Is your company planning to fail?

https://koorandassociates.org/avoiding-business-failure/is-your-company-planning-to-fail/

How do you make strategic decisions?

https://koorandassociates.org/corporate-governance/how-do-you-make-strategic-decisions/

Why is learning critical to your company’s success? V2

What it the purpose of this article?

Enable founders, CEOs, boards of directors, C-suite, and investors to discuss what people need to learn and how to learn. The focus is on your company’s value creation plan.  The concepts also apply to all other parts of your company.

You can download a PDF of this article from: Why is learning critical to your company’s success V2

 What are the critical learnings in this article?

  • Facts, assumptions, knowledge, experience, and skills are rapidly becoming out-of-date.
  • Making and executing decisions based on out-of-date facts, assumptions, knowledge, experience, and skills often leads to company failure – be it a startup or long-established global company.
  • The challenges are: leaders (e.g. board directors, C-Suite) not wanting to learn and/or unable to learn, determining what to unlearn and learn, as well as how to learn.

 Why focus on learning?

The inability to learn is the root cause of many companies failing. “The assumptions on which the organization has been built and is being run no longer fit reality.”1  This is true whether you are a pre-revenue startup or a long-established global company.

Why are assumptions critical?

All forecasts and plans are based on assumptions.  It is impossible to predict with 100% accuracy what will happen in the future and what the results will be from your decisions and actions.

It’s getting harder to make appropriate assumptions about the future because your company’s ecosystem will be getting more complex, the interactions between ecosystem members will be getting more complex, and changes will be occurring more rapidly to both your ecosystem members and the nature of their interactions.

Past results also often reflect assumptions rather than facts.  For example:

  • Did a good result occur due to good talent and good process OR was poor talent and poor process lucky?
  • Why didn’t customers buy your solution? Did you ask your customers?  Did they tell you the complete truthful explanation?
  • The interaction of your companies ecosystem members was complex. Hard to actually determine what the cause and effects were. Did your analysis reveal correlation rather than cause and effect? Correlation could lead some one to say “cancer causes smoking.”
  • Did you identify the past critical assumptions for success?

How fast is knowledge growing?

In 1982, futurist and inventor R. Buckminster Fuller estimated that up until 1900, human knowledge doubled approximately every century, but by 1945 it was doubling every 25 years. In 2020 it was doubling every 12-13 months.2

How do you know if your knowledge is out-of-date?3

Knowledge becomes out of date and decays.  The rate of decay varies by the specific area.  Just as the amount of knowledge is rapidly increasing, the amount of obsolete knowledge is rapidly increasing. Your decisions and actions must be based on the current situation, not on what existed a few years ago.  Your decisions should not be based on hopes, dreams, unvalidated assumptions, and missing or incorrect facts.

What is learning?

“Learning is about acquiring diverse, rare, and valuable chunks of knowledge through people, information, and experiences.”4  Learning must result in value.  You need both diverse and in-depth areas of learning, which will change over time.  Learning is far more than facts and data.  New mental models, frameworks, paradigm, and ways of thinking are all part of learning.

Are company learning efforts effective?

Most companies fail to help their employees learn.

  • 70% of employee report they do not have mastery of the skills needed to do their jobs. Only 25% of respondents believe training measurably improved performance. Only 12% of employees apply the new skills they learn in leadership and development programs to their jobs.5
  • 7% of the leaders polled by a UK business school think their companies develop global leaders effectively.6

What are the challenges to learning?

  • Knowing what to learn and what questions you need to answer. McKinsey states that the first step in strategy is asking “What are the right questions?”7  Are you focused on the right problem? Albert Einstein supposedly said “If I had only one hour to save the world, I would spend fifty-five minutes defining the problem, and only five minutes finding the solution.”
  • If people do not apply what they learn, they will forget 42% after 20 minutes, and 75% after 6 days. 8
  • You need to unlearn obsolete knowledge.9
  • Finding the relevant knowledge to be able to address your problems.
  • Being able to filter out the ever-increasing amount of mis-information.
  • Finding the right people with the appropriate knowledge.
  • Learning at the wrong time. You learn best when you have to learn what is needed immediately.
  • Learning the wrong things. Learning what has limited impact on performance and value creation.
  • You don’t have the ability or desire to learn new: mental models, paradigms, or areas of deep expertise.

What areas do you need to learn about?

The following are some of the areas:

  • Understanding the members of your company’s ecosystem. For example, customers: what are the cash paying customers urgent problems and needs for which they are willing and able to pay to solve? How may of these customers are there?
  • Understanding how the ecosystem members interact and impact each other. For example, pressure from various members can result in shareholders voting in board members who are focused on dealing with climate change.
  • What are possible future scenarios and trends, and how will they be different from the past?
  • What are the talent capabilities required to make decisions regarding the company’s competitively differentiated value creation plan?
  • What are the appropriate decision-making processes? Strategic decision making, tactical decision making, and day to day decision making processes are much different.

Some of what you need to learn includes: facts, knowledge, mental frameworks, paradigms, skills, processes, and analytical techniques.

How do you learn?

