WHY DO TECHNOLOGY COMPANIES FAIL?

There are several reasons technology companies fail, however, this work would focus on four of them because of their frequent mentions and significance in the various failure articles and literature reviewed.

1. Loss of Focus

Loss of focus is one key reason companies fail. Focus helps tech companies to stay at their core and not attempt to solve every customer’s problem. Successful companies like Google started with searches and till today, are still working on search. Loss of focus begins when companies want to constantly add new functionalities to appeal to customers and capture more market opportunities because they are unsure if their current product is providing sufficient value. However, more features culminate in making the product less usable to customers which makes the firms struggle for survival, lose investors, and be unable to gain greater market share.

Key among the reasons tech-companies lose focus is too much passion which causes the founders to lose sight of important steps to drive the company to success; super-high expectations from investors during a funding life-cycle which mounts pressure on the founders to move faster; and rapidly changing business environments such as evolving technology, regulatory frameworks, and political situations.

Kiko, an online calendar application that could integrate with other websites and web applications, is an example of a failed start-up because of a lack of focus. The three-year-old company failed because the team worked on various ideas and plans concurrently which distracted them from their main projects, created delays, led to wrong hiring, dwindled their finances, and affected their productivity. In retrospect, if the founders had known that broad product offerings require too much infrastructure (financial, human, and technological) which makes them liable to high-failure probability, and had clearly articulated strategy, they would have desisted from losing focus thus avoiding failure.

2. Lack of Product-Market Fitness

Research shows 42% of start-ups and 80% of new products from corporations fail because no one wants to buy them. When start-ups assume market-fit based on wrong factors, other than keeping the customers in mind, they are doomed to fail. Particularly when start-ups tackle problems they find interesting to solve rather than those with specific market needs, failure is inevitable. Lack of product-market fitness arises by developing a solution and then finding a problem; targeting the wrong problem within the right customer base, and going after a problem that is not significant.

There are several factors that impact on start-up in producing a market-fit product; these include product timing to the marketplace, emerging market trends, industry variances, company’s structure, size, and leadership team. An example of a start-up that failed because of product-market-fit is Lytro, a technology company that developed light field imaging technology and obtained about $215.8 million in funding. However, the products developed did not meet the needs of the photographers. To salvage the situation, it pivoted into virtual reality and made the same mistakes of lack of product-market-fit, thus leading to its failure.

3. Lack of Working Capital

Working capital enables businesses to grow as they can fund their own growth and release cash without additional funding requirements. However, lack of it and other financing options are a major reason technology companies fail. Often this lack of working capital arises due to the inability: to generate revenue, manage operational cash flow, and secure funding. Revenue and cash-flow issues arise when a business is a difficulty unable to sell its products or receive payments thereby unable to restock its inventories, meet its future obligations, and expand its business.

On the other hand, companies that could sell their products but have huge receivables deficits from slow-paying customers are also vulnerable to cash-flow problems. There are two ways lack of working capital contributes to the failure of a company: first, it incapacitates its ability to run its operations in terms of funding employees’ payroll; paying fixed and varied overhead costs; and ensuring that suppliers' payables are met timely. Second, it makes the company unable to carry out growth-related activities such as hiring talents, bringing a new product to market, funding business expansion, and paying for ongoing marketing drives. Yet, without these, a sinking company is most likely headed to failure.

In the United States, iParents.com is an example of a company that ran out of operations due to running out of working capital. The two-year-old social network failed in its efforts to get 100,000 members from its current 70,000 in the bid to raise $3 million from venture capital. In the process, it spent $18,000 in an unstrategic way thus lacking funds to run other operations.

?4. Overfunding

Start-up needs funding to launch and meet its costs like paying for the initial hires, obtaining office space, testing the market, manufacturing products, and expanding its market. With strong funding rounds and unprecedented demand for digital products and services around the world and venture capitalists investing over $612 billion globally in 2021 signifying a 108% increase from 2020, it appears every start-up with convincing ideas can get high funding.

However, overfunding often leads to start-up failure based on three reasons. First, there is a tendency for the financial imbalance between revenue and expenses due to speedy-up development owing to injected cash which leads to incurring expenses through hiring and marketing efforts thus causing negative operating cash flow. Second, overfunding which arises from capital from multiple investors pose a risk by mounting pressure on the founder and dividing the attention of the CEO who spends a lot of time managing the investors rather than on the company’s growth. Thirdly, overfunding often dampens the ability to innovate and make management complacent.

One example of a start-up that failed because of overfunding is Jawbone, a maker of fitness trackers, which raised about $900 million in equity and debt financing from venture capital firms at a valuation of about $3.2 billion. It failed to have self-sustaining business models, burnt cash at high raised, failed to capture 5% of the market shared, grew too quickly which cost it a long-term success, and struggled to innovate before eventually being forced to liquidate.

In retrospect, had the company secured less financing from fewer investors with lower valuation, it could have been acquired by bigger corporations like Microsoft or IBM – but the multiple investors were more interested in profitable exits. More importantly, the company should have focused significantly on the users, as argued in post-mortem reports that the CEO focused more on convincing investors than understanding the users.

Asides from the above-mentioned reasons, the entrepreneurship ecosystem- which consists of players such as investors, financial institutions, suppliers, government, human resources, and bigger companies- impacts the success or failure of a start-up. An unsupportive ecosystem denies entrepreneurs access to services, network partners, and support-system which can help their businesses; while an enabling ecosystem enhances networking with potential investors, fellow entrepreneurs, and collaborations through co-working spaces, incubators, and accelerators. As argued in Harvard Business Review, start-ups are most successful when they have access to the human and financial resources they need. Thus, the counter-truth is that lack of these leads to failure.

A clear example of the role of the entrepreneurship ecosystem is the impact of Silicon Valley on the start-ups around it. It enables culture, innovative mindset, access to funding and talent through housing over 40,000 start-ups, 1000 VC firms, and an ecosystem value of $1029 billion. Finally, the presence of large companies in the ecosystem sometimes lead to threat and eventually acquisition of high-potential start-ups because of fear of seeing them become competitors and in gaining greater market shares. An example is Axel Springer which had spent over $2.18 billion in acquiring over 15 start-ups.

Summarily, technology companies fail due to the reasons highlighted above and several others. While there is no one best advice, new companies can avoid failure through carrying out post-mortem analysis on failed companies to glean insights, periodically accessing their company and industry, and constantly seeking support from successful business networks.

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