Insights: Three lesser-known reasons why startups fail

A healthy entrepreneurship ecosystem is good for economies. And massive funding for regional players, driven by business-friendly government initiatives, sends a signal that the good times are just getting started. But while the region has become an undeniable epicentre for global entrepreneurship, success does not come with a guarantee. For every Careem, Washmen and RemotePass, there are hundreds of promising prospects that none of us have ever heard of because they failed to go the distance.

If you go looking for answers, answers you will find. There are plenty of reports packed with impressive-looking figures and charts in which the usual suspects are paraded for all to see. Access to capital, tough market conditions, talent shortages – the list goes on. And yet, it is incomplete. While the usual suspects undeniably play their part, in my own experience, the major culprit emerges as one of three factors that are often overlooked.

01. Inability to pivot
Business founders have a vision. And sometimes, they can get so locked into that vision that it makes them hard-headed at the very moments when they need to be flexible. Obsessed with the central idea that launched their business in the first place, it can be difficult to detach themselves from it when cash flow tightens and market dynamics shift. The simple fact is this: if you are unable to monetise for a sustained period, it is time to pivot. For a younger company, the skills may not yet exist in-house for the more dramatic changes, but if the founder cannot consult the board on revenue models and operations shifts, then they can turn to a coach, mentor, trainer or other neutral third party.

Certain scenarios will have obvious solutions. For example, if a B2B business model is bringing in a steady stream of revenue but a B2C product is not, then expending resources on the latter is wasteful. Formal and continual assessment of the effectiveness of a product or service is critical. And businesses should not be afraid to discontinue those that do not measure up, despite what they may mean personally to a founding team member. Early focus is vital. Monetise that which is easily magnetisable and leave the more adventurous ideas for later.

02. Inflated valuations
In lean times – such as during a pandemic, economic downturn or period of sustained inflation – this is especially prevalent. Without an accompanying rationale, founders set high valuations. In the absence of any real data to back them up, high valuations rely on being able to convince a few angel investors to overlook how much of the company they obtain as long as they have skin in the game. Inflated valuations can be highly detrimental to the company’s valuation in the future as institutional investors, who may warm to the founders and their ideas, will not see eye to eye with them on valuation terms. This will lead to a struggle to find a solid institutional investor willing to give the same terms as the angels. Unfortunately, many founders have fallen into this trap, and have consequently been forced to take a “down round” which causes a loss in valuation, decelerates growth momentum, and becomes a permanent blemish on the company’s record, potentially warding off future investment from most institutional investors.

03. Poor fundraising planning
Fundraising takes time and in fact, it takes a lot of time. The people to whom entrepreneurs pitch, typically require the approval of their bosses and their bosses’ bosses. Such an approval chain involves several rounds of due diligence, the sharing and verification of data, multiple rounds of conference calls, and ultimately, a few investment committee meetings before all the required legal steps have taken place and before the funds can be released.

The most successful founders I have encountered had such meticulous plans in place that they knew which investors they would call, on a specific date and why. For example, they might start conversations with a Series A investor while they were still in the process of raising pre-Series A rounds. It is all about building rapport ahead of time, getting to know potential investors and allowing them to get to know you. You keep them informed of your milestones and explain how the fundraising is progressing for your current round. This builds confidence so that when the time arrives for their support, you do not need to start from scratch. You should also be able to show that you have money in the bank. This also contributes towards building investor confidence because it demonstrates good cash flow management.

Hard times
Yes, we are facing inflation. Yes, we are amid a period of uncertainty. Yes, operational paradigms are shifting, and we must adapt. All these things are true, but so is this: every challenge presents opportunity. With the right focus, the right partners and access to the right information about potential pitfalls, a business can survive and thrive in the darkest of days.

Ryaan Sharif is the general manager of Flat6Labs UAE