Purpose of this article.
Help founders, their potential team members, and potential investors begin to understand whether or not they are planning to fail. The article is not intended to be comprehensive in breadth or depth.
You may download a PDF of this article from: https://koorandassociates.files.wordpress.com/2021/03/is-your-early-stage-startup-planning-to-fail-v2.pdf
What are the 3 greatest contributors to startup failure?1
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.
- 29% of the time running out of cash.
- 23% of the time, not the right team.
How do you recognize you’re planning to fail?
How can you tell you are building a solution for which there may be little or no market demand
- You’ve done few or no ongoing surveys and interviews of potential customers or cash paying customers.
- You’ve done no ethnographic or thematic analysis of surveys and interviews.
- You’ve done little or no analysis regarding the number of potential customers who believe they have a problem or need for which they are both willing and able to spend money to address.
- Your estimate of potential market size is based on your personal opinion, or a one-page chart from a 3rd
- You don’t have metrics for customer engagement at the pre-revenue stage.
- You don’t have an ongoing process to validate market demand and market size.
How can you tell you are planning to run out of cash?
- You don’t have a 24 month, by month cash flow forecast, with key milestones for each month. Your milestones don’t include monthly customer engagement targets, even at the pre-revenue stage. You don’t show the month in which the capital from your next fund-raising round is in the bank. You’ve assumed that fundraising only takes a few months. The customer engagement milestones prior to planned beginning of your next fundraising will not persuade investors to part with their capital.
- You assume that you can raise money from 3rd party investors when you have no revenue. Most startups obtain 3rd party funding (i.e. other than friends, family) once there is revenue. 27% of angel funded companies are pre-revenue.2
- You assume that it will be easy to raise money from angel investing groups. 4% of Canadian startups that apply to angel groups receive funding. Only 9% are asked to present to an angel group.3
- You assume that it will take little time to raise funds. The average seed stage round takes 12 ½ weeks. 20% of the startup require 20 weeks or longer. 20% of the startups require 6 weeks or less.4 A fund-raising round can take a long time. This research study examined 13,916 financing events.4 The average time between fundraising rounds was 20.6 months. The time between rounds ranged from 6 months, to 35 months, 68% of the time. e. 16% of the time less than 6 months and 16% of the time longer than 35 months.
- Your cash flow plan has no scenarios e.g. what if customer growth is slower than expected, what if fundraising takes longer.
- You don’t have a cap table, leading all the way to investor exit. The cap table assumptions are not related to your cash flow assumptions.
How can you tell don’t have the right team?
- You haven’t recognized that your team includes: founders, employees, contractors, advisors, board directors, investors, and your network.
- You haven’t identified the complete set of talent requirements and gaps for each stage of your startups evolution. Talent requirements include: ethnographic and thematic analysis, finance skills to create a cap table leading all the way to investor exit, monthly cash flow models and scenarios, presentation and communications skills, etc.
- You don’t know what a startup is. A) A startup is a temporary organization designed to search out a repeatable, scalable, and profitable business model with lots of potential customers who are willing and able to pay to solve their problems and needs. B) Startups are not building a solution. They are building a tool to learn what solution to build.6
Your next steps
As a startup founder:
- Ask your advisors to do an assessment. As they compare your startup to others, are you planning to fail?
2 Angel Capital Association and Hockeystick, “2019 ACA Angel Funders report “
3 A decade of deals, annual report on angel investing in Canada, June 2020, NACO (National Angel Capital Organization)
4“What we learned from 200 startups who raised $360 million”, Professor Tom Eisenmann, Harvard Business School, and DocSend
6 Lean Analytics – Use data to build a better startup faster (2013) by Alistair Croll, Benjamin Yoskovitz, O’Reilly Media, Sebastopol California Page 41