The key principle of learning is to learn and apply the learning at the time you need it.  This can be done in many ways:

  • Coaches and mentors helping you to address your problems and needs. These coaches and mentors could include colleagues and external advisors. You may have to pay your external advisors for timely access. The value of learning is reduced if you have to wait days or weeks to address your issues.
  • Formal education at which you work through your specific problems and needs.
  • Micro-courses (a few minutes to an hour) to immediately help when you have a problem or need.
  • Online help systems to provide you with immediate answers.
  • Reaching out to experts in your network, both paid and unpaid.

Use the Feynman Technique10

This technique was developed by Richard Feynman, Nobel Laurate Physicist.

  • Write down what you know about the problem or need. This includes facts and assumption.
  • Be able to teach it to a child. Use plain simple words, without acronyms and complex terminology. If you have difficulty in making this short and simple, then your have the opportunity to improve your understanding.
  • Identify what you don’t know. You may not know what you don’t know. Your research may involve contacting others as well as reading.
  • Organize what you’ve learned into a story with simple sentences and analogies. Tell the story of your learning out loud.

Richard Feynman’s example of how to explain what the universe is made of to grade 7,8,9 students. “All things are made of atoms – little particles that move around in perpetual motion, attracting each other when they are a little distance apart, but repelling upon being squeezed into each other”.

Write notes out by hand, not typing into a phone, tablet, or notebook.11

  • Understanding and the ability to apply learnings requires note taking. Take notes whenever you want to lean: e.g. meeting or interviewing people, attending seminars.
  • Research has shown that hand taken notes result in deeper understanding and improved ability to apply the learning, compared to typed notes. Typed notes are usually much longer than hand taken notes.
  • The research hypothesis is that hand taken notes require your brain to think about what you’re seeing and hearing, and to synthesis and process your learning.

What are your next steps?

You must develop a learning plan for your specific situation, be it yourself or your entire company.

  • Document the historical results of your company’s value creation plan?
  • Analyze the historical value creation results? Compare the historical results compare to the competition. List your findings.
  • Document the current talent capabilities and process for making decisions regarding your value creation plan.
  • Define the changes you need to make to the talent and process based on what you’ve learned from: your historical analysis and from others.
  • Create your learning plan for your decision makers. Who needs to learn what and how they will learn.
  • Establish a learning performance monitoring process to address questions such as: how well are individual leaders learning? What is the impact of their learning?

Footnotes:

1 Perter F. Drucker, “The Theory of the Business,” HBR.org, Harvard Business Review,1994 September-October issue, https://hbr.org/1994/09/the-theory-of-the-business

2 Michael Richey, PhD, Chief Learning Scientist, The Boing Company, “Future Systems of Learning and Knowledge Development: Human Capital, Sociotechnical Systems and the flow of Information“, SRI International,  https://www.sri.com/wp-content/uploads/2020/08/NSF-08.06-2020-Future-of-Learning.pdf

3 https://hbr.org/2012/11/be-forewarned-your-knowledge-i

4 Michael Simmons, “The No. 1 Lifelong Habit of Warren Buffett: The 5-Hour Rule”, Medium, https://medium.com/accelerated-intelligence/the-no-1-lifelong-habit-of-warren-buffett-the-5-hour-rule-57884dce03f3

5 Steve Glaveski , “Where companies go wrong with learning and development” Harvard Business Review Oct 2, 2019  https://hbr.org/2019/10/where-companies-go-wrong-with-learning-and-development

6 Pierre Gurdjian, Thomas Halbeisen, and Kevin Lane, Why leadership development programs fail McKinsey Quarterly Jan 1, 21014 https://www.mckinsey.com/featured-insights/leadership/why-leadership-development-programs-fail

7 Chris Bradley, Angus Dawson, and Antoine Montart, “Mastering the building blocks of strategy”, McKinsey, October 2013 article

https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/mastering-the-building-blocks-of-strategy

8 Steve Glaveski, “Where companies go wrong with learning and development”, Harvard Business Review Oct 2, 2019 https://hbr.org/2019/10/where-companies-go-wrong-with-learning-and-development

9 Mark Bonchek  , Why the problem with learning is unlearning. Harvard Business Review November 3, 2016 https://hbr.org/2016/11/why-the-problem-with-learning-is-unlearning)

10  Taylor Pipes, “Learning from the Feynman Technique”, Medium, August 4, 2017 https://medium.com/taking-note/learning-from-the-feynman-technique-5373014ad230

11 Cindi May, “A learning secret: don’t take notes with a laptop”, Scientific American , June 3, 2014 https://www.scientificamerican.com/article/a-learning-secret-don-t-take-notes-with-a-laptop/

What further reading should you do?

The seven essential elements of a life-long learning mindset

Jacqueline Brassey, Nick van Dam, and Katie Coates McKinsey Feb 19, 2019

https://www.mckinsey.com/business-functions/organization/our-insights/seven-essential-elements-of-a-lifelong-learning-mind-set

How do you grow your company’s value?

https://koorandassociates.org/creating-business-value/what-is-value-growth/

Is your company  planning to fail?

https://koorandassociates.org/avoiding-business-failure/

Is your company planning to fail?

The purpose of this article:

Help board of directors, CEOs, and founders understand:

  • Whether or not they have a plan for their company to fail.
  • How to address the two critical issues in plans which enable the company to fail.

You may download a PDF of this article from: Is your company planning to fail

There is overwhelming evidence that most companies are successfully executing their plans to fail.

