The majority of start ups fails for precedented and avoidable mistakes. Though innovation needs a degree of freedom to evolve, the discipline, applied by the venture capitalist’s whip can help the management, to focus on the right spot. Though uncomfortable, this might be critical to channel creativity and align with commercial success and ROI.
Innovation is great!! It is fancy, funky, exciting, sexy and meetings are never as creative, interactive and emphatic as in the Start Up scene.
And it is serious business, too. Some of the biggest and most relevant firms in the world are younger than 25 years.
Executives are carving for innovation, to fuel the fantasies of their shareholders and create dreams of growth and wealth for their organisations, well aware of the fact, that also the giants of today’s economy can be forgotten by tomorrow’s dawn.
From Dusk till Dawn
Overnight, new businesses can evolve, just as sudden as their rise, they can close down again rapidly.
For every 11 serious ideas or concepts, only 1 succeeds. Of those, the majority fails to deliver ROI. 62% of Venture Capital in Europe return no money!
Reasons of failure are repetitive. Generally, reasons to fail can be subcategorized into two groups:
1.) lack of market anticipation and customer focus: The most usual reason for failure is a mismatch of business planning, resources, and the market requirements. This falls into three areas:
- failure to understand the needs of the customer – especially technical innovators are observed to focus their start-up initially fully on the product. To create groundbreaking innovation, this might be vital; however, not to miss the switch to change scope for customer needs is core. On a product/service level, the question changes from “can do?” to “needs to do!” This is specifically important to “cross the chasm”. As proven by research, the technological enthusiasts (as described by Everrett Roger as “the innovators” and “early majority”) have significantly different expectations for products and services than mass market consumers. For innovators, it is likely to be a victim to a confirmation bias and feedback their ideas preferably with the group of the technological enthusiasts. Whilst reaching commercial success, crossing the chasm and succeeding in mass markets is absolutely critical.
- underestimating competition – for most fields of business, competitive advantage is a combination of characteristics, of which, none is sustain. Hence, the threats of substitution, copy or becoming subject to acquisition leads to erosion of differential criteria. Only, when relevant marketshare is gained and retained (!) the threat relaxes. Competition never sleeps, hence, success factor for innovation is (et al) time to market and the cadence of iterations to deliver innovation to the consumers.
- lack of finance – is said to be the third reason for failure. From my own experience, finance is of course most crucial for success, though, I’d reframe this from “lack of funding” to “inadequate funding”, including also situations of excess cash leading to scenarios of over investment, being just as critical and dangerous for the growing organization as the opposite.
2.) lack of organisational performance: If not failing in business planning (see above), failures in implementation and execution are easily root cause for default. Among the most relevant are:
- Poor project management during development – whereas the initial phase of vision and prototyping is marked by creativity and a great deal of freedom for trial and error in the field of R&D, obviously, during the implementation and go-to-market phase, timelines and budget restrictions kick in. Time is just as scarce as resources. Sound project management is required to steer the project through the increasingly accelerating business process. Especially for tech start-ups it can become a challenge, to manage the transition from the visionary state to the next level. A lack of project management backfires with delayed market launches and blown budgets.
- competing priorities / poor focus, too many projects – just as one subcategory of the lack of project management, the lack to focus on the most promissing projects and to consolidate the visionary ideas is critical to innovative organisations. This can also be understood as lack of strategy, as sound business strategy requires clear objectives and also the exclusion of the exploitation of certain opportunities, in order to focus resources and investments.
- too much process and bureaucracy / too little process – typically too much bureaucracy is not a characteristic of start-up firms. More over this is one of the most striking reason for the agility of start-ups in comparison to mature organizations; also, it is a motivation for mature organizations to outsource innovation to smaller, independend business units, to bypass the usual protcol. While the strikt limitation of bureaucracy is rewarded with quick decision processes and hence, translates into unorthodox solutions, quick iterration cycles and fast time-to-market tracks, the abscene of a minimum degree of processes limits the scaleability of any firm, as the foundation is not sustain and decisions processes are not predictable and reliable for the employees (and external partners). This limits the ability of the middle managers to claim ownership for business processes and take responsible decisons in their respective fields of business, which again translates into a sudden and immediate limit of growth.
Pleasure & pain
Balancing the various interests of a firm between market objectives and requirements for organizational control during the course of an innovation process, involves a change process for the scope and the attention of the management.
Misjudgement in the early days backfires in a later stage and may impact the economical success of new products and services. A strict financial management and commitment to timelines is essential. As the senior management in start-ups is very often identical with the technical visionaries and founders, hence, unchallenged by fellow executives, it is within the responsibility of the board to enforce these aspects.
The reputation of venture capitalists is not exactly what one would consider being only positive. A short time horizont, the reputation to act reckless with the founders of a firm and only being interested in money sticks to the whole industry.
To turn the perspective around, Start-Ups can benefit from inviting the meanest of all venture capitalists to their board (preferable as minority shareholder, to align incentives but also limit power and control). Having somebody at the board, who is specifically not long term and strategical oriented, doesn’t care too much about industry specifics and also is not among the “best friends” but focussing absolutely on economical KPIs, helps to avoid the above-named pitfalls.
This can help the management to observe timelines and budgets but also to focus, focus, focus on the market.
The VC’s whip might hurt a little bit every now and than, but the pleasure of success will overweight on the mid- to long run.