Why do start-ups fail?

Why do so many start-ups fail – when they seemingly have it all? Great products, customers and a good outlook? It probably has a lot to do with the transition from initial start-up to becoming a professional organization. Many just do not get there, or cannot sustain this level.

The question therefore is, “Does being intellectual property (IP) smart automatically translate to leadership or business smart?” In many cases, the answer is simply, “no”. There are several factors that play a role in this. Ranjay Gulati and Alicia DeSantola* say that extensive studies on fast growing companies have identified four critical activities for successfully scaling (professionalizing) the organization:

  1. Hire functional experts to take the enterprises to the next level;
  2. Add management structures;
  3. Build planning and forecasting capabilities; and
  4.  Spell out and reinforce the cultural values that will enhance and sustain the business

Such was the case of CloudFlare*, a San Francisco based start-up founded in 2009. The company quickly became an important player in content delivery and security for small and medium sized web sites. By 2012 it served nearly 500 000 websites with 2 billion daily page views. At the beginning, the founders proudly and vocally proclaimed that they would build a totally flat organization with no hierarchical structures or HR function. They wanted to promote flexibility and individual achievement, and believed structure and hierarchy would cause unnecessary bureaucracy.

However, along with their growth problems soon arose. By the end of 2012, five of the firm’s 35 employees had left, citing lack of structure and HR practices. Without official policies, they found it difficult to navigate aspects such as vacation, sick leave and balancing work and family expectations.

As many start-ups grow they go through a life cycle from small initial start-up to a larger enterprise. Some may even end up being acquired in its totality by another large corporation. Inherent in this growth, the founders and team members experience typical situations and behaviours akin to the growth of a team in organizations. Perhaps the best way to illustrate this is to use the work done by Bruce Tuckman on the life cycles of a team. The same life cycle could show how a start-up typically evolves into a mature and high performing organization:

  • The founders or CEO’s of start-ups are usually visionaries bringing something extraordinary to the market, often in a disruptive way.
  • However, they often mismanage finance, hiring (too many, too few or not the right people) or marketing, simply because these are not inherent skill sets they possess.
  • Start-ups go through a similar life cycle as teams and it is often in the storming phase that things go awry. This is where proper role clarification takes place, conflict emerges and trust becomes an issue if not managed.
  • Successful start-ups understand the importance of scaling at the right time and work on maintaining their culture that made it attractive for them to initiate their company in the first place.
  • Successfully navigating the storming phase allows start-ups, like teams, to grow and perform.

Maintaining that which you stand for

As the start-up grows and becomes more professional it is important to mould and maintain the culture and values that brought the start-up together in the first place. Few however take the necessary steps to reinforce culture and values.

Patty McCord, founder of Patty McCord Consultancy and former Chief Talent Officer at Netflix says that when he advises leaders of start-ups about moulding a corporate culture, he sees the following issues as needing attention:**

  • Often in start-ups there could be a premium on casualness that runs counter to a high-performance ethos that the leaders want to create. In this regard, it is the leaders that would need to walk the talk. It is a waste of time to articulate values and culture if it is not modelled by the leaders.
  • Making employees aware of the levers that drive the business. It is important that leaders clearly communicate how the company makes money and what behaviours will drive success.

In summary, there are 3 critical and intersected focus areas for start-ups to be aware of as they grow to scale or professionalize:

  • It is critical to keep focus on initial IP – that great idea or that innovative product. This is what gave rise to the start-up in the first place, and why customers keep on coming back.
  • In keeping focus, do what works in larger enterprises without losing the original culture and values. Professionalize the business through effective structures, governance, metrics, planning and forecasting. In so doing hire the right functional experts.
  • Create the right structure and discipline. This is how healthy habits are formed. Not only will this make the organization more efficient, it will most certainly open the door for new opportunities.

*Harvard Business Review – Start-ups that last, how to scale your business. March 2016

** Harvard Business Review – How Netflix reinvented HR. February 2014

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