In a recent study, data-marketing firm FRACTL analyzed why startups fail. I found this research particularly interesting because the findings serve as a good proxy for why ventures in established companies can also fail. At the end of the post I provide a simple framework to avoid the risks of failure.
A recent FRACTL study of over 200 company post mortems found that the #1 reason those ventures failed was because their business model was not viable.
The research shows that we have good ideas, but bad businesses.
The results of this research were pretty interesting to me because they put “business model not viable” right at the top of the list. The FRACTL researchers are one of the first to really focus on this. This new research adds a layer to the findings of the 2014 CB Insights study that put “no market need” as the #1 reason for failure.
We are too product-focused
These findings are relevant because they show that companies startup or established still focus very much on products and value propositions. Addressing a relevant market need only gives you the right to compete. Figuring out a profitable, scalable, and competitive business model is what gives you the right to succeed.
It’s what Strategyzer is seeing with the companies we work with all the time. Business models are a real challenge to people who work on launching new businesses, either inside of large corporations, or for startups.
It’s not enough to create a product that sells well and that customers love. If it costs you too much to create and deliver the product or service, you will fail. If it’s difficult or too costly to acquire customers, you will fail. If the customer lifetime value is too low, you will fail. Or if your pricing model is generally flawed, you will fail.
In other words, even if your product or service gets good traction, it won’t be enough to save you if you don’t have a viable business model that allows you to grow. And if you have investors, you won’t be able to offer them a return.
Personally, I believe we are moving to a business model focused world where it’s not enough anymore to just have great products because they can be copied very quickly.
Companies need to have the right business models to survive and thrive. You have to ask: what is the right business model around this idea? Around this opportunity? Around this technology or patent? Around this product or service? The companies that really understand business models and know how to design them with well guarded moats will win. They will succeed. And that’s the same for startups and large companies.
Money won’t solve the problem
Another extremely interesting finding of the study comes from their comparison of funded vs bootstrapped startups:
The study shows that funded startups are more likely to run out of cash than bootstrapped ones.
The reason why I point this out is because access to funding (in startups or established organizations) is often brought up as the key challenge in innovation or company building. However, The FRACTL study shows that money isn’t really the issue. In fact, the findings show that funded ventures (including those that raised $10 million USD or more) are more likely to run out of cash than bootstrapped ones. Why is that so? Because you are more likely to risk building something that nobody wants when you have the money to actually build it. Renowned venture capitalist Vinod Khosla famously argued that “people who raise more money reduce their probability of success”.
A simple framework to avoid failure
Based on our experience and the two research studies quoted above it’s clear that companies aren’t focusing enough on business models or testing business models.
What can you do to start thinking about the risks in your business model? I encourage you to apply IDEO’s prototyping principles to uncover the risks related to your business model prototype. In their Human Centered Design Toolkit (which also includes the Business Model Canvas) IDEO suggests that quick and dirty prototypes allow you to rapidly test a product’s feasibility, viability, and desirability.
My co-author Yves Pigneur showed me that the same principles could be applied to business model prototyping. When you sketch out a business model with the Business Model Canvas you actually make assumptions about desirability, feasibility, and viability:
Feasibility is about the assumptions that you chose the right infrastructure to execute your business model well (risk: poor execution).
Desirability is about the assumptions that will actually create customer value (risk: solving an irrelevant customer job).
Viability is about the financial assumptions that will earn you more money than you spend (risk: flawed business model).
Adaptability is about the assumptions that you chose the right business model within the context of external factors, like competition, technology change, or regulation (risk: external threats).
Once you have defined all those assumptions related to feasibility, desirability, and viability, and adaptability, you can apply customer development and lean startup to test them.
We can do better
The findings of the FRACTL study and previous research prove that we still need to do a better job at educating intrapreneurs, innovators, and entrepreneurs about business model design and lean startup testing. When I say “we”, I mean the whole community: founders, leaders, executives, teams, strategists, and consultants.
We need to decrease the rate of business model failure or failure based on “building” something nobody wants. We can’t have these kinds of statistics because it means we’re failing at our task of educating executives and entrepreneurs.
At Strategyzer we accept this challenge and we work hard to do better.