Top 10 reasons why start-ups fall-down

New Delhi | Published: November 30, 2016 6:35:35 PM

By far the most frequent cause of start-up failure (42%) is guess what? No Market Need!

Startup marketsThe start-up was modelled on Zappos – the US on-line fashion retailer with near-legendary customer service. (Reuters)

By far the most frequent cause of start-up failure (42%) is guess what? No Market Need!

“What we need” said the recently IIT-sprogged techno-stud and founder-CEO of the e-com start-up “is a killer brand-name that says it all”. Of course this led to a heated discussion about what’s the “it all” that the brand-name is supposed to say. In the end, the consensus, eloquently articulated by the founder co-CEO was our customers must know right up front that we absolutely love them. So was born

The start-up was modelled on Zappos – the US on-line fashion retailer with near-legendary customer service. The weloveyoumadly team figured that they were off to a flying start since their brand-name was much more customer-friendly than Zappos (which sounded as if the company wanted to ‘zap’ their customers). Now all they had to do was advertise like there was no tomorrow to attract millions of customers; propel GMV by selling everything at a loss; provide high-touch customer service and multiply their market cap stratospherically –i.e. the Unicorn Algorithm And so what if if a few spoil-sport PE funds and Investment Banks are marking down valuations – there’s still quite a few billions to go. The key, said founder-CEO, is Speed and Certainty –i.e. how fast and predictably can we generate huge losses by selling more products to more customers at high discounts and even higher cost of sales. (Running out of Cash is the second highest cause of start-up failure at 29% and Pricing/Cost Issues are the fifth highest cause of failure at 18%)

So now they needed a business model. Following the Zappos model weloveyoumadly decided to sell a range of multi-brand fashion wear starting with footwear and jackets. The company’s core strategy was that since they had nothing unique to sell they must sell in a unique way –i.e. with love. (Need/lack of Business Model is the joint sixth highest cause of start-up failures at 17%)

“At every customer touch-point every customer must feel the love” the founder-CEO sputtered in an emotion-choked voice – he had recently read the term ‘customer touch-point’ on Google and thought it sounded empathetic. At this point a few minor problems arose. Since the entire founder-management team were all dyed-in-the-wool techies none of them had ever sold or marketed anything – with or without love or had any clear idea about what these ‘customer touch-points’ were. In fact most of them regarded marketing as a vaguely evil art and selling as a low-skill process. That’s no problem, said the founders let’s go and get hard core sales and marketing guys.

So over the next 6 months they went through 3 hard core sales and 2 hard core marketing guys – both the marketing and two of the sales guys disappeared without a trace within weeks of joining and the remaining sales guy threatened a law-suit for misrepresentation and unfair dismissal. (Not the Right Team is the third highest cause of start-up failures at 23%)

While all this was going on the founder co-CEOs were on the funding roundabout with Angels, VCs and PEs. They had great PowerPoint and Excel. But the problem was that all the Angels, VCs and PEs had heard and seen and, most importantly, funded it all before (Being Outcompeted is the fourth highest cause of start-up failure at 19%)

Precedence is a powerful intoxicant. For start-up founders precedence means so many similar start-ups have got funding before. For VCs and PEs, precedence meant that they have funded similar ventures before which are yet to go belly-up or from where they have exited handsomely. So it came to pass that after a few head-spinning chakkars on the funding roundabout weloveyoumadly got funded by a Serbian VC.

In next to virtually no time the Portal was up; the vendor tie-ups in place; the advertising agency ready with multiple triple full page print and three minute prime-time TV ads; the futuristic offices featured in various architectural and interior decorator magazines and of course the statutory hire of a couple of mega-priced silicon valley techno-genius ghar wapsis.

To the stunned surprise of no one apart from the weloveyoumadly founders the launch failed. And since success has many fathers and failure is an orphan the finger-pointing aerobics started almost immediately. The first finger-pointee was the ‘Superset’ approach aggressively promoted by some of the founders including the CEO. Essentially, the Superset concept was that if you carpet-bombed the entire market then you are bound to cover the appropriate ‘subset’ target markets. It also meant that your time-to-market was supersonic (Poor Marketing ranks as the seventh highest cause of start-up failure, clocking in at 14%)

Other usual suspects included advertising, products, technology, supply chain, vendors and the love-source of weloveyoumadly – namely Customer Service.

