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The top 12 reasons start-ups fail

Market insights analyzed by CB Insights discovered the most common reasons for failing start-ups. The data is coming from digging into the fall of 111 start-ups and researching what led to their downfall.

There are very relevant lessons in the data for both entrepreneurs as well as investors. We want to take a deeper look into the top 4 reasons start-ups fail and how to identify the risk of getting involved in such a venture.

1. Running out of cash

Money rules the world. The scope of this fact might be not the same for everyone but surely there is truth in the statement when it comes down to business. Even if you have the best product, the strongest team, and no open questions regarding legal and regulatory issues, a lack of funding and/or too little funding compared to major competitors can lead to your downfall as an entrepreneur.

European budget airline Wow Air met exactly this fate. Never heard of them? Well, here is the reason why: “We have run out of time and have unfortunately not been able to secure funding for the company… I will never be able to forgive myself for not taking action sooner“ – Chairman Skuli Morgensen to employees.

As an investor, you want to test the fundraising capabilities of the founders you are considering investing in as early as possible. Do they have a strong network and a solid track record? Could you convince your own network to follow your investment and get into this company as well? What do the current financials look like: does the burn rate fit the desired fundraising and how long will it last? Is there a plan in place for further fundraising? And what is the realistic revenue potential?

2. No market need

Entrepreneurs are innovators. They want to create new, exciting things, making the world a better place. The key question to ask then is: who else cares? It might be a great idea in the eyes of the founders but if there is no market for a solution, the solution is not a business but merely an entrepreneur’s adventure. As an investor you want to make sure to not fund this adventure but to fund valid business models with a strong market need.

What we do is ask the right questions: Dear Entrepreneur, how many people have you asked if they need your solution? And how many of them said they are willing to pay for this? And how many of them did pay for this already? What is your total available market and what portion of that market needs your exact service? What realistic percentage of this market could you serve?

3. Got outcompeted

20% of all the failed start-ups surveyed by CB Insights stated it was due to competition that overrun them. Speed is a crucial factor for success since start-ups rely on innovation and what was an innovation yesterday can become the norm quickly in our fast-moving business environment.

Small start-ups are facing big corporates that sometimes simply overrun them on their way towards unicorn status or another start-up in a crowded market takes better decisions and outcompetes you. Just ask yourself why there are no start-ups bringing an innovative smartphone to market.

Therefore, a start-up investment requires an analysis of the competitive landscape before you join the ride. The saying “keep your friends close but your enemies closer” is not just a saying.

4. Flawed Business Model

Building a business is like building a house of cards. Everyone needs to be at the right place for the company to be and stay successful. Adjusting fundamental business parameters and performing pivots sometimes is necessary to stay profitable in the long run. If you stop optimizing your business model, chances are high that the house of cards collapses. Eventually, an entrepreneur’s job is to make sure that money flows in the right direction which can be impossible if chosen the wrong business model.

To clarify that a business model works, you need to make sure that there is a big-picture- as well as a detail-person in the founding team. Someone needs to know the market and the customers while understanding the mechanics of how profits occur and someone else needs to see how to pivot and how to improve the product.

Risk mitigation: what the experts are doing

Private Equity Firms, Venture Capitalists, Business Angels, or even Hedge funds all have their ways of analyzing companies to minimize risks associated with an investment. Usually, they use certain key performance indicators to assess the probabilities of a company’s success. One example could be if the founder of the founding team is a first-timer or serial entrepreneur. The latter option usually results in a much higher probability of a successful venture.

Eventually, start-up investing is tough. Numbers, charts, and data are useful but no guarantee for success at all in this industry. Start-up investments in the healthcare scene are even harder. Therefore, Aescuvest has an internal start-up team to analyze potential investments as well as an external investment committee of experts to receive their opinion as well. The result: no major failures in the reigns of our portfolio start-ups.

#investinhealth with Aescuvest