Eden Dwek
Innovative Startups
KPMG

Here’s how your Tech startup can reach its potential…

In 2010, George Osborne, the Chancellor of the Exchequer, announced the formation of a Tech City in East London. The popularly termed ‘Silicon Roundabout’ was intended to become the European equivalent to Silicon Valley, a dynamic hub for digital businesses. However, six years on and despite lavish government grants and tax benefits, Tech City has failed to live up to expectations with many remaining businesses in the area unlikely to make significant revenue for years to come.

According to a recent survey, a shocking 50 per cent of startups in the UK fail to survive beyond five years (Source: RSA). Most businesses predominantly fail because they run out of money, but there are a multitude of reasons why this can happen. Poor founding leadership, imperfect business models, lack of access to markets, timing and entrepreneurial shortcomings can all contribute towards failure.

So why are so many UK tech startups failing to meet their potential? Let’s look at the principle reasons and the practical steps startups can take to avoid becoming casualties.

The big idea

Having a good idea for a business is no guarantee of success. However good a business idea may be, there has to be sufficient demand for it. In March 2016, CB Insights carried out a post-mortem of 101 startup failures, finding that 42 per cent of the companies surveyed failed because not enough people wanted the service or product they were producing.

Leadership

Investors and business advisors are united in their belief that every successful startup needs a strong founding team and solid team management. According to the Tech Factor report, published in 2013, businesses with more than one founder tend to be more successful than those with just one. When Eran Hammer-Lahav, the founder of enterprise microblogging platform Nouncer, announced the closure of his business, he came clean on the prime cause of failure expressing: “I didn’t have a partner to balance me out and provide sanity checks for business and technology decisions.”1

Pricing and cost issues

If a company is selling a product or service that no one has heard of before, it can be hard to figure out how much to charge for it. This is exactly what happened to Delight.io, a company that tracked app users’ interactions with their devices. It originally priced its service by the number of recording credits its customers made. However, the company became unstuck because its customers had no control over the length of the recordings they made. As a result, customers became cautious about using the credits. When the company changed its pricing model to reflect this concern it was far too late.1

Not focusing on the competition

Startups are often inclined to get their heads down and plough time into creating a unique product without thinking about the competition. This can be a disastrous position to adopt, as Mark Hedlund, founder of Westabe, a personal finance management tool, discovered to his cost. Although Hedlund successfully raised $4.7m, his target audience ended up preferring the user experience of rival Mint.1

Raising finance

Inadequate cash flow can kill off a startup before it even has a proper chance to get off the ground. If a company’s founder is not financially minded, it must employ someone on their team who is. Companies struggling to raise capital should consider whether or not their businesses are viable since it is a commonly cited maxim that a great business will always find backers.

Even with seed capital, many startups fail because they are unable to nurture sufficient growth. According to analysis from Oxford’s Said and Cambridge’s Judge schools, less than one per cent of the 600,000 companies registered in Britain since 2012 have achieved the status of ‘scale-up’, defined as growth of 20 per cent in turnover over three years. The report’s authors argue that the problem lies in venture capitalists not investing for the long term – but the fact is that most VCs are happy to continue their investments if they see positive growth.

Timing

The timing of when a company comes to market can be a critical factor in its success. In a recent TED talk, the American entrepreneur Bill Goss referenced a number of Internet companies that came to market prior to the widespread use of broadband. The companies were in the wrong place at the wrong time and were superseded by businesses that got their timing right. Although it can be difficult to determine the best time to launch, startups should carefully consider whether their market is ready for the product or service before going live.

Unpalatable though it may be, the hard truth is that the majority of startup tech companies fail. Every day, tech startups go bust because they make poor commercial decisions, lack a coherent vision, or simply run out of cash. Something we aim to help startups with in our bi-weekly drop-in sessions, where you can receive free expert advice from one of our advisers.

So what can startups do to defy the odds and succeed?

To answer this question it makes sense to look at startups that have succeeded. They all make products or services that are heavily in demand. They are led by entrepreneurs that are focused on business processes; understand the minutiae of running an organisation; and have a razor sharp focus on growth, enabling them to avoid the trap of running out of venture capital finance. A good startup team should have the ability to change products; adopt new marketing approaches; shift industries, or even tear down a business and start all over again, should they need to.

Get these factors right – and you may have a shot at creating the next unicorn – a startup valued at more than $1 billion.

1http://www.inc.com/kimberly-weisul/what-went-wrong-failed-startups-tell-all.html

Resources

Guide

The Startup Cyber Guide

Your guide to a secure company.

Read more
Article

Should your startup pivot?

Pivoting might be a viable option for your startup, but what is it, and should you do it?

Read more
Report

Venture Pulse Q4 2017

An analysis of global and UK venture funding.

Read more