Tag Archives | competitive advantage

Why do most startups fail?

why most startups fail

Right now is the time of innovation – kickstarters and new types of marketing campaigns are popping up everywhere. You might have an idea yourself, regardless of whether you’re a Millennial, Generation X, or even a Baby Boomer! So how do you know if your idea is a good one?

As I have mentioned in previous posts, I am an adjunct professor at the University of Houston Wolff Center for Entrepreneurship. In one of our first classes, we discussed an interesting topic: the survival rate of a new business, and why most startups fail.

According to Fortune, 9 out of 10 new businesses fail. The number one reason for why most startups fail was not having a product that serves the market. I asked the students this question, and now I’ll ask you… Do you think a good product is enough to survive in the market?

Top 5 Reasons Why Most Startups Fail

The answer to that question is no. A number of factors play into why most startups fail. Here are a few:

#1: People don’t need it!

The number one reason for the failure of a business is creating a product for a market that doesn’t need it. The first thing you should do, before you spend all of your cash on producing and prototyping your product, is market research. Who is your customer? How many customers are out there? How much are they spending on a product that serves a similar function? If you can’t answer all of these questions about your idea immediately, then maybe this isn’t the best business to invest in.

 #2: Cash wasn’t King

Where are you spending your money? Research shows that 29% unfunded startups fail because they ran out of money. We can assume that they spent the money on research and development, marketing, salaries, and other overhead expenses. How did they run out of cash in the first place? Because the financial leaders overlooked important, and possibly tedious details.

Also consider that different businesses see profits at different times. You may go 5 years without seeing a dime. Or maybe it’s the other way around –  some startups might skyrocket after a couple of years. But do they have enough cash to keep them afloat? Looking ahead is always important when you manage your finances. Like gas in a jet, cash is the fuel to keep your business running. Cash is king.

Even if you aren’t starting a new business, taking a look at your company as a whole is always a good idea when making big decisions. Download our free Internal Analysis whitepaper to learn how!

#3: Lack of a Quality Team

why most startups failObviously when you start a company, you want the best staff you can build. However, most startups can’t afford “the best of the best.” There may be certain skills that you need, tasks that need to be done quickly, but your staff simply cannot keep up.

Let’s say your team has all the skills you need, but they don’t communicate or work well with others. You’ve just invested your money in a team that could fall apart. It’s better to a have a team that learns the skills and has a positive attitude, versus a skillful team with a negative attitude. In this case, quality is defined by the talent in the person, not just the skills they bring.

#4: No Competitive Advantage

On top of marketing research, you also have to conduct competitive research when you start a business. What makes your company unique? In a way, a condensed competitive scope may indicate that your product is needed. What you have to figure out is how to make your brand more attractive than your competitor’s.

This means more than just “being the cheaper alternative.” The intellectual property itself has to have that secret sauce… which also means that you answer your customer’s problem better than your competition.

#5: Poor Pricing

Poor pricing is another reason why most startups fail, so don’t underestimate the power of smart pricing.

The Startup Roadmap

Solve a Problem > Build a Good Team > Research/Develop the Idea >

Financial Projections > Look for Funding > Develop Product >

Disrupt a market.

This is a general roadmap of a startup. Typically, it takes 3 years to be successful in an industry. Think about it – when you apply for a job, they look for people with 3+ years experience. Why? Because they have 3+ years experience in a skill set. The interviewee knows how to navigate a problem and has practiced solving it. Same goes for a business.

Why Banks Turn Startups Away

The research pwhy most startups failreviously mentioned shows data for companies that have been around 3-5 years. I like to think that after you pass the first three years, things get easier for your company. For example, banks need to see at least 3 years of financial statements. You may not need profits for all three years, but you should be trending upward by year three for banks to consider investing in your business.

Banks turn away companies less than three years old for multiple reasons. One is that new or small businesses are more risky than larger businesses. Post-recession, banks have to be more strict with who they lend to. Banks also earn less profit on smaller loans. If you think about it, banks underwrite a $5 million loan for the same cost of underwriting a $50,000 loan. It makes more sense to focus on the larger loans, with a less risky business.

Conclusion

Although it seems like everyone around you is looking for that next big idea, really think through your next venture. Do you have a market, cash, and a good team? What is your competition like? And finally, what is your pricing strategy? If you create a roadmap and make financially sound decisions, your startup should already look better than most.

Speaking of making financially sound decisions, check out our free Internal Analysis whitepaper to assist your leadership decisions and create the roadmap for your company’s success!

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More Questions Your Banker Wants Answered…

monopoly bankerIn a recent post, I talked about a conversation I had with our banker and the three questions she’d most like answers to.  In case you missed it, her questions were…

  1. How are you feeling about your business and the local economy?
  2. What is the outlook for the rest of the year?
  3. What are you doing about it?

