The Telegraph recently reported that 50% of start-ups in the UK fail within 5 years. Despite this, people continue to set up new businesses, with 581,000 companies formed in 2015 and over 600,000 created in 2016. Entrepreneurs and business owners believe they can beat the odds and still grow a company that is profitable.
But why do so many fail? And what is the definition of a failed start-up? Is it one that doesn’t gain momentum and eventually closes down and takes the losses on the chin?
This is a hot topic in business schools, accelerator programmes, incubators and tech magazines. We interviewed the team at Tudor Lodge Consultants, a London-based firm that has consulted in marketing for numerous start up companies across the UK in finance, property, fashion and retail – and some of the findings will shock you.
How do you define a start-up?
Tudor Lodge: This is a good question, because does any new business count as a start-up? If you own a coffee shop on your high street, is this is a start-up? I would personally call this a ‘new venture’ or ‘new business.’
For it to be a start-up, there needs to be an element of risk and reward. I feel you need to be ‘starting something up’ that currently doesn’t exist – hence the risk. But if you can create some momentum, develop a brand and prove the product or service works, this could give you a much greater financial reward than a standard employee’s salary would.
So trying to prove the concept is key, and the financial returns need to be huge. If you can add tech and the Internet into it, well, even better.
A failed start-up can be defined as one that just doesn’t get off the ground, whereby it loses money and eventually shuts up shop.
Why do start-ups fail?
Based on academic principles and years of hands-on expertise, Tudor Lodge have highlighted the key factors that they believe cause start-ups to fail:
Who is the person running the company and why did they set it up?
Tudor Lodge: “When we sit down with a potential start-up, we always ask why they are starting the business. There is no question about it, studies have shown that repeat entrepreneurs have a better track record than brand new ones and we want to understand the motives – have they found a gap in the market? Have they just sold a business for good money and have now found a new venture?’
‘We have found some examples where the start-up was created because the main guy has no other job opportunities. They might be arrogant, awkward, ruthless or uncompromising and therefore getting a traditional job or working in team is not an option. The question is: does this make them qualified to run a company?’
‘In other instances, we have found people that have started a company because they have been fired from their previous one and are creating a competitor business to spite their ex-employer. This is not a healthy reason for starting a business.”
Does the owner have experience in this industry?
Tudor Lodge: “Being very intelligent or having a good degree is sometimes not enough, there needs to be real knowledge of the industry. Some people like the idea of moving to a different industry and disrupting the markets for things like online sports, betting or finance – but let’s face it, they’re going into an industry they know nothing about or have only started learning and reading about.’
‘Give me someone who has worked in the insurance industry for 10 years+ and when they want to go and start their own insurance firm, that’s who I want to back. I am more hesitant if someone who was working in banking, now start an online gaming product without having been in the environment before.’
‘And if the business is very focused online, then industry expertise may be less relevant but having the digital experience will be essential. I have seen recruitment and property guys start their own online comparisons and portals and whilst they know the business requirements, they have no idea about website specifications, softwares or how to run a web business.”
Is there a first-mover advantage?
Tudor Lodge: “There is a strong argument that being the “first-mover” and the first person or company to run with a new product can help you earn more market share. Known as the ‘first mover advantage’ – this can be great for early adopters e.g online hosting, selling domain names, cashback sites, apps and comparison websites – these are examples of industries where people got in there early and can then set up a barrier to entry.
‘The danger is that if you have a very new and innovative product, you have to be the one that educates the market on how to use it – meaning you will have to spend more on marketing to spread the word. Plus, you risk a second mover coming in, seeing your incumbency and creating a superior product. The likes of Google, Facebook and Apple (pretty much the three biggest tech companies), have all thrived on the basis of second mover. So being the first can be great, but so many companies lose money and go bust for spending too much and not seeing the return.
Does the market even exist?
Tudor Lodge: “Some people create a start-up on a complete whim, believing that a market for their product exists, when it doesn’t. However, an entrepreneur can easily be blinded because they love the idea of the product or service. But if someone hasn’t already come up with it and isn’t running it – there might be a reason for this …’
‘Rather than just jump into a new venture or start-up, see if other companies have tried it and what success they have had. Addressing the ‘need’ or ‘problem’ of the business or consumer is always a great way to approach a new start-up opportunity, because essentially you are delivering the solution. There needs to be a serious demand, not just a latent demand.”
Some things just can’t make money
Tudor Lodge: “There are some fantastic ideas out there, but sadly there are some that just cannot make money and this leads to their demise.’
‘An example if a company we came across that makes amazing kitchen knives that can slice a cucumber or grapefruit better than anything I have seen. The issue is that the design of the utensil is so intricate, it costs too much to make and this cost has to be passed onto the consumer. Although big companies have stocked their products, the problem is that each knife has to cost around £30 – which is simply too much for the customer when a £1 knife does the same thing. Instead, the company has a huge debt for patenting, licensing, designing, testing and shipping their product and it is struggling to make any returns. They will have to sell something like half a million to break even or get bought out by a big company.”
Does luck play a factor?
Tudor Lodge: “Yes, it certainly can do. If the timing of your product is perfect, you can see huge rewards. If you think about how the property industry has gone up and down over the last few years, if you bought or sold at a specific time, you could have made enormous wealth, or suffered great losses.’
‘Good luck and opportunity will naturally come to those with a good proposition, communication, product and strong leader. But is this indeed luck?”
Reduce Failure with a Lean Start-up Approach
As UK entrepreneurs and small businesses, we don’t necessarily need to accept failure as an option. The lean start up approach devised by Eric Ries is to date the most successful approach to creating a successful new business.
The idea is to create an MVP (minimum viable product) where you create the cheapest version of your business possible to see how the consumer responds. If it works, great! Then you can scale, scale, scale. But if you feel something is not quite right, you can ‘pivot’ or make ‘iterations’ to your business proposition or model to get it just right – but at least you wouldn’t have spent all your capital and failed.
Do you have any interesting start-up stories or fails? Comment below and let us know!