25% of new businesses fail within the first year.
66% fail within the first five years
After 10 years only the fittest 29% will remain.
Technology based businesses are more likely to fail than average in the first 5 years.
Failure is not limited to new ventures – well established names like Woolworths have disappeared from our high street in recent years. Take the technology space - what happened to Winchester hard drives, Sinclair and Kodak?
These startling statistics reveal that the odds of survival are stacked against new ventures – it truly is survival of the fittest. What are the most common reason businesses fail? What can be done to increase the odds of survival? Why are technology businesses more likely to fail? We cover failings not just in start-ups (a terms which has become almost synonymous with technology ventures) but failings in more established ventures.
Let's start with the top 5 most common reasons for failure:
Money is blood to a company. If there isn't enough cash to pay the bills then the company is on its way to insolvency. There are three main areas impacting cash-flow.
- Insufficient funding
- Failure to control costs
- Over expansion
Let's start with funding. In the current climate where raising cash is tough, it is fashionable for start-ups to “boot strap” themselves (self finance) to get off the ground. Although admirable, it is probably storing up problems for later on – there still needs to be plan. When will the self financing run out? Where will we secure additional funding and how long will it take to get it? When will the cash from the first sale come in? What is the burn rate? How many sales do we need to cover costs each month? With interest rates so low, there are no shortage of investors out there – is boot-strapping really just an excuse for failing to come up with a viable business plan and convincing investors?
As a company grows, so do the expenses of running a company. Many companies fail to understand forward financial commitments (accruals) and budget for them. This could be VAT, payroll taxes or contractual agreements to pay for some item in annual instalments. At the other extreme is companies that receive a large tranche of funding or get the big sale and then go on a spending spree on items which eventually turn into a liability, for example plush rented offices. The majority of businesses have seasonal fluctuations in demand – is there sufficient cash in the kitty to get the company through the lean periods?
Over expansion is similar to a failure to control costs. Investing in a large new factory for example creates a cash lag. It may take 1 year for the factory to come on line with cash burn in the meantime yet it may take another 6 months from coming on-line to get cash from the new capacity. What happens if the demand doesn’t materialise or the market changes? The new factory has become a liability. In this situation, doing what-if scenario planning before the risk materialises could save the company's life. Similarly a company may want to increase sales so invests in new sales personnel. Depending on the market, it could take between 3 and 12 months before they bring in sales – can you afford to employ them before they pay their own way?
2/ Lack of Focus
After investing all that effort creating your offering, you start getting customers. Great news! You're so pleased people want it. You start getting customers asking for customisations, customers in far away places. “We love your product...can you just add this feature”. It's all going great....or is it.
It is critically important to prioritise and focus. Not all customers are equal. The reality is 80% of your profit (not necessarily revenue) will come from 20% of your customers. Delivering customisations in the product, service or support may be costing you more than it is worth. You need to understand the real costs and ensure you're making profit from all the extras.
Your business is extremely unlikely to have a surplus of resource. Are you spreading yourself too thinly? Resource is finite – it needs to focus on the things that really matter and add financial value to the company. Never adopt strategic pricing – pricing to win business with a view to the customer being profitable in the long term when they buy additions.
Focus is nutshell is your marketing strategy. You need to be clear about who you are targeting, why they will buy which means knowing what problem you solve for them. Be prepared to say 'no' to some customers. It can take real courage to say 'no' – if you're not prepared to say no, then you must question and review your business plan and strategy – which parts don’t you believe in?
Focus is a particular problem for technology companies. Technology companies are usually created by technologists. The majority of technologists are not strong at marketing or sales, which we will come to shortly.
Quality is important. Is the quality of your product good enough for the needs of your market? If you have the perfect product and it's not costing you more than the market needs, then great news! If it is costing you more but your customers don’t value your perfection then disaster – your costs are too high.
