How can I stop a new business from collapsing
I love software and plan to startup a business out of it. However I am told that over 90% of new startups fail before their 5th birthday. I don't intend to fail but I wonder what it takes to produce a real world software business.
Dr deo
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They're using the term 'fail' loosely. – Jeff O 14 years ago
5 Answers
One thing to remember, there is a 100% failure rate among those who never try because they're afraid to fail.
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love it! Thanks for sharing your thought – Filippo Diotalevi 14 years ago
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I used to be like that. Thinking of 10 good ideas per quarter but then finding 100 reasons why it won't work, why i'd fail. Eventually I got to a point where I said to myself "MY GOAL IS TO FAIL", just so that I'd get the mental energy required to do something about one of my ideas. I'd like to fail when it's the MARKET that fails me, after I launch, not me hitting the breaks while still in the idea phase... – Ron M. 14 years ago
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...Or If the phrasing bothers you: forget about "MY GOAL IS TO FAIL", adopt: "I will consider myself successful when I actually launch something, even if time dooms it to fail". – Ron M. 14 years ago
In Denmark 60% of all business that fail do not fail because they are not profitable. Their primary cause of failure is cash flow issues. This means that a business might have gotten lots of good customers who are satisfied and things look bright, apart from that on the short term the business is not able to pay things like salaries and rent.
During the height of the financial crisis, I spoke to the lawer who was responsible for liquidating a company, which had operated profitably for 36 years, and had 20 employees. This company was not able to get a loan of just 60.000$ dollars in any bank (their old bank had gone bankrupt), and therefore had to be liquidated.
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+1. This is why I prefer running businesses with 1-2 years total expenses in savings / investment accounts. – Net Tecture 14 years ago
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How long could you operate a 20 employee company on 60K? After 36 years it came down to a month or two of expenses? – Jeff O 14 years ago
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@NetTecture, how does this magical 1-2 years of expenses in savings come to land in your bank account? Even running lean as hell with no salaries for founders... you're talking millions in the bank (which is NOT FDIC insured BTW). I simply don't see most companies having that sort of money in the bank. – Sean 14 years ago
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@Sean, it's a prudent business practice to have capital reserves in order to smooth out any future issues with cash flow and to handle unanticipated expenses. The exact amount to retain will vary with the nature of the business. I started a question on this topic a while back: http://www.brightjourney.com/q/cash-reserves-guidelines – Oleg Barshay 14 years ago
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@Oleg Barshay, I don't disagree that having reserves is important... I was saying that 1-2 *years* of reserves is excessive. When I was freelancing I ran with 6-12 months of cashflow in my personal account (and it took a while to get there), but now that I'm running a business, building that much cash is hard, especially in this startup/rampup phase where we seem to be spending cash at an incredible rate. – Sean 14 years ago
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Good business. That simple. I dont start something without those 1-2 years. Depends a lot waht you do, obviously. – Net Tecture 14 years ago
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@Jeff Oresik, it should be mentioned that the company got some additional financing from amongst others, the employees, who were willing to work without salaries for a period, but 60k was what was needed from outside in the end. I believe cash flow management is considered a detail to many managers, but the devil is often hidden in exactly this detail. – David 14 years ago
The best way not to fail is build an amazing product with a referral model so you can get customers easily (like DropBox). It also has to have a simple, beautiful and elegant design so that people actually enjoy using it. And the other piece of the puzzle is to start charging from Day 1.
Don't hire unnecessary help and don't spend money on non-essential things (plush office space, large advertising budgets, etc).
If you can build something that people tell their friends about and will actually pay you for, I think you're in good shape to be a successful company.
I think the answer is more nuanced and interesting than just "they weren't good enough." Sure, some startups mismanage cashflow because they don't all have great accountants. Some are just in a dying market. Lots of technology startups fail simply because they can't keep up.
Have you ever had an idea so simple and brilliant that you couldn't believe it didn't already exist? When you're dealing with the web, that could mean you've got a matter of weeks or even days before someone else gets the same idea to market. Even if you're a programmer (which I am), this is a really fast pace to work in. So the first thing you launch has to be great, but you also have to iterate really quickly.
That's just a lot to ask from most startup teams, when you're also trying to figure out salaries, insurance, real estate, etc.. Which is why (in New York, at least) you see lots of tech startups sharing giant rooms and long picnic tables. They've gotta put all their money into the code.
All that said, examining why startups fail never really seemed that useful to me. Primarily because there are just so damn many of them failing, compared to the number who aren't. I work in music as well, and it's amazing the similarities I see between bands and tech startups. What's particularly interesting is the similarities between the successful ones for each.
What I find is a universal thread? Who keeps going no matter what. Cheesy, I know, but it seems to be the thread.
Musicians, entrepreneurs, bands, startups... some "make it big" on a stroke of luck and crazy timing (see: chat-roulette / britney spears), and some persevere through failure after failure, until they succeed (see: madonna, apple).
Just a thought from a fellow scared-shitless startup owner. It's what keeps me going. Hope it helps.
Great Question! It takes hard work, persistence , vision, and a focus. The reason most fail is usually becuase they run out of cash...so the goal is make sales! Get in front of as many clients as you can and make sure you are set up to deliver or have apln as to how you will deliver once they come through. Forecast your cash flow so you will know when you will be short well in advance so you can figure out how you will cover it...If you do these things you are off to a good start! One more thing...DON"T LISTEN TO WHAT OTHERS SAY JUST BECAUSE OTHER FAILED THERE ARE MANY WHO MADE IT !!!!
