It’s a common adage in Silicon Valley that 90% of startups ultimately fail. To understand why that’s the case, a pair of researchers meticulously pored over 193 blog posts—startup postmortems, if you will—written by founders examining what went wrong.
A recent report by Fractl found that for the failed startups analysed in this study, the factor most often cited by founders, even more often than running out of cash, was that their business models weren’t viable.
What is intriguing to us is that the #1 reason is that business model was not viable. We think that the one thing in the control of the founders is the viability of the business model. Cash – hard to raise. Traction – hard to generate. Investors – hard to convince. But the business model? Surely people can understand and predict whether their business model is viable? If not, why not?
The reasons that founders, indeed any executive, become blinded to the viability of their business model are manifold, and we see this all the time at The Strategy Group:
Lack of business model validation
A good idea goes straight to pilot and funding without validation. The reality is that a business model, at its inception, is just a bunch of hypotheses. Some may be true, many will not.
Lack of validation processes
Founders, and indeed executives, have no concept of how to validate a business model before implementation. Let’s give it a go and hope for the best is often the mantra
Lack of product-market-fit
For every customer segment, you need a value proposition. And one that sticks in the eyes of the customer. Many models don’t ensure that there are meaningful customer value propositions for each customer segment – is it surprising that they fail?
Lack of a tested financial model
Excel can be made to show anything – what counts is taking the financial model to the market and running meaningful experiments to validate that the customer segments, when confronted with the value proposition, will indeed pay. And pay more than the cost!
Lack of a true partner model
Every business model needs partnering. It is imperative to flesh out a validated partnering model before launch.
No understanding of acquiring, keeping and growing customers
Oh, through FaceBook, Twitter and blogs, you say? Heard it all before? What really is the Cost of Customer Acquisition (CAC)? What really is the Customer Lifetime Value (CLV)?
The reality is that every business model must be validated before launch. At The Strategy Group we have developed robust processes to achieve business model validation in very short time frames, using the Business Model Canvas at the heart accompanies by The Lean Start-Up methodology. Getting out of the building and running validation experiments with real customers is essential to the success of a business model – even more so as demonstrated by the Fractl research. If start-ups and corporates alike deployed these tools, the rate of success of both would, in our view, increase very significantly.
