Conventional wisdom is once again wrong.

Almost every bank manager will tell you that most start-ups fail because they were undercapitalised. Like so much conventional wisdom concerning start-ups, this is simply not true.
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Of course failed companies always run out of cash toward the end but that, by itself, explains nothing. Except for the victims of fatal accidents, most dead people were unhealthy during their final days. One must not confuse consequences with causes.

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I have observed scores of failed start-ups. The majority had sufficient funds when they began trading and some had considerably more than enough.
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Just as there are different paths to success, failure too has different causes.
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The stillborn

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Many, many projects are abandoned because the innovators exhaust their savings before their project ever gets to the marketplace. That is, of course, a form of failure, but it is not what the bank managers are talking about.
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I suspect that many of these non-starters could have succeeded. The market for seed capital is inefficient everywhere. Governments, both national and regional, are trying to address this problem. So far their measures are only marginally effective, if at all.
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I urge innovators is to be patient and find some source of income – for example, a temporary or part-time job – before starting to look for funds.
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• The bad news: once the development is finished, getting funded seldom takes less than six more months. The process frequently takes a year or even longer.
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• The good news: market opportunities for a real innovation, except in advanced technology and even then, seldom evaporate or even diminish so quickly.
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Failure can occasionally be attributed to the innovator’s greed.
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• I handled one project where investors offered 150 K€ –enough to prove the concept –with a commitment to invest much more if the pilot market succeeded. But the innovator held out for much more cash up front and the investors, predictably, walked away.
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• For another project I recruited a managing director for a couple who needed one. He and I raised almost 1 M€ from banks and business angels. But the innovators insisted on keeping a much greater share of the business than the investors could reasonably accept. So the project collapsed and the innovators got nothing.
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Such cases are rare. Excluding the stillborn, there are two major causes of failure and they are inter-related.
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Innovators tend to be autistic
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Many innovators refuse to allow competent managers transform their creations into proper businesses. Their pretext is invariably “I invented it and I know more about it than anyone else”.
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That is always true but seldom relevant. Success never comes from deep product knowledge alone. It comes instead from learning about prospective customers’ preferences and perceptions, then applying that knowledge systematically and cost-effectively.
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Few innovators possess these skills, just as few really good managers are innovators. Success almost always requires a marriage of the two competences.
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Strategy, strategy and strategy
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The majority of failures have more to do with poor strategy than with either funding or management.
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Start-up companies, more than others, have to focus on short-term goals. This is absolutely essential for survival but insufficient to achieve long term success. Start-ups need somebody who does not have day-to-day responsibilities has to articulate a long-term strategy and re-think it regularly.
That “somebody” can be an investor or a friend or a consultant. It never hurts to have more than one point of view... providing the managing director knows how to translate advice from many sources into coherent action.
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Here are some of the strategic mistakes I see over and over again:
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• No market research is done because “the need is obvious”. Hmmm. What if most of the prospects don’t realise what they “need”? A start-up cannot succeed unless it can persuade some of its prospects to change their buying habits.
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• Market research is conducted by the innovators themselves. This is usually worse than no market research at all because inadvertently designed to confirm the innovators’ aspirations.
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Impecunious start-ups cannot afford to hire professional market research agencies but they can employ students and a free-lance consultant. Start-ups can learn a lot with a tiny market research budget if: 1) a competent professional prepares the questionnaires, and 2) the interviewers never learn for whom or why the research is being conducted.
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• The product (or service) was over-engineered. So it is either too expensive or too complicated for most prospective customers to use comfortably.
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• The innovator insists on developing a “mainstream” product that many different customer segments can use. The opportunity may be real – it usually is! – but what if it will cost millions to exploit it?
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Many innovators refuse the obvious alternative: develop a niche product which could, in due course, become a platform for penetrating other niches and, eventually, the mainstream.
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• There is already too much competition in the market segment the innovators know well whereas better opportunities exist elsewhere. I see this often in distribution projects. Why create yet another marketing network for cosmetics when there are no big ones yet selling services or products for the elderly?
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• The innovator wants to receive royalties but will not participate actively in the business set up to generate them. This can be a fatal mistake, especially for a service, if the innovator’s creative work is part of the marketing message.
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• The concept could succeed, albeit slowly, via niche marketing and e-commerce but the innovator insists on a mass-market launch. Such a strategy, even in a very small country, almost always costs much more than a start-up can afford. Investors with consumer marketing experience are seldom prepared to underwrite such a risk.
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• The fixed costs, though not ostensibly unreasonable, are too high because it will take much longer to break even than expected. One could interpret this as being a case of insufficient seed capital. I think there is another, more constructive interpretation.
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Entrepreneurs can usually allocate both their seed capital and their working time differently if they understand, from the beginning, that it almost always takes much more time than expected to generate the monthly income need to break even.
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