The mathematical formula for why startups fail!
Writing about this subject has a special importance for me, as i’m involved in what i like to call startup networking @ Startupz.org (Psst you can join too, it’s free).
You probably have already heard the saying that more than 90% of startups fail, and some versions of this saying put the number even higher at 99%. This high number is usually based on observation and statistical analysis of startup fails VS. startups success compared to the total number of startups.
But, there’s actually a mathematical formula that will show you why exactly do most startups fail!
Follow closely the following Factors + probabilities and see the magic happens:
- Does the company has sufficient capital ?
Keep in mind you will need lots of money for marketing, and there’s no budget that can be considered big enough for marketing!!
So, if you have unlimited line of funding and credit you get 100% on this factor, but for most startups we’ll be generous and assign 70% to 80% on this factor.
- Is the management able and focused ?
Are you able to lead a team smoothly without conflicts, do you have the leadership skills to get things done as they should, and being able to focus on your product without getting lost in details and side projects?
If you are Steve Jobs you get 100% on this factor, let’s assume you have 70% to 80% of his skills and Charisma, thus we’ll assign you 70%-80% on this factor.
- Are you well connected ?
Connections create opportunities, from a simple article in a blog or a news site, to a partnership worth millions in customer acquisition, the more and the better you are connected the better for your startup! Remember that there might be hundreds of competitors out there but no one knows about them because they don’t have the connections!!
Let’s assume you are quite well connected, thus you get around 70% for this factor.
- Is the product development and production happening as planned ?
Is everything fitting where it should, no delays, no price increase, no faulty materials, no problems, no bugs, no incompatibilities, no crashes, no security issues, no safety issues, no IP infringements, no legal issues, no shipping problems, etc … Do you have the required talent and people with necessary skills …
We’ll assign 80% for this factor, which means you have a 80% chance of not encountering any problem whatsoever product development wise!
- Are competitors behaving as expected ?
Will the competition ignore you or will they enter in a tough competitive mode to take you out? And in case there’s no competition, will the big players in your industry take notice and start offer similar products / services ?
Let’s assume you have 70% to 80% chance of not having any surprises from competition!
- Will the customers want or need the product and how much ?
Is your product or services needed and how much are they needed? On a scale from 0% to 100%, how much is what you offer needed? 100 being the a way to split fuel consumption by half, 0 being comics for cats!
Let’s assume you have 70% to 80% real demand on your offer!
- Is the pricing forecast accurate?
Have everything been well calculated and is the forecast accurate, did it take in consideration all the production and distribution chains accurate costs. This factor will determine optimal pricing of a product/service, and market share penetration of a given product at specific price points. Let’s assume you have this factor 80% right.
- Do you have patents issued and enforceable ?
This will prevent or delay others from outright copying you! So you need to make sure that all the specifications that you can protect are protected, and make sure there’s no other ways to accomplish the same results that you haven’t thought of… Let’s assume this factor is 80% met.
- Do you need to educate your customer and are you doing it right?
Are you presenting your offer as you should, does your offer require educating or teach how to use, and are you doing it correctly? Let’s assume you have a nice explainer video , and you go into enough details to make 80% of potential clients understand it, thus we’ll assign 80% on this factor.
- Are you doing the marketing and Branding correctly?
Probably one of the most important factors, even with enough capital, if you are doing branding and marketing wrong then your chances to fail are higher … Branding wise make sure to nail it, marketing wise find the right strategy that suits your startups … there’s a lot to choose from but only few might actually be efficient! Assuming you hired advertising consultants to advise you, and only in this case i’ll assume you have 75% of getting it right.
If everything goes as planned, the combined probability of success is: between 8.8% and 5.1% .
But usually, for startups a lot of things don’t go as planned!
Let’s assume for a moment that only one of the above factors is not that optimal, let’s put one factor at 50% (which is a 50/50 chance), combined probability will drop to between 5.5% and 3.1%.
A standard startup have at least 3 of the above factors at 50%, thus the probability of success of a standard startup is between: 2.1% and 1.2%! That means for every 100 startup you’ll have 1 to 2 that won’t fail!
This is of course a general formula, investors through their know how and connections could improve the % in many of these factors. Also this formula will not apply to all startups as some factors may change with different monetization models and products/ services offered.