On September 20, 2012, the WSJ published an article entitled, “The Venture Capital Secret: 3 Out of 4 Start-ups Fail.” The article stated that less than 1% of the start-ups register for an IPO. This Cassandra –like statistic should not discourage the start-ups. Even then I doubt it will. People still buy lottery tickets with an even lesser probability of success. But with a start-up, you can at least control your odds. And that is why I keep authoring the blogs – how to increase your odds of winning. Better yet, let me give an example of what decreases your odds from winning.
Months ago I met with a management team that has developed a software application in the health field. The founder had the right credentials to understand the diagnosis. It developed its own proprietary software to diagnose the symptoms. The company has raised some grant funds from a federal program. It has enough capitalization for 6 months and it was looking for additional $1 million capital, half would originate from a government program that needed the other half to be raised from the private sector. Private funding was needed to have the grant kick in. I spent over an hour meeting with the business development head and attempted to understand the technology and the marketing strategy.
First, the marketing chief was focusing on distributing the technology through hospital networks. The team had been presenting to various hospitals in the West Coast. And had established a pricing system that the company believed would work based on its own assumptions what the market would bear.
Second, I understood the technology that related to measuring the impact from concussions and how that technology applies to war veterans, which number over a million, which group was the principal focus of the founder of the company. After seeing the demonstration, I recalled having seen similar technology being applied to high school football players in Virginia, where every player was required to take a benchmark test before the season started from a software platform.
But what really set me back was when I asked the marketing guru whether he explored the possibility of expanding the same technology to sports where the issue of concussions keeps rising. His answer was that he spoke to someone who said that this market would not be interested. The high school sports market was a consistently growing market. This company’s market had to have a finite lifespan because of the economic limit of veterans – the need for military forces drop when there is no war. After my meeting, I thought what he said about ignoring the high school market. I immediately logged unto the Internet and searched for the similar software application being used in Virginia.
I discovered that a company founded in Pennsylvania at least 10 years ago had developed a software package for measuring concussion recovery. It is already in international markets, written in seven foreign languages, and it has been deployed in 50 states. Since it has a shrink wrap solution, allowing school personnel to use the application, the company has established itself fairly strongly nationwide. The company was also being used at medical and rehabilitation facilities. And it was entering into the military veteran market. It has an aggressive pricing model. Since the company was private, I could not get any revenue models, but I can safely assume that it must be close to $2-3 million a year based on the number of clients and pricing model. It was a daunting competitor.
Again, I ask myself, why do companies fail? First problem as I saw here, the marketing head failed to look at the competitive environment. By acknowledging competition, a start-up can prepare itself to outmaneuver the competition in markets where the competitor is weakest. Second, I already know that the other company is well funded and the new entrant must prepare itself financially in the event that the established player enters its market directly. There were already indications that it has begun to from its website. The start-up has to skew its marketing to beat the competitor.
Failure to prepare for competitors, both direct and indirect, is a major reason start-ups fail. And what is interesting is that in this particular case, the marketing head did not bother to research carefully his industry. As a colleague once stated, does this person ever heard of the Internet? So research is always needed in working with start-up businesses. What I was shocked by this example was that I was able to identify the competitor, look at its pricing model, and review the software platform in less than one hour by on-line research. Meanwhile, this marketing guru did not know that this ubiquitous competitor existed. Unless that company acknowledges the competitor and makes strategic plans now, I doubt it can make it through by the next couple of years. So the WSJ has an interesting statistic. I wish the article had delved into the reasons why, but I would not be surprised that the reasons these start-ups fail are not they do not follow the strict regimen of strategic planning and execution in their pre-launch analysis. Preparation is how a start-up becomes the 1% home run.