Few major companies survive:

  • 16% of major companies in 1962 survived until 1998.1
  • Of the 500 companies in the S&P 500 in 1957, only 74 remained on the list in 1997. Only 12 of those 74 outperformed the 1957-1997 S&P index.  An investor who put money into the survivors would have done worse than someone who invested only in the index.1
  • 31% of Fortune 500 companies went bankrupt or were acquired from 1995 to 2004.2
  • 52% of Fortune 500 companies went bankrupt, were acquired, or disappeared between 2000-2015.3
  • 50% of the S&P 500 will not be on the list in 10 years’ time.4

 Most public companies will not survive.5

  • 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.

Companies do not recover from crisis.6

  • 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.

 Few major companies have sustained value creation:

  • McKinsey analyzed the world’s 2,393 largest corporations from 2010 to 2014. The top 20% generated 158% of the total economic profit (i.e. profit after cost of capital) created by those corporations.  This was an average economic profit of $1,426 million per year. The middle 60% generated little economic profit, an average of $47 million per year. The bottom 20% all generated negative economic profit, with an average loss of $670 million per year.7
  • Less than 13% of global companies had sustained value creation in the 1990s.8
  • 12% of public companies had sustained value creation from 2002 to 2012.9
  • Mark Leonard, CEO of Constellation Software, in his final annual CEO letter said: “Qualified and competent Directors are very rare, and not surprisingly, the track record of most boards is awful. According to the 2017 Hendrik Bessembinder study of approximately 26,000 stocks in the CRSP database, only 4% of the stocks generated all of the stock market’s return in excess of one-month T-Bills during the last 90 years. The other 96% of the stocks generated, in aggregate, the T-Bill rate over that period. This means that 4% of boards oversaw all the long-term wealth creation by markets during that period. Even more disturbing, the boards for over 50% of public companies saw their businesses generate negative returns during their entire existence as public companies.”10

 Most Venture Capital backed startups fail

Three quarters of venture capital backed firms in the United States do not return all of the investors capital.11

 What are the 3 greatest contributors to startup failure?12

This research study analyzed 101 startup failures and identified the most frequently cited reasons for failure.  Usually there were several reasons for failure.

  • 42% of the time built a solution looking for a problem i.e. No market need. The is a clear indicator of not understanding the customer.
  • 29% of the time running out of cash.
  • 23% of the time, not the right team.

What do I mean by “A plan to fail”?

What is a plan to fail?

  • Boards of directors, CEOs, and founders make decisions as to what is, and is not, in a plan.
  • They two factors which ensure company failure are:
    1. Not having a deep understanding of the customers and users. Who is buying and not buying?  Why are they buying or not buying?  What are the urgent problems they want to open their wallet for? If they are already a customer/user, why are they staying, or not staying, with you?  If they are not a customer/user, why aren’t they switching?
    2. Having leadership talent which is not competitively differentiated. The board of directors, CEO, and founders need to have competitively differentiated skills, experience, knowledge, networks, morals, and ethics to succeed in the scenarios which may occur in the next 2-3 years. You need to have the right talent at every point intime.  There is little value in having talent who only know how to solve yesterday’s problems with the day-before’s solutions.
  • “A plan to fail” usually excludes a deep understanding of the customer. The plans often include a superficial customer understanding.
  • “A plan to fail” usually excludes ensuring that board od directors, CEO, and founders have competitively differentiated talent. What usually happens is that the talent issue is only addressed when the company is in crisis or failing.

The evidence regarding not understanding the customer is clear.

  • As noted above, poor business results are one of the critical indicators of not understanding the customer. You cannot succeed if you don’t have customers who have a need that your company can solve better than the competition.
  • It’s hard to understand customers if companies don’t listen to them. The 2017 Edelman Trust Survey for Canada showed that only 36% of people believed that companies listen to customers

There is significant evidence regarding the lack of appropriate talent in the boards of directors, CEO, and founders.

Lack of talent is clearly demonstrated above, with the facts regarding the degree to which most companies are successfully executing their plans to fail.

Most company directors do not understand: the strategy; how value is created; and industry dynamics.

  • A McKinsey survey of board directors showed that most had little understanding of their companies. Only 16 percent said directors strongly understood the dynamics of their industries, just 22 percent said they were aware of how their firms created value, and a mere 34 percent said they fully comprehended their companies’ strategies.13
  • A survey of board directors asked how many directors agreed that their members collective skills and backgrounds are appropriate for their organization’s needs: 54% of directors of high performing companies agreed, 40% of directors of low performing companies agreed.14

94% of large company executives site internal dysfunctions as their key barrier to continued profitable growth.15

The board of directors and CEO often lack the capabilities to align HR and IT with the strategy and ensure that most employees are working to achieve the strategy.16

  • 67% of HR and IT organizations are not aligned with business unit and corporate strategies.
  • 60% of organizations do not link their financial budgets to strategic priorities.
  • Incentive compensation is not tied to achieving strategy (70% of middle managers, over 90% of front-line staff).
  • 95% of employees are not aware of, or do not understand the strategy.

The board of directors and CEO lack the talent to plan and oversee major changes.

