Episode 49: How to avoid the 7 most common mistakes that lead to startup failures.

When studying serious accidents or incidents it is noted that there is a chain of events that lead up to the ultimate tragedy. After spending hours looking at startups that have failed, I found was firms that went under usually had at least three or more of the following characteristics.

· They scaled up too fast · They entered an industry which was new to them · They changed their business model too often · Their systems were not suited for their growing business. · They hired the wrong people · They continued down the path towards failure, even when the writing was on the wall. · They ran out of money

These were all companies that had initial success but went out of business within one to four years from launch.

Let’s look at some real cases to see what we can learn from other’s mistakes.

Our first example is Quincy Apparel that identified an unmet need for young professional women to be able to find affordable stylish work clothes that fit them well. They identified a solution and developed a minimum viable product, that is a product that is the simplest that will provide reliable customer feedback. The minimum viable product was well received, based on this success the founders quit their jobs, raised nearly $1 million, recruited a team and launched. Initial sales were strong and nearly 40% of customers placed repeat orders. High sales meant high inventories which drained their cash. In addition, production problems meant garments did not fit well and this resulted in higher rate of returns. The company trimmed its product line with the aim of simplifying operations and improving efficiency. But there was not enough cash to see the change though and the business closed 12 months after its launch. Which mistakes did the founders commit?

1. They entered an industry in which they had no previous experience. They did try to find a co-founder with fashion industry experience but without success. 2. They hired the wrong people. The founders did hire some industry veterans. These folks were used to the high level of specialization within the garment industry and were not willing to help beyond their area of expertise. In a startup you need people who are willing to do what is needed to keep the business going 3. I may be being harsh here, but the founders continued to launch the business even when they fell short of their funding targets. They had correctly estimated they need $1.5M to get started but they only raised $950K. As a result, they 4. Ran out of money.

Let’s look at Baroo a pet care business that launched in Boston in 2014. The original concept was to provide pet care services in an office setting, allowing people to bring their pets to work and see them during the day. Baroo’s owners did limited testing of their idea and decided that it would not be viable. So they adjusted their plan to provide pet care services in apartment buildings. The initial launch in Boston was a success and they quickly expanded to Chicago. After raising more capital, they moved into the Washington DC market which proved to be quite different than Boston, apartments were more spread out which increased travel times for Baroo’s staff.

Operating in 3 cities began to put strains on the management team, and the off the shelf scheduling app they used was unable to cope with the demand. The financial performance was not great, in the first six months of 2017 the business lost $800,000. It was time to raise more capital or sell the business. The founder was unable to do either and the business closed in February 2018. What lessons can we learn.