A shockingly high percentage of start-up businesses fail: maybe 70% in the first 18 months, and about 90% over the course of five years. Investors have not made a return on their money, and founders have worked all sorts of hours in the struggle to get the business going.
Some of these failures are inevitable – such as when there is an underlying flaw that means the business can never work at scale – but many are avoidable. There is no single thing that can be identified as the reason for failure, but there are some common causes.
Many founders might never have spoken to a potential customer
For example, often the company doesn’t understand the market for its product. Many founders who have worked to develop it might never have spoken to a potential customer. The company may well fail to appreciate the quantity and quality of engineering required to take the product from prototype or lab, or to produce it at scale.
Sometimes it’s the board that fails the company; members need to be aligned and committed, not part time and pulling in different directions.
In addition, start-up leaders often underestimate the need for cash resources. It takes a lot to go from the germ of an idea to a self-sustaining business. Getting funding from the right sources, with the most advantageous terms, is a skill that is often missing.
And, finally, leadership skills can be a challenge; technical founders might not be the best people to lead a business or even understand the fundamentals of how business works.
Skills gap
This is a particular problem. As finance professionals know, a company that reaches a certain key stage in its growth needs a proper FD or CFO, but the CEO and the board, often too focused on controlling costs while driving revenue, sometimes fail to understand this.
Board members might consider themselves to be financial experts (because they don’t understand the product so they must be there for some reason), so believe they can provide enough of a FD/CFO function without hiring a professional for this role.
The board needs to see a good-quality financial plan for the company
I suggest that the threshold at which a company needs a CFO is when it has raised more than £10m. This is the point at which the finance professional can step in to deal with contract negotiation, banking relationships, cash management and the significant working capital requirements. Founders often come from scientific backgrounds, and I have yet to find a physics or biology PhD programme that taught anything about working capital.
The board needs to see a good-quality financial plan for the company – one that shows what will happen if those goals are achieved and looks at one or two upside and downside cases.
Build confidence
The most important question the finance professional will be drawing to the board’s attention, whether they’re on course to achieve the plan or not, is ‘When will we run out of cash?’ If the business grows more rapidly than planned, can the supply chain respond, and is there the working capital to fulfil demand, without giving away more equity? The CFO’s skills here will be invaluable, giving confidence beyond what the CEO can provide as a vision for the business.
The CEO, unless they have been down this road before, will often not see this need – indeed, in some cases will resist it. It is usually up to the board to make the CEO recognise that a CFO will allow them to focus on the things that they are better equipped to do. A good CFO will also be a sounding board for the CEO, helping them sharpen their ideas and present them better.
Every CFO knows that managing cash is the single way to prevent a business from failing. Not every venture investor – certainly not every technical founder – sees that there is a lot more to this than just adding up positive and negative numbers each month and hoping that the result is positive. A CFO, at a certain stage of a business’s life, can materially reduce the risk of failure.
More information
Bernie Bulkin is the author of Why Start-ups Fail, published by Bloomsbury Academic
