Many start-ups fail due to pressures from funding and high growth. Marc Orchard, the Director of Startups with BDO in Brisbane, outlines how start-ups can maximise their chances for survival.
1. What is the “trough of sorrow” and how do new startups survive it?
A startup is a new business with a business model that is designed to grow fast under conditions of extreme uncertainty. The ‘trough of sorrow’ is a term coined by Y Combinator founder Paul Graham to describe the period of struggle that follows the initial rush of starting a high growth company. During this time several difficult things happen, often at the same time:
- Initial client feedback indicates that the startup doesn’t have product/market fit
- Traction and growth isn’t occurring as quickly as they hoped
- The company is financially vulnerable
- The team is small and often overwhelmed and/or burning out
- There are no clear right answers or next steps.
These factors often then lead to the three things that typically kill a startup:
- Running out of money
- Lack of product to market fit
- Founders giving up.
Reversing this - the teams that survive are the ones that find product/market fit, are resourceful/have access to capital, and have the resilience and grit to stay the course.
Source: Paul Graham – YC Hacker News - https://andrewchen.co/after-the-techcrunch-bump-life-in-the-trough-of-sorrow/
2. For a founder looking to pursue a scaleup, what are the key governance questions they need to consider?
Often a founder of an early stage high growth company hasn’t previously had much experience with corporate governance. Usually, it’s not until a startup is looking for investment that founders get feedback on whether their internal governance is appropriate, often leaving them vulnerable during the negotiation stage of the funding process.
Main questions founders should consider include:
- What is corporate governance, and are we appropriately prepared for the stage our company is at?
- How do we create our own Corporate Governance Playbook to make sure that we are always investible and sellable?
- Who do we go to for help to make sure we get this right?
If founders know what their corporate governance requirements are, create a playbook as part of their long term business plan, and get the support they need when required, they make themselves far more attractive for investors and potential exit opportunities.
3. For a director joining the board of a startup, what kind of issues should they look out for?
For directors joining the board of a startup, the following important points should be considered.
- For many founders, this is their first time running a company. That means they often don’t have the experience that would typically be expected of a CEO. Things such as corporate governance, financial and legal responsibilities, decisionmaking, and strategic planning are all things on which directors may need to spend more time with a startup founder/CEO.
- A startup’s mission is literally to find out whether they can create a high growth company as quickly as possible. That means that unlike a typical SME, revenue and profit are not usually the most important growth/traction metrics and should not always be treated as such
- Getting access to capital is one of the most important assets a startup can acquire, therefore having a personal network of angel and early stage investors, Venture Capital Firms, and High Net Worth individuals who are actively investing in these types of companies increases the value of directors as a board member.
4. What distinguishes those startups which become global facing companies, and those who fail?
There are two popular TED Talks that cover this issue. In a nutshell, the most successful startups/scaleups get the right combination of the following factors:
|Timing||The macro market factors that provide the context for the opportunity & market push momentum in the startup’s favour|
|Team/Execution||The founders choose/attract the right team of talent, and together they successfully execute the startup’s creation, launch to market and scale|
|Idea||Competitive advantage from uniqueness/capacity to protect the startup’s key idea/main point of difference|
|Business Model||How the startup makes money at scale|
|Access to Funding||How the startup finances it’s operations (via a bootstrapping and/or investment)|
Startups that have a great idea, a fantastic team, a business model that is profitable at scale, access to funding, and timing on their side do exceptionally well. Take any of these factors off the table, and it can ultimately lead to the failure of the company.
- “The Single Biggest Reason Why Startups Succeed” by Bill Gross
- “Two Reasons Why Companies Fail” – by Knut Haanaes
5. Jeff Bezoz recently said that despite Amazon’s recent market capitalisation of $1 trillion, it was not too big to fail and that in fact Amazon would fail at some point. How can scaleups future-proof their organisation?
The short answer is that there is no way to completely future-proof your business, particularly if you are a scaling, high growth company. But perhaps a better question to ask is: “How do we continue to grow?” During the scaling stage, a company’s goal is literally to grow as fast as possible. This hypergrowth, or ‘blitzscaling’ period, is deliberately high risk to maximise the financial return of the venture. Often, scaleup companies have a mandate to do this to justify a recent funding round and create long term market value and return to their investors.
More broadly, there are two high level reasons why companies fail. They either only do more of the same, or they only do what’s new. To combat this, companies need to be self-aware about the following market opportunities:
|Core Competencies:||Known Company Capacity
Known Client Need/Market
|Market Opportunity:||Known Company Capacity
No known Client Need/Market
|Market Opportunity:||No Company Capacity
Known Client Need/Market
|Moonshots||No Company Capacity
No Known Client Need/Market
In order to stave off decline and expand their lifespan, one of the primary goals of any company should be to proactively convert market opportunities and moonshots* into new core competencies.
* A moonshot, in a technology context, is an ambitious, exploratory and ground-breaking project undertaken without any expectation of near-term profitability or benefit and also, perhaps, without a full investigation of potential risks and benefits.
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