Enter ORCA – no not the killer whale but Outsourcing RFP Consulting Advisers. According to ORCA the prime objective of any business should be set up and immediately outsource the major pain points – starting with Customer Service. In the market they were renowned for constructing the most tortuous and one-sided RFPs that basically ensured that the service provider consistently teetered on the edge of insanity and insolvency (so maybe killer whale wasn’t that far off). What was inexplicable was the number of service providers that happily lined up for the commercial water-boarding treatment

For ORCA conjured up a pay-for-performance + penalty-driven Customer Engagement Transformation RFP which had only 3 questions (well actually they sounded more like commandments):

1. Explain in detail how you will achieve 100% customer retention (and the penalty you will accept per customer loss)

2. Define your strategy and process for increasing our client wallet-share by 100% within the next 90 days (and the penalty you will accept for per % point below 100%)

3. Describe how you will improve our Net Promoter Score (NPS) from the current base of – 50 to + 80 in 6 months (and the penalty you will accept for every NPS point below 80)

The fact that every metric was insanely impossible and with the possible exception of Apple and USAA no organization anywhere had anything even remotely close to the target customer retention and NPS didn’t seem to cause a pause in anyone’s mind – well certainly not ORCA or the weloveyoumadly management.

The founder-management team were split down the middle about outsourcing Customer Services. The anti-band felt that it will lose all control over the company’s core differentiator of selling with love. While the pro-band basically said to hell with love let’s get our mess done for less. The Serbian VC of course sided with the pro-band because the monthly burn-rate was starting to singe deep (Disharmony on Team/Investors is the eighth highest cause of start-up failures at 13%)

The co-CEOs called a crisis meeting. “What we need “said CEO 1 “is to pivot on our axis”. As you can imagine this sudden geometric-Excel jargon left most of the other founders somewhat befuddled. “What I mean” continued CEO1 sensing that he was speaking in Martian ”is that we need to immediately change our direction because it’s obvious that right now we are heading in the wrong direction”. So that left the minor question of What Is The Right Direction?

Re-enter ORCA – this time with SODA (Start-up Organization Direction Advisors). Team SODA always automatically advised their clients to change directions from whatever direction they were going in. Their approach was to quickly highlight what went wrong and then even more quickly define the New Direction. In this case they immediately recommended switching to high-end mobile devices because they could be positioned as fashion/lifestyle accessories –i.e. an adjacent/associated space. Plus enthused the SODA Head the brand name still works; all your technology will still work – so all you have to do is to change vendors and the triple full-page print and the 3 minute prime-time TV ads. So once again they carpet bombed and once again – to the repeat stunned surprise of the weloveyoumadly team – the launch bombed. (Pivot Gone Bad is the ninth highest cause of start-up failure – 10%)

The co-CEOs sat across a glossy faux-onyx-topped high table in the tear-drop shaped Perspex-walled coffee shack on the executive floor of weloveyoumadly’ s award-winning office. Both glumly sipped their Keurig coffee-maker made café lattes from monogrammed mugs. Both looked like they have been beaten with wet towels in a Turkish bath by a huge hairy masseuse. The Serbian VC wasn’t taking their calls and occasionally WhatsApped threatening texts in broken English. Major creditors sensing imminent rigor mortis were pushing for payments.

“I don’t understand why it didn’t work” whispered CEO 1 more to himself than to anyone else.

“If only we had offered much lower prices and lost much more money we would have made it”.

“No point dwelling on it “consoled CEO 1”I believe most of the tech majors are hiring failed start-up entrepreneurs so let’s start applying”

“Really? Why” asked CEO 2

“Because” replied CEO 1 in a wisdom-redolent voice “we may not know what to do but at least we now know what not to do”

(Lack of Passion is the tenth highest cause of start-up failure at 9%)

Note: CB Insights – the data source for this post actually had 12 reasons between the highest score 42% and the tenth highest score –i.e. 9%. 2 were at 17% and 14% and 3 were at 13%. I have only picked one from each set to arrive at the Top 10.


– By Sumit Bhattacharya

(The author is executive President – Strategic Businesses and Marketing, HCL Infosystems)

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