Why do most tech start-ups fail? Ask the experts and the answer
is almost universal: Why shouldn’t they?
Technology is unpredictable, so the one thing you should expect
To put it another way, technology is innovation. Innovation
requires change, and change is unpredictable. Starting a tech
company is, therefore, a do-or-die struggle between the entrepreneur
and the unpredictable. Frankly, the odds are with the unpredictable
-- a fast-moving, evasive and sly adversary.
Although official statistics are not available, Jaffer Ali, CEO
of PennMedia.com, producer of an e-mail newsletter with 11 million
subscribers, estimates that three out of four online start-ups will
go belly up in the next three years. Although reasons abound to
explain why good ideas go bad, a failure to adapt to changing
technology often lies at the root.
Beginners aren’t the only ones who fall to technology’s guile.
“I’ve met executives of large companies who say, ‘Oh, yeah, we’re
gonna innovate. We’re tired of these young whippersnappers beating
us out. We’re gonna have technology,’ ” said Jim Schrager, a
clinical professor who teaches new venture strategy at the
University of Chicago’s Graduate School of Business.
“I ask how they plan to manage the unpredictability of the
venture. They answer, ‘We know it will work. We’ll pick the right
stuff. We’re smart,’ ” Schrager said. “The smartest people in the
world know that innovation is unpredictable by definition. If it
were predictable, it wouldn’t be innovation.
“Start-ups generally fail because when you are changing
something, there are huge risks, and one thing you can be sure of is
that technology just isn’t going to do what you think it’s going to
do,” Schrager said.
It’s a tough beast to tame, and part of the difficulty might be
because the only way to learn how to manage technology is to fail
and fail again.
Gary S. Lynn, an associate professor at Stevens Institute of
Technology in Hoboken, N.J., uses General Electric’s development of
CAT scanning technology as an example.
“They first tried to develop a heart scanner, then breast, then a
head scanner,” Lynn said. “Finally they tried the whole-body scanner
and it barely worked. ... If there’s truth in the adage you learn by
mistakes, then GE was the smartest company in the CAT scan business.
“Unfortunately, we don’t teach failure to MBAs,” Lynn said. “They
do scenario planning, plotting their best- and worst-case scenarios,
but those typically don’t account for the wide swings that are going
to occur in technological innovation.”
This unpredictability doesn’t doom all start-ups, but it lurks
everywhere. When companies fail to negotiate and manage it, the
likely result is failure.
We asked our experts to identify the stages of a start-up’s
development at which traps are most frequently laid. Clearing them
all requires quick thinking -- and quick acting.
Developing the idea
The roaring economy, fueled by hot technology companies, had led
to a ready supply of venture capital. This, teamed with wide and
relatively inexpensive Internet access, has led to historically low
barriers to entry for budding companies.
Getting started might be easy, but long-term success depends on
changing with technical and market conditions while remaining true
to the original mission.
“Vision is paramount, but it can’t be blind,” said Mark Lang,
executive director of Ben Franklin Technology Partners, an economic
development agency in Pennsylvania that has worked with hundreds of
tech start-ups. “You must have an idea you will stick to through
thick and thin, yet rarely do the customers develop quite the way
you thought. If you are arrogant and refuse to see beyond your idea
and adapt, you lose.”
In the battle against uncertainty, deftness is aided when the
idea brings with it a defendable position in the market.
“A brilliant idea isn’t enough -- everybody has an idea. You need
an asset,” said Michael Drapkin, founder of tech-business solutions
company Drapkin Technology in Monsey, N.Y. “You need a barrier to
entry so someone can’t easily step into your market: a strategic
alliance, big subscriber base, contract with various suppliers,
Launching a product
Inventing the future is difficult, but that’s exactly what most
technology companies are attempting to do. Without a firm foundation
on which to build, launching a product can be a chore.
“A fundamental flaw in tech start-ups is that many have no
product, just an idea and some source code,” said Eric Olson,
director of corporate content and the new media at Retail Systems
Alert Group, a b2b information supplier in Newton Upper Falls, Mass.
