Fifty percent of all businesses formed will fail within the first two years.
There are many variations of this number since there are a number of ways to measure failure. But the number is a startling reminder that creating a business is not easy, nor is it any assurance of success.
How to define “success” for a startup?
After speaking with many entrepreneurs over the years, each defines success in his or her unique way. To some, it is independence from the dictates of a boss who doesn’t appreciate that person’s talent, foresight, or abilities. To some it is financial security, building a base of wealth created from the increased value of the enterprise at the end point of sale or at an IPO. To others, it is simply a way to express a talent for art, cooking, consulting, management, development or more.
Vision, risk and capital, oh my!
Everyone has a vision when starting a business. And few think of the risks that increase over time as initial capital is expended. We all see the examples of well-known successful entrepreneurs, many in our chosen field, who achieve success by anyone’s measure, and we optimistically expect to emulate these role models with at least some level of success.
Can you take the risk?
[Email readers, continue here…] The best advice to anyone considering this course of action is to measure one’s ability to take the risk. That ability varies with economic status, age, responsibility to family, and more. If there is enough freedom to make that leap, then the journey can more safely begin. If not, there are alternatives, such as raising initial capital from friends and family, before leaving the lifeboat of a present job.
Some say that taking the leap, burning the bridges, the lifeboats – or whatever security is left behind – forces the entrepreneur to focus like never before and succeed because there is no alternative. Although investors may respect that bold a move, it is so dangerously risky as to be a bit insane. Then again, with the fifty percent rule, aren’t all entrepreneurs a bit insane to start?
Images created with MS Designer (DALL-e) using prompt: “A young woman entrepreneur leaning on the front of her desk with a worried look. 6-pixel white border around ragged edge picture sized 100 x 629 pixels.”
I think the biggest risk for startups is not fully understanding what is involved in running a business. (I’m speaking from painful experience here as a founder / manager.)
Even if you have product / market fit, but don’t know how best to market your product, understand the sales cycle within your market, how to manage cash flow, manage your time, accurately project revenues & expenses, how to prioritize expenses, have a backup plan in case you don’t meet projections… the list goes on.
I had a transformative product, a new way of doing business that literally created a new market for both buyers and our clients. I was under-capitalized and I knew nothing about the management necessities listed above. So while I quickly made an impact within a very insular business sector, I had an “artistic success” while concurrently blowing through my capitalization and going broke, and I had to merge my startup into a larger company within a year’s time.
@Jack yes indeed – here’s a recent podcast on a company who blew through $40m on a bad product/market fix . . . turns out nobody is much interested in lab grown meat YET: https://shows.acast.com/dannyinthevalley/episodes/josh-march-2024 . Apprently many millions more will be lost to the folks who funded a myriad of other companies still trying to crack this product/market mismatch.
The podcast is a refreshingly honest (IMHO) view from the founders “in the trenches” till the very last day that their baby stopped breathing.
Hi Dave,
I think the biggest risk for startups is to find the product market fit. In my opinion, that’s the most important reason for failure. Most new entrepreneurs aren’t knowledgeable enough about it and there isn’t enough education and emphasis on it. If we start with a good product market fit, the failure rate will be much less.