The ?Fail Fast Culture“
Reasons start-ups fail and how to prevent it from happening
A prime example: The media covered it enough already – but Theranos is just a very good example of big-time failure. The American healthcare start-up was an established company with prestigious investors having their stakes in the business already when it broke down just recently. Why? Due to fraud and dishonesty from the management: one of many reasons a start-up can potentially fail in the short-term or in the long run. As an investor, you want to make sure to limit your risks by thoroughly investigating the company you are about to be a part of.
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?