By Les Gaw, Advisor, NXD and Chairman to tech based companies

Less than 50%

This is the probability that a start-up business will not be in business after 5 years. I have read reports with considerably higher rates of failure too. Regardless of the specific survey it is clear from the numerous studies in this area that there is a high probability of failure in a start-up business.

Corporate failures, by comparison, historically run at significantly lower levels. Even when a corporate fails, this failure often takes the form of an acquisition by another organisation who absorb the trade and assets of the failing corporate typically retaining a significant number of jobs, products and revenues of the failing corporate.

This is just one example of the many significant difference between start-ups and corporate organisations.

Start-ups vs Corporates

  • Perhaps the fundamental difference, the one that has the most impact on the the high failure rate in start-ups, is that a start-up is often just an idea, or an early product or a service searching for a customer. They don’t have revenues. Or if they do have revenues they are at such a low level they do not support the operating costs of the business. This search for customers who will buy the products or services in sufficient volumes is one of the most significant differences between a start-up and a corporate. In a corporate environment there will be existing products with a history of sales in to known markets and customers often over a period of years. Forecasting sales of these products is, by comparison, relatively straightforward using historic sales volumes in combination with the underlying knowledge of the market drivers and the competition to forecast future sales.
  • In start-ups the lack of cash is often a significant focus of the management team and the board. In most corporates, the board don’t spend a significant amount of time worrying about cash.
  • Most start-ups don’t have an established brand. Most corporates have significant resources focused on marketing and brand development.
  • Start-up commit a considerable amount of resource trying to raise funds rather than running their business. Very few people in a corporate organisation are focused on raising funds.
  • Many start-ups have to build their operational infrastructure to allow them to develop their business. All corporates have an established infrastructure and typically have specialist functions focused on this area.

The list could go on. It seems reasonable therefore to conclude that a start-up is not just a smaller version of a corporation. If this is then true, what are the implications for your start up?

Hiring The Right Mindset

I think one of the main implications is how you build the team and the board in a start-up with the right mindset and culture to develop the business.

Individuals operating within a start-up need to have a high degree of tolerance for uncertainty. Starting work for an organisation which typically has less than a 50% chance of being around in 4 years could be viewed as daunting.

In the early days it is sometimes difficult to see where the cash for payroll will come from each month or the money to support product development. It is difficult, if not impossible, to forecast when sales will happen. Even when those first sales happen these tend to bring issues with product performance levels which sometimes lead to a significant drain on resources.

Often there are insufficient resources to cover all the jobs that need to be done. So the team has to be capable of multi-tasking often having to move outside of their comfort zone into areas where they have to learn quickly.

When raising investment it is not always certain whether the funding round will be successful. Or if it is successful, managing the cash with the business until that much needed cash is finally received. There are many stories of now successful organisations who presented to Venture Capitalists after Venture Capitalist before finally managing to secure that first investment round that started the business on its way to future growth. The ability to deal with rejection and maintain resilience is another part of the mindset required.

Finding the Right Board of Directors

From a board perspective there are specific challenges in operating in this type of uncertain environment. When the risks are high and the performance of the business uncertain this requires a different mindset when compared to the board in a medium or large sized business with relatively stable sales and an established organisational structure.

When sales do not hit plan in a start-up it is not a case of laying blame. There is a need for the board to understand the underlying reasons why sales are not hitting plan. Is it that the product is not quite at the performance level required or does not have all the features required? Is it that marketing material and sales support is not of a high enough quality? Is it that the product pricing is not hitting the sweet spot for the market? Or are the wrong individual is in the role?

This work involves understanding the processes and status of product or service development, understanding the development of the routes to market, building a team that will grow with the business as it develops and dealing with the inevitable knocks and issues that will invariably impact the business.

It requires doing this without an established support infrastructure and often with an incomplete team.

The Start-Up Mindset

That is not to say that someone coming from a corporate environment will not fit in at a start-up either on the team or on the board. But the environment is different and the mindset required to be successful is different and hiring the right team in a start-up is one of the most critical tasks of the leadership.

If you’re an early stage business interested in securing the top talent to build your business or are interested in working in an exciting innovative business, let’s talk.