Startups come up like mushrooms but most of them do not even see the second year of their business endeavor. Most people think that lack of steady cashflow hinders their business operation and progress for which they have to give up so early in their process. Well, they are true but in part. Most of the startups look up for a source to fund their business and spend a lot of time in it without being able to focus on other important areas of their business.
- This leads to improper progress and significantly low growth in their business which forces them to close down operations early.
- This also results in taking on loans from any sources left, right and center pushing them deep down into debt.
This makes their situation even worse as they now have to look for suitable debt relief option at sites likeNationaldebtRelief.comand others in order to protect their personal credit and financial health.
However, if you have proper plan to arrange for the resources beforehand and spend it strategically, then you will not have to experience such a situation.
So much for the funding aspect! However, there are several other reasons for a startup to fail. Out of these the most significant ones are:
- The market problems and
- The issues with the business model.
Both of these have the ability to cause different types of difficulties for a startup to continue with the business. Knowing these in depth will help you to make proper plans so that you do not have to face with such situations and focus on your business operation fully.
Look into the market issues
There maybea lot of issues in the market itself that may hinder the growth of a startup resulting in an early closure. In fact, one of the major reasons why startup companies failis that there is little or no market for the type of product they deal with.
There are a few common reasons for such market issues such as:
- There is not an enough and compelling value proposition of the product or even any fascinating event that will make a buyer actually commit to purchasing the product. Therefore, startups find it much difficult to get an order from a prospective buyer in tough market conditions of today.
- As it is, the buyers are ‘in extreme pain’ or have their ‘hair on fire’ and they do not have the time or even the ability to distinguish between a product that is ‘nice to have’like a Vitamin, or a ‘must have’ like an Aspirin.
- Even the market timing may be wrong for the startups. Some may be a few years ahead of their market and the customers may not be quite ready for the particular solution that the startup has to offer at this stage.
In such situations, it is only those startups that have adequate amount of money and proper funding to last through these early years of hiccups, and most of them are not so fortunate. For these failing startups, the size of the market of people having pain or the size of the funds they are both simply not large enough to let them sustain and survive.
Failure of the business model
Another most significant reason for startup failure is selecting the wrong business models that the more optimistic entrepreneurs make and try to follow. They think that it will be much easy to acquire new customers. With such intent in mind they build an interesting and appealing web site, product and service. However, this may attract a few customers initially but will not be effective for the long-term
It will soon become an expensive proposition to attract new customers because this will:
- It will raise the Cost Of Acquiring The Customer or CAC and
- It will also be higher than the Lifetime Value of that customer (LTV).
In order to survive, the startups will have to ensure that both the CAC and LTV combined are far too less than the value the customers you acquire will generate from the relationship with you.
In spite of that, there is a vast majority of startups that fail to pay passable attention to figure out a more realistic cost of customer acquisition. For this, it is required to make a proper, more strategic and immaculate business plan in which the CAC is not greater than LTV.
Example of a business model
While outlining a perfect business model, you will need to focus on a simple and effective way to do so. In fact, your business model should look to answer two specific questions such as:
- Whether or not you can find a more scalable way to acquire your customers and
- Whether or not you can monetize those acquired customers at anexpressively higher level than the cost of acquisition.
When you think about your business model in such a simple way it will be very helpful in the end.
In addition to that, you will also need to developtwo specific rulesaround your business model, which are more of a guideline rather than any hard and fast rule. These rules are:
The CAC or LTV rule: This is an extremely simple rule that needs to keep the CAC much less than LTV.
- To calculate the CAC, you must divide the cost of sales and marketing including salaries, travel, marketing programs, and lead generation by the number of customers you acquired during a fixed period of time.
- To calculate the LTV, you will need to look at the gross margin that includes net of installation, operational expenses and support over their lifetime. It is a simple calculation for one-time fees business but for recurring subscription revenue business it is computed by dividing the monthly recurring revenueby the monthly churn rate.
Lastly, the Capital Efficiency rule is another that you should focus on. This will help you to recover the cost of acquiring customers in less than 12 months.
With all such efforts, startups can sustain the initial years of their business venture for sure.