Why entrepreneurs fail? or Hot Killer Mistakes you shouldn’t repeat!

Hello, World! Hello, everyone who wants to change this world to the best! Hello, everyone who is interested in the topics of technology entrepreneurship, business incubation, innovations, tech trends and global “next big things”!

In Russia we have just got out from our bear dens :). Another Christmas and New Year vacations are over. So, let’s start. My last post was about Tech Predictions for the 2014. Hope that these predictions will be real and much more new inventions, and startups will happen in 2014 around the World! Ideally I would like to track each of the trend and see it in dynamics in terms of major players, key events and main products/services which will be brought to life by startups and corporations. Probably I will do it with a help of semantic engine. Let’s see.

Now, I’m going to give you a short proof-of-concept that almost all of the covered areas were proved by last CES in Las Vegas. Such trends as wearables, Internet of Things, advances in mobile devices, robotics, 3D printing, smart homes and intuitive computing were evident there. Please see this nice summary about main trends in CES 2014.

Killer Startup Mistakes

Today we will think about startup failures. First, I would like to share with you the key mistakes entrepreneurs do in their first startups. This is the result of my one year research into the failures of entrepreneurs, my own lessons learned from CrowdSynergy startup failure and several months’ research made by Andy King from small marketing company based in London. Both researches are based on entrepreneurs’ interviews (in UK and Russia), as well as such sources as theguardian.com, Forbes.com, Entrepreneur.com, Inc.com, kommersant.ru, vedomosti.ru, Quora.com, businessinsider.com.

Building a company from scratch is not an easy task. Being honest I think that this is the most hardest and challengeable thing a human being can do. That’s why a lot of mistakes are made along the way, and first-time entrepreneurs make the most.

This subject have been researched many times. I’m not going to give you something new. However, I will present infographics created by Andy King and will give you ideas what to do with these common mistakes based on my experience, and Elon Musk rules of starting a business (i.e. rules of life).

It’s not a secret that 9 out 10 will fail. Even though this meme is only myth, there is nice Quora thread What is the truth behind “9 out of 10 startups fail”? which was contributed by Chuck Eesley, Christoph Möller and others who show that for many, the failure rate is extremely high — generally 50% to 70% of small businesses fail within the first 18 months. So, let’s see why do entrepreneurs fail…

The infographics below is created  by Andy King and it’s devoted to the 9 Killer Mistakes. The idea behind Andy’s work was to find to find top of the most common causes of entrepreneurial failure based on opinion from entrepreneurs who had experienced past failures and experts in the industry. Why Entrprenuers Fail - 9 Killer Mistakes

Well, could be! I guess everyone who has started at least once can think about his own list of failures. Thus, another possible list could be as follows:

  1. Picking the wrong co-founder.
  2. Not understanding the skills needed to be CEO.
  3. Trying to make a product for everyone.
  4. Obsessing over the competition.
  5. Not learning every side of the business.
  6. Running out of cash.
  7. Getting too emotionally attached.
  8. Not hiring the right fit.
  9. Not getting feedback from your customers.

Or you can take Paul’s Graham list 18 Mistakes that Kill Startups:

1. Single Founder
2. Bad Location
3. Marginal Niche
4. Derivative Idea
5. Obstinacy
6. Hiring Bad Programmers
7. Choosing the Wrong Platform
8. Slowness in Launching
9. Launching Too Early
10. Having No Specific User in Mind
11. Raising Too Little Money
12. Spending Too Much
13. Raising Too Much Money
14. Poor Investor Management
15. Sacrificing Users to (Supposed) Profit
16. Not Wanting to Get Your Hands Dirty
17. Fights Between Founders
18. A Half-Hearted Effort

Or you can go to Quora.com and check out great discussion thread called What are the most common mistakes first-time entrepreneurs make? or Why do startups fail?

I would like to share my personal experience of startup failure in relation to the points from Infographics, and general understanding of what business & entrepreneurship is, as well as applying a kind of systems engineering paradigm to the subject. The main goal is to come to 3 main points. Why three? Because it’s simple. I can’t remember even 9. 🙂

From systems engineering point of view on startups we deal with several key entities: startup (organization), team (arrangement of people to accomplish some specific purpose), and external stakeholders (environment, customers, partners, service providers, VCs, mentors, etc).