  • Major changes almost always fail. 12% of change programs succeed. 38% produced less than half the expected results. 50% diluted the value of the company.17

As noted above, few board of directors and CEOs have the talent to identify that their companies are heading into crisis and to successfully recover from the crisis

 Founders are often the cause of start-up failures18

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 strategy and business model, underestimate and misjudge the need for additional skills, and make decisions that don’t reflect the current situation.

Your next steps:

Review your current company plan to identify the degree to which it’s a plan to fail.

  • Determine the breadth and depth of your customer understanding, based on direct input from customers and fact-based analysis of their behaviours and actions.
  • Identify the gaps.
  • Gather your company’s future scenario’s regarding customer’s, the customer’s ecosystem, and the company’s ecosystem. If these don’t exist, make assumptions and use your strategic plan.
  • Outline the competitively differentiated talent requirement’s for your board of directors, CEO, and C-Suite to succeed in the scenarios for the next 2-3 years.
  • Identify the gaps.

Determine the changes required to your pan.

  • Differentiate between aspirational changes and practical to achieve changes.

Identify who will be accountable for achieving the results.

The results are:

  • The board of directors and CEO understand the customers.
  • The board of directors and CEO have the competitively differentiated talent to enable company success over the next 2-3 years.

 

Th further reading sections provides guidance for your planning of your next steps.

Footnotes:

1 “Creative Destruction – why companies that are built to last, underperform the market”, by Richard Foster & Sarah Kaplan

2 “Unstoppable” by Chris Zook, 2007, page 7

3 Accenture 2016

4 “2018 Longevity Report” by Innosight Consulting

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

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

7 Chris Bradley, Martin Hirt, and Sven Smit, “Strategy to beat the odds”, McKinsey Quarterly February 2018, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/strategy-to-beat-the-odds

8 “Profit from the Core” by Chris Zook. 1,800 companies in seven countries with sales in excess of $500 million analyzed.  Criteria were: 5.5% after inflation sales growth; 5.5% real earnings growth; total shareholder returns exceed cost of capital.

9 Christoph Loos, CEO Hilti Group, Swiss AmCham Luncheon, September 1, 2015.  Analysis based on about 2,000 public companies in 2002 with revenues greater than $500 million.  Sustainable value creation defined as: real revenue growth exceeding 5.5% per year, real profit growth exceeding 5.5% per year, and earning cost of capital.

10 https://www.csisoftware.com/docs/default-source/investor-relations/presidents-letter/presidents-letter-april-2018-final.pdf

11 Deborah Gage, “The venture capital secret: 3 out of 4 start-ups fail”, Wall Street Journal,  https://www.wsj.com/articles/SB10000872396390443720204578004980476429190, September 19, 2012

12 https://s3-us-west-2.amazonaws.com/cbi-content/research-reports/The-20-Reasons-Startups-Fail.pdf

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

14 “A time for boards to act” McKinsey Survey 2018 March

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

16 “Creating the Office of Strategy Management”, Harvard Business School; paper 05-701, by Robert Kaplan and David Norton

17 “It’s 8-to-1 against Your Change Program”, Bain website, Managing Change Blog, 2017 June 23

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

 

 

 

 

 

 

 

 

 

Further reading:

Do you understand your customer?

https://koorandassociates.org/understanding-customers/do-you-understand-your-customers/

What will be the board and C-Suite talent requirements?

https://koorandassociates.org/creating-business-value/what-will-be-the-board-and-c-suite-talent-requirements/

Why is learning critical for your company’s success?

https://koorandassociates.org/avoiding-business-failure/why-is-learning-critical-for-your-companys-success/

Can your CEO pass this simple startup test?

https://koorandassociates.org/avoiding-business-failure/can-your-ceo-pass-this-simple-startup-investor-test/

The purpose of this article:

Help board of directors, CEOs, and founders understand:

  • Whether or not they have a plan for their company to fail.
  • How to address the two critical issues in plans which enable the company to fail.

 

You may download a PDF of this article from: Is your company planning to fail

 

There is overwhelming evidence that most companies are successfully executing their plans to fail.

Few major companies survive:

  • 16% of major companies in 1962 survived until 1998.1
  • Of the 500 companies in the S&P 500 in 1957, only 74 remained on the list in 1997. Only 12 of those 74 outperformed the 1957-1997 S&P index.  An investor who put money into the survivors would have done worse than someone who invested only in the index.1
  • 31% of Fortune 500 companies went bankrupt or were acquired from 1995 to 2004.2
  • 52% of Fortune 500 companies went bankrupt, were acquired, or disappeared between 2000-2015.3
  • 50% of the S&P 500 will not be on the list in 10 years’ time.4

 

Most public companies will not survive.5

  • 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.

 

Companies do not recover from crisis.6

  • 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.

