NOM encounters entrepreneurs with innovative ideas every day. These ideas range from: a new app for organizing events, a platform for making study materials available worldwide to solutions for logistics problems in inner cities.
These innovative entrepreneurs often need external funding to realize their ambitions. The prevailing thought is that due to limited collateral security and uncertain future prospects, little or no capital is available to startups. However, the funding landscape has changed dramatically, providing more opportunities to raise capital. In addition, interest rates are low and this ensures that there is a lot of capital available in the market.
That the availability of capital is an important prerequisite for the success of a startup goes without saying. Many startups experience the "valley of death": the gap that falls between initial investment and large follow-on investments a company needs to grow. The question is who will take the startup risk. This gap is usually filled by Business Angels, or informals. The NOM business developers guide these innovative startups towards funding; often business angels in combination with another financier, often a fund.
But besides funding, what is crucial for a startup to succeed? The number of startups growing into unicorns (a startup valued at least $1 billion) is increasing. At the same time, 70 percent of startups must close their doors again within a few years. On average, the first 20 months after investment prove to be a critical period for these companies. Why don't these companies make it? Is it a lack of growth money? Wrong marketing? Or were they unable to scale up (internationally)?
Reasons why startups fail
Here are some common reasons why startups fail:
1. Insufficient founder commitment.
Founders must possess: creativity, perseverance, a focus on results and be able to deal with a high degree of uncertainty. Starting a company is not a part-time job; a 40-hour week is often not enough. Founders must also have 'skin in the game', i.e. they must be involved in the venture themselves.
2. No suitable team
A good team is essential. Of importance is that the team is multidisciplinary; only technical knowledge or only sales will not get you there.
3. Market validation is lacking
Inadequate listening to customer needs is a common pitfall. Start-up entrepreneurs make assumptions about the target market and the market on which their idea is based. In retrospect, these assumptions often turn out to be incorrect.
As many as 42% of startups fail because they try to bring a solution to market that customers do not need. One pitfall with market validation is that startups are too focused on validating the solution they offer rather than the problem. Therefore, it is important to test your idea against the market early on. Go to potential customers and first try to thoroughly understand your target market's problem. Then draw up a "problem statement" and test it with your target audience. Once you have validated the customer's problem, test whether they see your solution as the best available solution and are willing to pay for it. If this is the case, you have a problem-solution fit. In addition, develop a prototype as early as possible and test it with potential customers.
4. Sales arrive later than planned
Entrepreneurs are optimistic and often estimate the future too rosy. In forecasts, turnover is expected in the short term; in practice, a longer lead time is often needed and costs turn out to be higher than forecast. It is important for the company to be flexible in its cost structure, i.e., to be able to cut costs when sales start later than planned. It is important to consider a financial cushion when raising funding.
5. Inconsistent scaling
Inconsistent scaling means that a startup is working on things such as: setting up the organization, marketing strategies and/or further development of the product, without first having found a clear product/market fit. Premature scaling occurs when a startup grows faster than the entrepreneur or than the product is ready. This unnecessarily "burns" cash on things that are not appropriate for the stage of the business and makes the startup less agile. Example: often too much money is spent on marketing before there is a clear product/market fit and a repeatable and scalable sales process.
Focusing on scaling is not the right thing to do. Instead, focusing on customers is essential.
In summary, access to capital is important for startups to get their plans off the ground, but is not THE critical success factor for a startup to succeed. A dedicated entrepreneur, with a good team, and knowledge of how to systematically scale a business, with a repeatable and scalable sales process, is the critical factor in whether or not a startup succeeds.
Becoming Investor Ready Whitepaper
Are you a startup, do you have big plans and do you want to move fast? Do you need investors? To perfect your product, scale up your production or hire staff? Download our free white paper "Becoming Investor Ready" and read all about the steps you need to take to make your plans come true.
In this white paper:
- What challenges do you face and how do you deal with them?
- Becoming investor ready in four steps!
- An overview of all funding options
Please note that this whitepaper is only available in Dutch at the moment. We are in the process of translating this whitepaper.