Why do our startups fail?

  • Columns
  • Sunday, 12 Jun 2016

It could be due to limited product validation or disputes between partners.

RECENTLY, Cradle Fund had its first Open Day at the Malaysian Global Innovation & Creativity Centre (MaGIC) in Cyberjaya. Cradle has done many similar events before but they were more creatively branded. This time round, we went old school and essentially, had a day open for people to learn everything there was to know about what we did and how we help entrepreneurs build their dreams.

The stats were very encouraging. There were 190 people at the event, an 80% turn out rate despite it being held in Cyberjaya (we had received 236 registrations). We extended the half-day event an additional two hours to accommodate demand for more one-on-one sessions in the afternoon. I guess entrepreneurship is still alive and kicking in Malaysia. This reflects a momentum I have observed over the last five years. A momentum which I hope will continue in the coming years.

At the event, we took the opportunity to celebrate the successes we had achieved over the years, and reeled off numbers to encourage budding entrepreneurs. Some 770 grants had been approved (since 2003), 1,131 entrepreneurs coached and RM845.2mil in revenue have been generated by participants of Cradle’s Coach & Grow Programme and a growing roster of startups, which have gone on to make a name for themselves such as carlist.my, iMoney, Grab (MyTeksi), Flexiroam, Aexio, SocialWalk and EasyUni.

But for every grant we approve, every entrepreneur we coach and nurture, there are easily a few which have failed to scale, or failed altogether, leaving a trail of wreckage affecting not just the founders and their staff, but probably also their families. I am painfully reminded of my own inability to sustain my own entrepreneurial adventure recently.

So why do our startups fail?

The most common issue is limited validation of the product or poor product-market fit. This has to do with the problem you are attempting to solve and the solution you have developed to address the same. Many entrepreneurs dream of solutions to problems that don’t really exist, or exist only in their own worlds. Sometimes, they are just “solutions looking for a problem”, backed by flimsy market research. It could be just a gut feel. Without any rigour, validation risks being based on the founder’s own perceptions of the market. The thesis of the validation might hold up to a point, but as the startup progresses, it begins to show weaknesses and starts to fail. The only way is to test that idea you have thoroughly. Use some of the funds and resources you have to conduct market research, distribute samples and conduct surveys. Use total strangers to validate your idea as they are more likely to give candid feedback. Having validated data to back up your claims, and demonstrating the need or problem that lies at the core of your idea, is powerful beyond just proving that it works, and it will also help you convince investors in your quest for money.

Next is the lack of a comprehensive growth plan covering all aspects of the business such as having talent/manpower requirements and funding for each stage of growth. Those requirements are rarely static or constant. They change as the startup progresses. The plan needs to be able to support the founder effectively otherwise the founder will quickly find himself in a situation where his own abilities, resources and time are stretched to the limit. In such a situation, things start to fall by the wayside. While the founder is busy looking for funding, the marketing plan does not get executed or, execution falls short. These things have a tendency to spiral out of control very quickly.

Or, it could be that the different parts of the business don’t grow together in tandem. Usually, it’s marketing and fulfilment. One grows faster than the other, resulting in a bottleneck, and eventually, customer experience/satisfaction suffers. In a fickle (and crowded) market, you have only one shot to make a good impression. Your loss will be your competitor’s gain. Do it once, you survive for another day. Do it over and over again, and you’ve just signed your death warrant.

Sometimes this asymmetric growth is a function of the founder/CEO himself.

Perhaps one area gets more attention than the other because that’s where his interest or competency lies. Whatever the case, the founder needs a good grip of the overall business to be able to anticipate or identify issues early. Having a good No. 2 or partner to complement the founder or fill in the gaps or weaknesses, is very useful in this case.

This leads to the issue of a lack of talent when a startup reaches a certain size. Most founders start with a certain team when starting out and selection is not done optimally. This could become a problem when you find you have the wrong guy for the job and he becomes a bottleneck. Another aspect is growing beyond that same founding team. Trust issues or the need by the founder to find somebody “that’s just like him/her” stifles growth. Knowing when to let go and trusting the team is critical.

Losing interest is also a big issue. You end up just wanting a paycheck at the end of the month. If indeed a startup finds itself fire-fighting constantly, it will take its toll and everyone will have a limit in terms of how small a salary they can live with. Here, being brutally honest with the motivations behind embarking on the entrepreneurial journey is relevant. The founder and the team need to know what they are getting themselves into, and set realistic expectations and limits.

Finally, arguments between founders/partners/investors. This is when parties have not comprehensively discussed the various aspects of their business, leaving a lot to chance. As Asians, we may be too polite to discuss difficult issues candidly. This is made worse when things don’t get documented because founders cut corners and fail to engage proper legal support in the process.

Take time to reflect and learn from the mistakes of those who have gone before you. When you are ready, the Cradle team will be here to support you and your entrepreneurial ambitions.

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