 

Few major companies have sustained value creation:

  • McKinsey analyzed the world’s 2,393 largest corporations from 2010 to 2014. The top 20% generated 158% of the total economic profit (i.e. profit after cost of capital) created by those corporations.  This was an average economic profit of $1,426 million per year. The middle 60% generated little economic profit, an average of $47 million per year. The bottom 20% all generated negative economic profit, with an average loss of $670 million per year.7
  • Less than 13% of global companies had sustained value creation in the 1990s.8
  • 12% of public companies had sustained value creation from 2002 to 2012.9
  • Mark Leonard, CEO of Constellation Software, in his final annual CEO letter said: “Qualified and competent Directors are very rare, and not surprisingly, the track record of most boards is awful. According to the 2017 Hendrik Bessembinder study of approximately 26,000 stocks in the CRSP database, only 4% of the stocks generated all of the stock market’s return in excess of one-month T-Bills during the last 90 years. The other 96% of the stocks generated, in aggregate, the T-Bill rate over that period. This means that 4% of boards oversaw all the long-term wealth creation by markets during that period. Even more disturbing, the boards for over 50% of public companies saw their businesses generate negative returns during their entire existence as public companies.”10

 

Most Venture Capital backed startups fail

Three quarters of venture capital backed firms in the United States do not return all of the investors capital.11

 

What are the 3 greatest contributors to startup failure?12

This research study analyzed 101 startup failures and identified the most frequently cited reasons for failure.  Usually there were several reasons for failure.

  • 42% of the time built a solution looking for a problem i.e. No market need. The is a clear indicator of not understanding the customer.
  • 29% of the time running out of cash.
  • 23% of the time, not the right team.

 

What do I mean by “A plan to fail”?

What is a plan to fail?

  • Boards of directors, CEOs, and founders make decisions as to what is, and is not, in a plan.
  • They two factors which ensure company failure are:
    1. Not having a deep understanding of the customers and users. Who is buying and not buying?  Why are they buying or not buying?  What are the urgent problems they want to open their wallet for? If they are already a customer/user, why are they staying, or not staying, with you?  If they are not a customer/user, why aren’t they switching?
    2. Having leadership talent which is not competitively differentiated. The board of directors, CEO, and founders need to have competitively differentiated skills, experience, knowledge, networks, morals, and ethics to succeed in the scenarios which may occur in the next 2-3 years. You need to have the right talent at every point intime.  There is little value in having talent who only know how to solve yesterday’s problems with the day-before’s solutions.
  • “A plan to fail” usually excludes a deep understanding of the customer. The plans often include a superficial customer understanding.
  • “A plan to fail” usually excludes ensuring that board od directors, CEO, and founders have competitively differentiated talent. What usually happens is that the talent issue is only addressed when the company is in crisis or failing.

 

The evidence regarding not understanding the customer is clear.

  • As noted above, poor business results are one of the critical indicators of not understanding the customer. You cannot succeed if you don’t have customers who have a need that your company can solve better than the competition.
  • It’s hard to understand customers if companies don’t listen to them. The 2017 Edelman Trust Survey for Canada showed that only 36% of people believed that companies listen to customers

 

There is significant evidence regarding the lack of appropriate talent in the boards of directors, CEO, and founders.

Lack of talent is clearly demonstrated above, with the facts regarding the degree to which most companies are successfully executing their plans to fail.

 

Most company directors do not understand: the strategy; how value is created; and industry dynamics.

  • A McKinsey survey of board directors showed that most had little understanding of their companies. Only 16 percent said directors strongly understood the dynamics of their industries, just 22 percent said they were aware of how their firms created value, and a mere 34 percent said they fully comprehended their companies’ strategies.13
  • A survey of board directors asked how many directors agreed that their members collective skills and backgrounds are appropriate for their organization’s needs: 54% of directors of high performing companies agreed, 40% of directors of low performing companies agreed.14

 

94% of large company executives site internal dysfunctions as their key barrier to continued profitable growth.15

 

The board of directors and CEO often lack the capabilities to align HR and IT with the strategy and ensure that most employees are working to achieve the strategy.16

  • 67% of HR and IT organizations are not aligned with business unit and corporate strategies.
  • 60% of organizations do not link their financial budgets to strategic priorities.
  • Incentive compensation is not tied to achieving strategy (70% of middle managers, over 90% of front-line staff).
  • 95% of employees are not aware of, or do not understand the strategy.

 

The board of directors and CEO lack the talent to plan and oversee major changes.

  • Major changes almost always fail. 12% of change programs succeed. 38% produced less than half the expected results. 50% diluted the value of the company.17

 

As noted above, few board of directors and CEOs have the talent to identify that their companies are heading into crisis and to successfully recover from the crisis

 

Founders are often the cause of start-up failures18

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 strategy and business model, underestimate and misjudge the need for additional skills, and make decisions that don’t reflect the current situation.

 

Your next steps:

Review your current company plan to identify the degree to which it’s a plan to fail.

  • Determine the breadth and depth of your customer understanding, based on direct input from customers and fact-based analysis of their behaviours and actions.
  • Identify the gaps.
  • Gather your company’s future scenario’s regarding customer’s, the customer’s ecosystem, and the company’s ecosystem. If these don’t exist, make assumptions and use your strategic plan.
  • Outline the competitively differentiated talent requirement’s for your board of directors, CEO, and C-Suite to succeed in the scenarios for the next 2-3 years.
  • Identify the gaps.

Determine the changes required to your pan.

  • Differentiate between aspirational changes and practical to achieve changes.

Identify who will be accountable for achieving the results.

The results are:

  • The board of directors and CEO understand the customers.
  • The board of directors and CEO have the competitively differentiated talent to enable company success over the next 2-3 years.

 

The further reading sections provides guidance for your planning of your next steps.

