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Reasons why tech startups, entrepreneurs fail - She Leads Digital

The nature of tech is disruptive and it levels the playing fields in a way that was not possible, even a decade ago. Many with an entrepreneurial spirit feel they can enter the field because the barriers to entry appear so low.

There are generally three types of players in the TECH startup arena:

  • entrepreneurs / founders of the startup
  • venture capitalists
  • government or regulators of the business environment

Below are some of the reasons startups fail as a result of the actions of each of these three types of players.

Entrepreneurs / Founders

  • Founders have a loose understanding of the industry, usually as seen through the eyes of the media.
  • They fail to research long-term successful business models and the nuances of their success.
  • They focus on the technology and their own capabilities and not enough on the market needs, timing or viability. 
  • Entrepreneurs in startups employ people who think like them, resulting in a lack of diversity in the organization. There are few people to point out shortcomings in the business model or in their actions .
  • They also hire expensive technical or sector specific staff rather than management or sales staff, i.e. people who know how to close deals.
  • Lacking business skills, founders often have difficulty communicating their business ideas effectively to investors and venture capitalists, most of whom do not understand the IT industry.
  • Usually due to a lack of resources, they choose market niches with low barriers to entry. The same factors attract several entrants which heightens competition.
  • They fail to distinguish their ventures from the pack due to a lack innovation. Consequently they have no competitive edge.
  • The inability to manage finances is a large contributing factor to failure. General accounting skills, cost management and an understanding of the ‘cash burn rate’ are lacking.
  • Consequently, many fail to obtain additional funding timeously.  This is sometimes described as ‘having the runway end before the enterprise can take off’.
  • If subsequent funding is obtained, it is utilised like revolving credit, for survival and not growth or scaling up. Long-term funding is used for short-term assets or immediate consumption.
  • Entrepreneurs get bored easily, lose focus and want to move onto the next thing, without putting good management structures in place.

Venture Capitalists

  • Venture capitalists look for short-term profit making schemes. They favour high risk / high reward investment opportunities that enable them to extract the profits quickly.
  • The industry is changing rapidly and venture capitalists do not understand it in depth. They focus on mega successes which are touted in the media, not on the middle of the road businesses. They view companies like Microsoft, Amazon and Apple as the norm.
  • Success in the current IT business area is often measured using ‘Vanity metrics’ , i.e. statistics like registered users, downloads, and raw page views. These do not necessarily correlate to more actionable metrics, such as active users, engagement, the cost of getting new customers, and ultimately revenues and profits.
  • ‘Vanity metrics’ extend to the share prices. Much feted mega successes, like Amazon and Twitter, although much sought after on the stock market did not make a profit for several years. According to Investopedia, “Amazon was founded in 1994, first traded publicly in 1997, and didn’t turn a profit until 2001.” The company remained in debt until 2009.
  • Venture Capitalists favour ventures that disrupt the market as they perceive this to translate into a competitive advantage.
  • They apply pressure on entrepreneurs to remain disruptive in order to maintain the competitive advantage. This is not sustainable in companies that lack the ability to innovate.

Government / regulators

  • Business licencing, tax compliance and labour laws an hamper cash-strapped startups.
  • Small businesses in general have a larger burden of paperwork required by government, relative to larger enterprises.
  • Government does not quite fully understand the nuances of the IT sector.

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