A
startup can be a high-stress environment,
especially when you are struggling to turn the corner before the lights
go out. At moments like this, disagreements about the direction of the
company or the division of profits among the owners can lead to a rift
within the founding team. Because people wear lots of hats in startups,
the sudden departure of a key executive can doom a fledgling
organization. This makes it imperative to structure agreements so that
the founders and key hires are treated fairly and that everyone's
interests are closely aligned with the success of the new venture.
The
most common method for setting prices is
to start at the unit cost and then mark up the price to achieve a
profit, so-called "cost-plus" pricing. Unfortunately, cost has little
to do with how a product or service is valued by customers, which can
lead to systematic underpricing. For example, if a widget costs $20 to
manufacture, and you sell it to a customer for $25 when that customer
would gladly have paid $35, you have left $10 worth of value on the
table.
Even worse, cost-based pricing can lead to prices that are greater than
what the market will bear. Because unit cost is related to sales volume
(see
CVP
Analysis
for more info), high prices lead to fewer sales, which in turn
increases unit cost, leading to a further round of price increases.
As Thomas Nagle and John Hogan point out in
The Strategy
and Tactics of Pricing,
failing to account for the effect of price on sales
volume—and
hence costs—has led to numerous business failures over the
years
once they enter a "death spiral" of price increases to allocate fixed
costs across a smaller volume of sales. You should instead let
anticipated prices, based on the product's perceived value to
customers, determine the
cost
structure, not the other way
around. Consequently, pricing strategy and customer value should be
addressed in the earliest stages of planning a new business.
Growth
is considered as an indication of
business success, but uncontrolled growth can—and
does—kill
entrepreneurial companies for two primary reasons. The first is that
businesses need systems and infrastructure to scale properly, but few
invest the time and effort to lay the foundations for growth in those
first hectic years. That's too bad, because things tend to spin out of
control when you put the pedal down. This can be especially problematic
for companies that receive a large infusion of outside capital. It's
the equivalent of trying to break the land speed record by strapping a
jet engine onto a soap box racer. Don't be surprised when the wheels
come off...
The second reason is that top-line growth requires additional
investments in fixed assets (warehouses, machinery, trucks, etc.) and
working capital (inventory, accounts receivable, etc.). At controlled
rates of growth, companies are able to finance incremental sales
through internal cash flow. Hypergrowth, on the other hand, can suck up
large amounts of cash, forcing businesses deep into debt or bringing
the whole enterprise to a screeching halt. Many times, owners are not
even aware of the impending collapse, because they focus on
profitability
(as depicted on the income statement) rather than cash flow. Never
forget that cash is the lifeblood of your business!
11. Bonus - Add Your Own Reason
Share your ideas on why startups fail...
1 Lack of perseverance
In every aspect of life - try, try and try again. From the moment
you open your eyes till you lay in bed. In everything you do. It's all
up to you!4 points
2 Giving Up Too Easily
So many people expect to make a ton of money super fast and it just
doesn't work that way. Many ideas will work in the long run if you
stick with it.2 points
3 No Channel Strategy
Some companies focus on building a product, but don't think through
how to get it into the hands of customers. Even if your product is
great, unless you can sell directly, you may be dead in the water
without strong channel partners.1 point
4 Poor leadership
Most of the entrepreneurs just dont get it. They dont treat people
around them nicely. I feel that in today's world an entreprenuer needs
to be exceptionally good with people. Focus should always be on the
bigger picture, its about winning the war not just the battle.1 point
5 Following a Hot Trend
How does the saying go? A wise man does first what a fool does
last. You don't want to get into a business at the tail end of a fad or
a business cycle.