Startup StructureStartup is an organization of people arranged in order to find scalable business model. From that perspective all the majority of the failures occurr due to mistakes in human part (team, knowledge, motivation, passion, etc), organizational part (execution, effectiveness and efficiency of startup to deliver, resources such as money & time invested, business model) , interaction with the environment (customers and their needs/problems, geographical location, cultural issues, entrepreneurship ecosystem, etc). Thus, what really matters is people, organization and environment.

People.

People is alpha and omega of any endeavor. Venture is created by people and it is done for people. By saying people I mean founders experience, knowledge, their “soft” skills, ability to interact with each other, to understand each other, to deal with the rest of the world (outside startup and their ideas – often I see how people fall in love in their technologies and completely forget about potential customers). People and their ideas strongly linked together. Ideas come from people’s brains :). If people can’t work together, or their psycho types are misalligned you will never see successful startup. Thus, you will always find advices such as:

  • Choosing someone as a partner is a big responsibility, and it’s one of the first choices you’ll face when starting a new business, or
  • Not understanding the skills needed to be CEO, or
  • Not hiring the right fit, or
  • Poor investor management, or
  • Bad Idea

It’s all about people, about team building, about their ability to build effective organization. Thus, the whole bunch of mistakes that kill startups comes from human side of the story. That is why if you will ask any VC: what are key factors of success of any venture, he/she will surely will tell team or people.

Organization.

Organization is a deliberate arrangement of people to accomplish some specific purpose. It was Ronald Coase who asked, why and under what conditions should we expect firms to emerge? In 1991 he became a Nobel Prize winner for ideas developed in his article called “The Nature of the Firm”. Since modern firms can only emerge when an entrepreneur of some sort begins to hire people, Coase’s analysis proceeds by considering the conditions under which it makes sense for an entrepreneur to seek hired help instead of contracting out for some particular task. He concluded after some point that companies arise when number of transaction costs (to use the market; costs, including search and information costs, bargaining costs, keeping trade secrets, and policing and enforcement costs, etc) somehow can be avoided or minimized. Thus, startup is simply a net of humans who discovered that they can avoid some costs if they will work together on a regular basis and according to some guiding principles (organization). This leads us to the idea that startup mistakes could occur in an area of how people can organize theirselves in order to be more efficient, effective, solve some tasks, and deal with uncertainty (key attribute of any startup). And here comes a very interesting point. Many entrepreneurs are doing something that’s never been done before, this type of innovation is bound to lead to many failed attempts, just as most innovation attempts in academic sciences and engineering do not work initially. I also think that we are still at an early stage in understanding the entrepreneurial process, how to build effective organizations that will fail quickly and learn quickly, how to create a net of people which will be effective not only in inside connections, but also with outside stakeholders, with environment. Ultimate goal of a startup (apart of building a technology and product) is to create a scalable business model, in other words how business operates, how it creates, sustains and deliver value to customers.

Environment.

Therefore, customers and external environment really matter! This is ultimate reason why those People decided to joion their efforts, save transactional costs and create something new. Environment consists of those customers, whose problems startup solves, key partners, VCs, etc. I’m not going to spend much time on this point. I think it quite obvious. What is underestimated by entrepreneurs is in which environment they are going to start their venture. It’s extremely important. When I say environment, I mean social, economic, political, cultural, business background of thei region, country. Investors often use term market, but it’s too narrow. It deals with amount of potential money and the growth of sales per year. I mean where entrepreneurs are going to incubate their child. It really depends on environment will they be Quasiomodos or Davids. It also depends on how you will interact with this environment. If you will quickly analyze Steve Blank’s or Eric Ries works, you will realize that mainly they speak about how effectively to work with environment (Customer Development is about that).

 

In conclusion, I do believe that there are only three major mistakes entrepreneur could do when he starts venture – wrong work with people, incorrect approach towards organization, and ineffective work with environment.

In my next post I would like to share with you a guiding principles of Elon Musk life. I really like what he say.

Good luck!

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2 thoughts on “Why entrepreneurs fail? or Hot Killer Mistakes you shouldn’t repeat!

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