At the other extreme we have products and services that simply aren’t up-to scratch. They either don’t work, are too unreliable or don’t do what the target customers need them to do. Guy Kawasaki famously said “It's OK to be shitty if you're first”. This is right – get something out there – the early adopters will tolerate it but be fast and responsive to fix the issues they highlight.
Perfection is an area where many technology companies suffer. Left alone, engineers will take forever to deliver the product – they will redesign parts they have already developed because they can see a better way of doing it. They will fill the product with great ideas and functionality that was never asked for.
The consequences can be severe – product is never delivered. The product might end up being too expensive to build or the product may be brimming full of differentiated features that no-one knows is there.
The last point is an important one. Marketeers are forever going on about USP – Unique Selling Point. There may be some hidden gems in the product that the technologist have put in there but the marketeers don’t know exist and therefore the sales people don’t know they can sell the value of these hidden features. Alternatively the commercially aware technologists may have put some features in there which they think are great and real differentiators. The problem is the end customer really doesn’t care – the features have no value to them – end result wasted effort and additional cost. We'll come back to functionality and marketing later.
4/ Inability to change
As companies grow, they become more entrenched in their market and way of doing things. A dangerous side-effect of focus in specialism. Evolution tells us that species adapt to improve their ability to survive, yet extinctions are common events. Companies are no different.
Environments change. Kodak couldn’t let go of it's origins despite every omen saying the world was going digital. It is not a good idea to be in a declining market unless your strategy is clearly to exploit that with a clear plan to move onto something else. Marketing is not just promotion too l to sell what you have. It is understanding the environment in which you operate and positioning yourself for success.
Similarly being reliant on a small number of customers can lead you to extinction. Look at the statistics at the beginning of this article. If you have 5 customers, there's a pretty good chance one of your customers will go out of business. This could at best leave you with bad debts and at worst push you over the edge as your cash-flow is impacted.
5/ Ineffective sales and marketing
The final entry in our top 5 is ineffective sales and marketing. The opposite to over expansion is not selling enough or selling at a loss. Price your product below cost and watch your cash flow out the door.
Make a load of product in volume to reduce costs but fail to sell it – watch your business die – look what happened to Rover cars – fields of unsold cars yet the factory kept making more.
Technology companies are particularly susceptible to ineffective sales and marketing. Technologists are very good at technology but poor at articulating the benefit and ultimately the value of their technology.
Fact. People do not buy technology – they buy what it does for them. My children didn’t buy an iPod – they bought downloading free apps and playing Angry Birds. They bought the ability to listen to THEIR music in the car on boring long journeys. They bought “fitting in” with their friends who all had iPods.
Technology companies talk about features. Excellent marketing translates features into benefits. Excellent salesmanship translates benefits into value for a specific customer. Selling features and benefits which have no significance for a customer raises objections – they will be paying for something they dont want or value.
The linkage between marketing and sales is key, yet most companies rarely have joined up marketing and sales. Marketing may even be viewed as a luxury. Marketing is not advertising. Marketing is not promotion. It is not PR. It can include these things but it is ultimately about getting effective sales.
Sales is a tough job. You need to be thick skinned to handle frequent rejection. In a typical selling scenario just 3% of your target customers are ready to buy. Targeting is important – wasting effort selling to people that have no need for what you have is stupid. In a business to business context, there is no excuse nowadays for targeting the wrong companies and the wrong people. Some salesmen will strike lucky and sell to the 3%. But it does mean 97% of of viable prospects will say no. They will say no because they simply haven’t removed the filters. When I decided I needed a 4x4 car, I suddenly started noticing how many different types of 4x4 cars there were. Prior to that my brain simply filtered these alternatives out.
Joined up marketing and sales opens the eyes of your prospects enabling selling.
Getting it right
Marketing and sales plays an important role in technology company survival. Most companies are getting it wrong. Don’t be a dodo.
If you are a technology company within a 50 mile radius of Harlow in Essex, Market Footprint will help you get it right.