“People think a tech company starts with a fully completed
solution to a problem, but they always start with a problem and an
undefined and incomplete solution, which makes success elusive at
best,” Schrager said.
Olson said pressures to introduce an idea quickly to a wide
market can force companies to focus more on marketing than on
delivering on the promise of the new technology or idea. When that
happens, the result for the company is usually the same. “It will
fail,” he said.
Financing product development is another snake in the pit that
has claimed its share of start-ups. A resourceful entrepreneur can
get by on bootstrapping for a while, but most don’t have the means
to take an idea all the way to rollout.
Although angel investors can help get things moving, big-time
success requires big-time money, and venture capitalists hold the
key to the safe. Some start-ups die when their core ideas become old
hat while the founders toil to build a cash cache; others wither
when their founders balk at giving up the huge chunks of equity many
VC partners require.
“It’s tough for start-ups -- taps of money aren’t pouring like
geysers,” Drapkin said. “To get $500,000 in funding may cost you 30
percent of your company.” Sometimes it’s even more.
Too much, too fast
Success can spawn failure, especially if a start-up hasn’t
planned for it. Can you handle all the customers who are going to be
attracted to your great new idea?
A recent television commercial for an international delivery
service exaggerates an all-too-possible scenario for an e-commerce
site. As a fictional site opens for business, the company’s
principals hold their collective breath until that first order comes
in. Cheers follow as more orders are placed in just a few seconds.
The mood turns grim moments later as thousands of orders start
pouring in; the company already has outgrown its capabilities.
Scalability is critical to the success of any start-up. It’s
nearly impossible to predict customer behavior accurately, so a new
venture must be prepared to move swiftly to meet demand that can
fluctuate by the hour.
Can the orders be filled quickly? Are there enough customer
service representatives to handle questions? Can the Web servers
keep up with traffic? All are questions that should be considered
before a new business makes a run for the big time.
“Start-ups often fail to imagine how fast an initiative can scale
up, adding perhaps a half-million users every day,” said Bradley
Wheeler, an assistant professor of information systems at the
University of Indiana at Bloomington. “If they haven’t revved the IT
system to handle the load, they’re like the guy trying to change a
tire while the car is careening down the road at 70 miles an hour.
They can’t off-line production systems that are working for them day
in and day out, but yet they have to adapt. Usually they crash and
But successful scaling is only half the battle; it must also be
done in such a way as to drive up the company’s value.
“Say you can handle a humongous number of hits per day. Do you
have the managerial competency to derive value from the information
you get from customers?” Wheeler asked. “Start-ups burn through
tremendous marketing expense to build brand but what do they get? If
you’re generating calls to the help desk and e-mails to answer,
you’ve scaled up your costs, not your profit. That’s a start-up
nosedive waiting to happen.”
Holding it together
Unfortunately for would-be dot-com potentates, success, once
attained, can be as fleeting as it is elusive. Some start-ups fall
off the radar screen simply because they can’t keep their money,
management team and product assets all flying in the right
Drapkin says long-term success depends on raising money to
further development, a core group of smart people who can remain
focused on business goals and a product that continues to add value
in a marketplace overflowing with competition.
“Capital, management and asset are like a three-cylinder engine,”
Drapkin said. “If you’re a huge company, maybe you run on 16
cylinders -- lose a few and you keep going. But start-ups have only
three. If one fails, the engine sputters and stalls.”
“The single most important ingredient to success is people,” said
Ashok Roy, vice president of corporate development at SeraNova, a
New Jersey-based e-business services provider. “Most companies that
lack the right human talent for key roles go belly-up or become
prematurely swallowed by competition.”
“The easiest way to kill a company is (to have) a lack of
critical decision-making ability or a lack of core skills in a
critical area,” Drapkin said. He pointed to tech companies with no
technologists at the helm -- or technologists at the helm with no
idea how to run a business.
“I recently fired a client who just landed $5 million in
first-round funding,” he said. “I told them, ‘You guys are the
walking dead because you don’t know how to run a company.’ ”
Freelancer Jon Swartz contributed to this report.
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