 

Footnotes:

1 “Creative Destruction – why companies that are built to last, underperform the market”, by Richard Foster & Sarah Kaplan

2 “Unstoppable” by Chris Zook, 2007, page 7

3 Accenture 2016

4 “2018 Longevity Report” by Innosight Consulting

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

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

7 Chris Bradley, Martin Hirt, and Sven Smit, “Strategy to beat the odds”, McKinsey Quarterly February 2018, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/strategy-to-beat-the-odds

8 “Profit from the Core” by Chris Zook. 1,800 companies in seven countries with sales in excess of $500 million analyzed.  Criteria were: 5.5% after inflation sales growth; 5.5% real earnings growth; total shareholder returns exceed cost of capital.

9 Christoph Loos, CEO Hilti Group, Swiss AmCham Luncheon, September 1, 2015.  Analysis based on about 2,000 public companies in 2002 with revenues greater than $500 million.  Sustainable value creation defined as: real revenue growth exceeding 5.5% per year, real profit growth exceeding 5.5% per year, and earning cost of capital.

10 https://www.csisoftware.com/docs/default-source/investor-relations/presidents-letter/presidents-letter-april-2018-final.pdf

11 Deborah Gage, “The venture capital secret: 3 out of 4 start-ups fail”, Wall Street Journal,  https://www.wsj.com/articles/SB10000872396390443720204578004980476429190, September 19, 2012

12 https://s3-us-west-2.amazonaws.com/cbi-content/research-reports/The-20-Reasons-Startups-Fail.pdf

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

14 “A time for boards to act” McKinsey Survey 2018 March

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

16 “Creating the Office of Strategy Management”, Harvard Business School; paper 05-701, by Robert Kaplan and David Norton

17 “It’s 8-to-1 against Your Change Program”, Bain website, Managing Change Blog, 2017 June 23

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

 

 

 

 

 

 

 

 

 

Further reading:

Do you understand your customer?

https://koorandassociates.org/understanding-customers/do-you-understand-your-customers/

What will be the board and C-Suite talent requirements?

https://koorandassociates.org/creating-business-value/what-will-be-the-board-and-c-suite-talent-requirements/

Why is learning critical for your company’s success?

https://koorandassociates.org/avoiding-business-failure/why-is-learning-critical-for-your-companys-success/

Can your CEO pass this simple startup test?

https://koorandassociates.org/avoiding-business-failure/can-your-ceo-pass-this-simple-startup-investor-test/

 

Can your CEO pass this simple startup investor test?

The two-fold purpose of this article is to:

  • Enable CEO’s of established revenue generating companies to identify some potential survival issues.
  • Enable startup founders to assess if they have some deal-killer issues from an investors point of view and from a survival perspective.

You may download a PDF of this article from:  Can your CEO pass this simple startup investor test

Investors, advisors, the board of directors, employees, and others may already be aware of the CEO/founders issues.  This process is intended to increase the CEO/founder self-awareness.

The following are some questions that you can ask the CEO in a 20-minute period.  The questions are those that some investors use to screen out in a quick phone call early stage companies seeking funding.  These questions are known as deal-killers. Individual investors will have various deal-killer issues.

If the existing company has more than one business unit, with different target users/customers (e.g. users are people using Google to do searches, customers are people paying Google to advertise), then the question should be asked of the business unit leader.  The questions can also be adapted for internal users/customers

Deal-Killer Questions

The following questions are those investor deal-killers for a pre-revenue company.  The questions are valid for any stage and size of company. When asking your CEO these questions, remember that much of the actual work and  analysis may have been done by others in the company.  These questions identify if that work has been done and the degree of the CEO’s understanding.

  • Who are the target users/customers and what are their urgent problems or needs?
  • How did you calculate the market size? Number of customers, users, and revenue if you had 100% market share with all possible distribution channels and partners?  Number of customers, users, and revenue if you had 100% market share using your initial or current distribution channels or partners?  What is your initial or current market share, recognizing that not everyone will actually buy, there will be adoption rates as well as competition.
  • How many potential customers did you interview to validate the assumptions above and what did your learn from your interviews? What did you do differently as a result of your learnings?
  • Can your solution easily be duplicated or copied by other companies? What is unique and hard for others to copy?
  • Would you be willing to step aside, if necessary, for another CEO? If so, why?  If not, why not?

How do the questions address deal-killer issues?

The deal-killer issues I use are:

There is not a large number of people with a problem or need they are willing to spend money on.

  • If the market size isn’t large, then investors are not interested.
  • Many startups merely copy a few numbers from consulting report and don’t do their own bottom up analysis supported by potential user/customer interviews.
  • Existing companies must do ongoing user/customer interviews, and surveys to understand the changing user/customer needs as well as user/customer perception of your company’s solution relative to competition.
  • This insight is provided by questions 1,2,3,4

The CEO/founder is not coachable.

  • Some signs that a CEO is not coachable include: They always think they’re right and don’t possess the ability to self-reflect; They are not willing to experiment, learn new things and are not open to change; They are arrogant about their intellectual prowess; They usually are rolling eyes during constructive criticism; They have answers to every question without even questioning the logic of their answers; They react negatively to any constructive criticism; and they are disrespectful of others and/or others’ opinions.
  • Being coachable means: being open to radical changes; when getting constructive criticism, they ask themselves “What can be the benefit of this feedback to me and what is there for me to learn from this feedback?”; They are comfortable acknowledging their ignorance and are willing to do the work in order to fill the gaps in their knowledge.
  • They need to be coachable because they need to learn from users/customers, advisors, investors, distribution channels, partners, and others in order to change their behaviors and actions in an environment where unexpected change is a constant.
  • This insight is provided by question 4.