More Questions Your Banker Wants Answered…

In response to the article, several of you reached out with questions of your own to add to the list.  Not surprisingly, the questions largely focused on what is going on in the Houston economy right now as a result of the decline in oil prices. Here were your thoughts:

1.  How is the current economic situation impacting your specific industry?

If you’re doing business in Houston you’ve likely felt (or will soon feel) the effects of the drop in oil prices.  Even if you’re not in the energy sector, your banker wants to know that you’ve taken a look at how the economic situation may affect you.

2.  What are the recent trends in your industry that impact your operations?

What other trends are affecting your industry?  Government regulation, increased competition, technology, substitution, etc.?  Your banker wants to know what your plan is to deal with these trends whether it entails mitigating risks or exploiting a competitive advantage.

3.  What are your 5- and 10-year goals and what are you doing today to achieve those goals?

It’s important to your banker to know where you’re headed in the long-term.  It’s easy to get wrapped up in the day-to-day operation of a business, but your banker wants to know that everyday decisions are made with the bigger picture in mind and not just reactions to the situation on the ground.

In the original article, I talked about the 5Cs of credit and how Character was the most important “C”.  Based upon your comments, I’d have to say that Conditions may be of greater importance (or at least more immediate) to you in the current economic climate.

Thanks so much for your feedback!  I’d love to hear what other questions you have.

Questions your banker wants answered

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Value Chain

See Also:
Valuation Methods
Value Drivers: Building Reliable Systems to Sustain Growth
Porters Five Forces of Competition
Responsibility Center
Cost Driver

Value Chain Definition

Value chain refers to the functional activities of a business that add value to its customers. The concept was created around 1985 by Michael Porter, Harvard Business School professor. According to Porter, it consists of primary activities and support activities, all of which add value to the products or services offered by the business. Ideally, the company’s products pass through the activities of the value chain and along the way each activity adds value to the products.

When managing the value chain system, the idea is to optimize the chain so as to maximize value while minimizing cost. A business must use its value chain activities to create value, and then capture that value. The value created by this chain should exceed the sum of the values added by each individual activity.


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Porters Value Chain Analysis

Value chain analysis is an important strategic tool for business management. This model allows a business manager to identify the activities that add value to the business and those that do not.

The idea is to divide the activities into primary activities (those activities that relate to core operations, sales, marketing, and customer service), and support activities, which are activities related to human resource management, firm infrastructure management, information technology and technology development, and procurement. And then to identify which activities add value and which don’t. Presumably each activity adds some value.

For the activities that add value, the business manager must identify the costs associated with each activity as well as the value drivers for that activity. Furthermore, the purpose of the analysis is to ensure that the value created by the activities exceeds the cost to perform those activities. Improving the performance of the functional activities involves trying to maximize the value created by the activities while minimizing the cost to do so. For each activity, and for the value chain as a whole, the objective of the value chain analysis is to find ways to create and capture value.

Typical Primary and Support Activities Include:

Primary Activities

Typical primary activities include the following:

Support Activities

Typical support activities include the following:

Value Chain and Competitive Advantage

When analyzing a value chain in terms of competitive advantage, the idea is to compare the aspects of the business’s chain to the aspects of the value chains of competitors. The value-creating activities in a company’s value chain contribute to competitive advantage when they meet one of two criteria.

  1. The activity is not performed by competitors
  2. The activity is performed superiorly than similar activities performed by competitors

Value Chain and Supply Chain

See the supply chain as a system of interconnected value chains. Each business along the supply chain contributes value to the supply chain via its value chain. According to Michael Porter, a value system is the interconnected system of value chains along a supply chain. Participating in a strong value system can increase the competitive advantage of a business.

The concept of the value system is similar to the value chain but on a broader scale. The idea is to maximize value created by the value system while minimizing costs. Therefore, analyze the entire system with the objective of creating and capturing value throughout the entire system. Optimizing a value system for increased efficiency and lower cost makes the overall system more valuable than the sum of its contributing value chains and adds value to the end consumer of the products.

If you don’t want to leave any value on the table, then download the Top 10 Destroyers of Value whitepaper.

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Proprietary Trading

Proprietary Trading Definition

Proprietary trading definition is the act of companies profiting directly from the market rather than working on a commission basis. Several companies who have a competitive advantage in an area of trade often do this.

Proprietary Trading Meaning

Larger companies who have expertise in a certain market usually perform proprietary trading. For example, an energy company will have extensive knowledge of how oil and gas will be traded. These companies use this advantage to their benefit. It can however get out of hand when a large company has the ability to manipulate the trading amounts. For example, Enron exuberated too much control over the trading energy numbers. If done correctly, then proprietary trading can provide major benefits to a company and provide some well made profits over time.


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proprietary trading definition

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See Also:
Exchange Traded Funds
Currency Exchange Rates
How to Select Your Commercial Insurance Broker
Capital Gains
Credit Rating Agencies

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