A book provides a clear view of why startups fail and how they can avoid the pitfalls
Startups have always been the fashion of the day for quite some time now and given the fact that every venture has something new to offer makes them attractive. Investors are always interested in putting their money as the potential looks good. If one looks around our own country, we have seen several of them come to the fore with innovative ideas, and even the concept of e-commerce platforms was a startup to begin with. They do tend to get concentrated in the technology sphere because this is how they are able to reach a larger consumer base. Yet most of them end up failing and this is the focus of Eisenmann in his book The Fail-Safe Startup.
The author is a professor at Harvard Business School who has taught the course on ‘entrepreneurial manager’ and has been an angel investor in some startups. Hence, his experiences as an investor, as well as being mentor to several students who ventured into this field provide a clear view on why startups fail and how they should avoid these pitfalls.
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Here, he brings in various concepts, which are often used when we analyse failures. The single-cause fallacy is common and we can relate it with how we look at any cricket match and relate a loss to one person not doing well even though there are multiple factors at play. Often we fail to distinguish between dispositional and situational factors. For our own success, we attribute it to dispositional factors and failure to situational factors. When startups fail, investors and team members blame the founder, while the latter blames the situation. This is what triggered this study by Eisenmann where he segregates failures at two stages: early and late.
Now, as the author describes these factors with examples in separate chapters, the reader will be able to correlate the same with several Indian cases too. The interesting thing is that while 90% of startups fail, there is still a large appetite for getting into such projects and, more importantly, there are several investors willing to finance the same. Further, not more than 40% of such ventures still have their founders active in the venture years down the line. This gives the feeling that a large number of innovators would be more on the lookout to sell their shares and the long-term commitment may be absent. Or probably their mindset is more of creation rather than growing the venture.
At the early stage, failure can be due to what he calls ‘good idea, bad bedfellows’. As the term suggests, the concept is good and could have worked, but the team just does not work together. This can be because the multiple founders have a divergent set of views on running the firm, which is mostly the case, or it can be a case of not taking stakeholders along, which includes investors, employees and strategic partners.
The second is what is called a ‘false start’ where it is realised that there is no market need for the product. Entrepreneurs launch what he calls ‘minimum viable products’ and do not get to the testing of the market. The third is the converse of a false start, which is a false positive, which makes one ambitious and invest more only to realise the product is not viable. An example given here is of a startup, which takes place in a newly-constructed building and offers pet care to residents, which is an instant hit. There is more capital put and the circumference is widened to other existing settlements where people already have their systems running and are reluctant to switch over, which then creates a barrier for the new venture. Not surprisingly, it reaches a dead end.
Then, there are later-stage failures, which he calls ‘speed trap’, ‘help wanted’ and ‘cascading miracles’. In case of speed trap (Groupon is one which we in India can identify with), the product picks up fast and more investment is poured with the demand of faster expansion into new areas and territories. As this is done, one realises that the market is saturated and, hence, leads to closedowns. Similarly, ‘help wanted’ is another pitfall where money is required, but the industry is not willing as was the case with biotech in the 1990s and cleantech in the late 2000s. The ‘cascading miracles’ syndrome is one where there are challenges of changing tastes of the public, changes in technology, which makes the present model outdated, getting regulatory relief from the government and so on.
A problem for all such enterprises is that the founders never know when to withdraw as they often live in self-denial. This, admittedly, is not easy as failure happens slowly in the background. A lot of relentless introspection should go along with such startups to avoid these barriers to success.
Madan Sabnavis is chief economist, CARE Ratings
The Fail-Safe Startup
Penguin Random House
Pp 350, Rs 799