The solution is easy to copy and duplicate or is already a common commodity solution.

  • Investors seek what is both unique and hard for competitors to copy.
  • New technology and new intellectual property may be hard to copy.
  • There are markets where all solutions get copied, thus the key actions are: understand the user/customers better than the competition; enable users/customers to obtain value quicker than the competition.
  • This insight is provided by question 5.

 The CEO/founder is unwilling to step aside, if necessary, for another CEO.

  • The majority of startup CEOs/founders will end up stepping aside (either voluntarily or forcibly). Few CEOs are like Bill Gates, able to change and learn as they take a startup to a massive global company.
  • CEOs need to understand that they are in place to meet the needs for a point in time (and the next 24 months) and that in 24 months time, they may not be the right person.
  • A CEO who refuses to recognize this will impact the value of any investment, plus result in a painful and costly CEO exit. The CEO may not be enabling the development of a pool of qualified successors, both short-term and long-term.
  • This insight is provided by question 6.

Your next steps

If you are a startup CEO/founder:

  • Ask one of your trusted: investors, potential investors, advisory board members, board directors, or advisors to prepare their 4-5 deal-killer questions, which may be different from what I suggested.

If you are the CEO of an established revenue generating company:

  • Ask one of your trusted: investors, potential investors, advisory board members, board directors, or advisors to prepare their 4-5 deal-killer questions, which may be different from what I suggested. If you are a public company do not ask: investors, potential investors, or bord directors.

In either case:

  • The reason for a trusted person is the assumption that the CEO/founder will listen to and think about the feedback.
  • You should know the questions in advance.
  • You will be probed and asked for the logic and/or proof of your answers. Opinions, guesses, and hopes are of little value.
  • You will have a 20-minute discussion, in which you’ll be asked the questions. The discussion will be recorded.
  • The trusted person will review both their notes and the recording to set down their observations. The recording will then be destroyed.
  • The trusted person will then share their observations with you.

The implications of the constructive criticism observations:

If you are a startup CEO/founder:

  • The CEO/founder is not coachable. Investors will likely decide to not invest or continue investing.  Advisors will likely decide to not be involved, because there is little value and impact from their time investment.
  • There is not a large number of people with a problem or need they are willing to spend money on. If this is a result of logical, fact-based analysis, the investors will decide if the market size still warrants an investment.  If the CEO/founder is bootstrapping, the CEO/founder needs to determine if the potential warrants continuing.  If there has not been sufficient logical fact-based analysis of the target market, the CEO/founder may be coached on how to address this.
  • The solution is easy to copy and duplicate or is already a common commodity product. The CEO/founder will focus on how she will successfully compete against both current and future competitors. Investors will likely not invest.
  • The CEO/founder is not willing to step aside, if necessary, for another CEO. The CEO/founder will require coaching, assuming the CEO/founder is willing. The willingness may also come about when the startup runs into difficulty or when investors require a new CEO in return for funding.

If you are the CEO of an established revenue generating company:

  • The CEO is not coachable. The external environment (customers, competitors, technology, regulation, etc.) is transforming at an ever-increasing pace.  An uncoachable CEO, who cannot learn from others and continually transform themselves is dooming the company to eventual failure. Investors and the board of directors will sooner or later (unfortunately often later) make the decision to exit the CEO. /Advisors will likely decide to not be involved, because there is little value and impact from their time investment.
  • There is not a large number of people with a problem or need they are willing to spend money on. If this is a result of logical, fact-based analysis, the CEO needs to fundamentally rethink the target market and the solution.
  • The solution is easy to copy and duplicate or is already a common commodity product. The CEO needs to understand the logic and facts as to why the company has been successful in this environment, what needs to continue, and what needs to be transformed for continued success.
  • The CEO is not willing to step aside, if necessary, for another CEO. The CEO/founder will require coaching, assuming that they are willing. The willingness may also come about when the company runs into difficulty or when investors require a new CEO in return for funding. Investors and the board of directors will take actions to ensure that qualified successors are available.  The investors and board of directors will also prepare and maintain an exit plan for the CEO, which may be triggered at any point.

If you are in survival mode, should you still consider the long-term?

Few companies survive. Avoiding survival mode and getting out of survival mode requires the talent which can develop and execute a competitively differentiated business plan.  The foundation for survival is competitively differentiated talent on the board and in the C-Suite. The core reason few companies survive is because there is a shortage of talent.

 Overview

  • Few companies survive.
  • How can you tell if you are in survival mode?
  • You may not realize you are in survival mode.
  • You might be in survival model from day one.
  • You might enter survival mode at some point.
  • How do you get out of and stay out of survival mode?

The purpose of this article (supported by a one-page slide) is to provide a framework, process, and facts to enable discussion and action planning among owners/shareholders, boards of directors, CEOs, and advisory boards. There is no one-size-fits-all answer.  The approach and action plan will be unique to the specific situation of each company.

Few companies survive.

