7 common mistakes that lead to startup failure

14 June 2014

It takes so much self-confidence, risk tolerance, and focus to launch a startup, that entrepreneurs can be forgiven for not listening to others. If they listened more to other people, they would have likely given up on their startup dreams a long time ago.

Given that there are a handful of traits shared by successful businesses, it is not surprising that startups tend to fail in the same ways over and over again. Below are seven common mistakes made by startups that are worth paying attention to – they might just save your business!

Mistake 1: “What hidden costs? I don’t see any hidden costs…”

In the rush to market, entrepreneurs tend to disregard many of the little details about how their great idea will actually get to the market. Distribution and channel costs are often higher than expected, especially for newcomers with small volumes and unreliable order schedules.

Support costs, such as legal, accounting can be much higher than expected as can be the cost of filling out your management team as you grow (not everyone is so passionate about your idea that they are willing to work for free and a chance at payoff in 5 to 10 years!).

There is a place for being focused on the big picture and not sweating every last detail. But, understanding your fixed and variable cost base through the first year or two of operations is key to making it through.

Mistake 2: Bootstrapping without the boots.

There has never been an easier time to launch a startup. It is possible today to launch a business for under $500. But to get from launch to a sustainable business is an entirely different matter.

Startups need sufficient cash on hand to stay operational. Way too many startups fail because the founders don’t have sufficient runway to take their idea through to operational and financial stability.

A good rule of thumb is 18 months of runway to get off the ground. This doesn’t mean you need 18 months of cash burn in the bank when you start (although that would be ideal), but you do need to plan for how you raise funding as you move through this initial capital intensive period of business growth.

One of the cash requirements that are often under-budgeted for is working capital. Many B2B startups need to offer their customers long payment terms in the beginning of their relationship. In this case, new customer wins are a double-edged sword. Considering ways to fund the businesses’ working capital needs as it grows is very important in the early stages of rapid growth.

Mistake 3: “Spare no expense – even if it kills us.”

MVP used to mean Most Valuable Player. Today, it stands for Minimum Viable Product. The use of the MVP approach by Dropbox is one of the most successful examples.

Basically, an MVP approach means starting the company with the most stripped down version of the concept that can work as a viable product. The concept is to get the product or service into the hands of the customer as quickly and cheaply as possible, and use the customer feedback to develop and iterate the concept into a full-blown product or service offering.

The MVP approach has the benefit of giving the startup the ability to undertake low-cost trial and error on new product and service offerings and minimise the cost of product launch failure.

Mistake 4: Hyper-scaling and the need for speed.

Scaling at the right speed is what many business get wrong in the first few years. For small businesses that intend to sell actual products, substantial investments are required to maintain sufficient inventory, people, and systems to run the business.

In the rush to show revenue growth, though, companies often over-commit on their expenses to support potential future growth. Do you really need a full call centre and sales force before the IT department has built the product?

Timing your investment in the business to support growth but preserve capital is one of the keys to statup success.

Mistake 5: Star-struck! The super client with negative value.

Many small businesses believe that winning one super client is the key to success (“just think of the testimonial we’ll get!”). Big, credible clients are obviously great, but they typically want big concessions in order to buy a product or service from a start up.

Too often small businesses sign zero margin or loss-making contracts just to secure a reference customer. Tread carefully. Big clients can, and frequently do, suck up all companies resources and constrain growth in other areas.

Mistake 6: “It’s free now, but people will pay for it later.”

Companies such as Google, Facebook, and Twitter, have grown to massive scale by offering a free product, growing a customer base and not focusing on monetising the customer base until they were very large.

In addition, the “freemium” model has become very popular with apps – where a free basic version of the product is given away for free and the premium version is sold as an upgrade.

These strategies are great and have worked well for many (typically, internet-based) businesses. However, as a general rule, understanding your product, its pricing and why your customers will pay for your product are key aspects of your business.

With the possible exception of internet and app businesses, it is much better to find out early on if your customers are willing to pay a commercial margin for your product or service than to grow your customer base with subsidised pricing and find out down the track that the market just doesn’t support your standard pricing.

Mistake 7: “Go it alone for as long as possible.”

Ever heard this before? “Don’t raise third-party capital too early or you won’t get the valuation you want”.

There is a lot to be said for getting runs on the board before seeking external business finance. However, many small businesses just take this too far and end up running out of cash before they get to build what they want.

The equity capital raise process is long and arduous and for that reason requires planning. The best time to raise equity funding is when you don’t need it, so don’t leave it too late.

Entrepreneurs should also consider how other forms of capital might fit into their capital structure. There are a range of business loan options including Business Overdrafts and lines of credit, trade credit, equipment leases etc. that can offer good funding solutions depending on the nature of your business.

About Shift

Shift is finance on demand for business. Enabled by streaming data, Shift provides credit and payments platforms that help businesses trade, pay and access funds.  As one of Australia’s fastest-growing technology companies. 

Shift is changing the way businesses access finance. Shift has been recognised by AFR’s Fast 100, Deloitte’s Technology Fast50, Smart Company’s Smart50 and Deloitte’s Asia Pacific Technology Fast 500.