Three quarters of venture capital backed firms in the United States do not return all of the investors capital.1

Half of the S&P 500 will be replaced in the next 10 years.2

 How can you tell if you are in survival mode?

Each day is a firefight (get a customer, get some capital, etc.) in order to stay in business. If the current profit trends continue, the business will fail. If current external trends continue, the business will fail. There is no time to think about the future. You may be losing market share, have declining customer satisfaction scores, or be close to breeching financial covenants. Cashflow is declining and may even be negative. You feel you have no time for planning.

You may not realize you are in survival mode.

  • You are hoping things will change. What are the facts?  Are the facts showing that you’re are in survival mode?
  • You’re not tracking your achievements relative to the milestones in your business plan, or you don’t have milestones.
  • You have not validated the assumptions in your business plan. You have little or no customer confirmation of your assumptions.
  • You don’t know what is happening or the trends in your ecosystem e.g. is the market growing or shrinking? What is the competition doing and how are they changing their companies? How are customer needs changing?
  • You have not updated your business plan, or may lack a plan.

You might be in survival model from day one.

  • You lack a business plan and the management talent needed for your business.
  • Your strategy reflects hopes and dreams rather than a range of scenarios. As a result, future events surprise you or you say that you they are black swan events.
  • Your business plan is not achievable. But you don’t realize this.
  • You lack the quality and quantity of resources (talent, processes, technology and capital). But you don’t realize this.

You might enter survival mode at some point.

  • Unanticipated changes to your ecosystem.
  • Unanticipated changes to: customers, their needs, or the competition.
  • Your business plan becomes outdated.
  • You discover internal issues with resources (talent, processes, technology, capital).

How do you get out of and stay out of survival mode?

  • Have a documented business plan, which includes an easy to understand picture of what future success looks like. Peter Jensen, Olympic athlete coach, writes “People can’t do things they can’t imagine.”3 Your business plan must be clear on how your company will create value in the future.
  • The plan has actual results for the past three years, the current year, plus forecasts for the next three years.
  • The world is rapidly changing, with regular surprises (No-one can accurately predict the future 100% of the time). Every month revisit your business plan required improvements.
  • Regularly assess and revise if necessary your board, C-Suite, and advisory board talent.
  • The plan must answer 6 sets of questions
  • Who are the target customers and what are their needs? Do the customers know they have a problem? Why are the characteristics of an customer?  What are the characteristics of inappropriate customers?
  • How will you meet their needs? Why will the customer buy from you?  How does the customer perceive your competitively differentiated value proposition?  What will be the customer experience as you’re meeting their needs?  Who are your competitors?  How are your competitors better than you?  How are you better than your competitors?  Why have past customers bought from you?  What does analysis of past customers reveal?
  • How will you sell to your customers? Are the customers seeking a solution or will you have to find customers?  Will the customers buy from you via a mobile device or direct face-to-face sales calls?  Do you have a range of sales prices e.g. freemium?  What are your distribution channels and who are your partners?
  • What are the key metrics? Net promoter score?4  Customer acquisition costs?  Customer support costs?  Lifetime customer value?  What are you revenue and cost drivers? Margins?  Free cash flow forecast?
  • What are the trends in your ecosystem and the implications for your business plan?
  • What is the board, C-Suite, and advisory board talent needed to achieve the above? Do you have the talent to create a business plan and successfully execute .

What do you if you are a SME (Small Medium Enterprise)5

The availability of talent may be the greatest challenge faced by a SME.  Create an advisory board with the talent to challenge your thinking, and provide insights from their experience, skills, and networks.  An advisory board is not feasible until you have: a strategy, strategic plan, financial plan, and management team.

Conclusion

Few companies survive. Avoiding survival mode and getting out of survival mode requires the talent which can develop and execute a competitively differentiated business plan.  The foundation for survival is competitively differentiated talent on the board and in the C-Suite. The core reason few companies survive is because there is a shortage of talent.

Your next steps

To enable discussion with your board of directors, C-Suite, and advisory board, download the following one-page slide.

If you are in survival mode, should you still consider the long-term?

 Footnotes

1 Deborah Gage, “The venture capital secret: 3 out of 4 start-ups fail”, Wall Street Journal,  https://www.wsj.com/articles/SB10000872396390443720204578004980476429190, September 19, 2012

2 Scott D. Anthony, S. Patrick Viguerie, Evan I. Schwartz and John Van Landeghem “2018 Longevity Report” by Innosight Consulting, 2018 page ,  https://www.innosight.com/insight/creative-destruction/

3 Peter Jensen, Igniting the third factor, Toronto, Performance Coaching Inc., 2008, page 105

4 The Net Promoter Score concept was initially developed by Bain.  The following is a link to the Bain website homepage for Net Promoter Score, which contains several short articles.

http://www.netpromotersystem.com/about/why-net-promoter.aspx

The following is a quick overview of using Net Promoter Scores.

https://www.forbes.com/sites/shephyken/2016/12/03/how-effective-is-net-promoter-score-nps/#1b1391b423e4

5 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

BDC (Business Development Bank of Canada) has a business plan toolbox with samples and templates you may download.  You must customize the business plan to your specific situation and ensure it has the answers to the questions from the above section “How do you get out of and stay out survival mode?”  https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/templates-business-guides/pages/business-plan-template.aspx

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