The Startup Game: Why Do Startups Fail ?

The term “startup” and the ecosystem surrounding it is a relatively recent invention! Although the technical definition encompasses any business that has recently set up shop, the working definition refers to venture capital funded organizations.

In this article, we will look at the good old startups. The “mom and pop stores” that have a high failure rate of 90%. We need to understand that the problems faced by these startups and the resources that they have available are entirely different from the million dollar startups. It is for this reason that warrants a separate analysis for these organizations.

Lack of Focus

The number one reason behind the failure of mom and pop stores is the lack of focus. Businesses tend to thrive when they are specialists. Customers have a clear-cut perception about them. Also, they can build expertise that will allow them to build a solid reputation.

Reputation is the number one asset on which mom and pop stores survive. Hence, a loss of focus means suicide when it comes to these micro-organizations. Be it a laundry or a grocery shop or a video rental store, the success of the mom and pop stores lies in understanding the demographics better than the mega-corporation. The mega-corporation may beat them on price but it cannot compete as far as providing personalized service is concerned.

One Man Army

Startups tend to owned, managed and run by a single person. This, just like the lack of focus, is a major detriment to their well-being. Although, mom and pop stores cannot afford to hire an army of managers and specialists, they must still follow the fundamental principle of division of labor.

The entrepreneur must use his intelligence to perform strategic tasks. Mundane tasks that can be delegated must be delegated. A myopic view of increased costs must not stop the mom and pop stores from outsourcing frivolous tasks. Proper division of time must be done to ensure that operational, tactical and strategic function of business is all paid attention to.

Failing to Automate

In modern day business, automation is the name of the game. It does not matter whether mega corporations compete of whether mom and pop stores do, the ones that automate live another day. Once again, mom and pop stores do not have the budget for robotic process automation. If they did have that kind of budget, they wouldn’t be called mom and pop stores! However, a lot of automation is now available very cheaply or even for free.

Several ERP’s provide cloud-based “pay as you go” options that fit into the pockets of these micro organizations very well. These applications save times from mundane tasks like accounting and tax filing. Mom and pop stores must also make an attempt to build in efficiency.

Premium Pricing

Mom and pop stores will by default be a product that has a premium pricing. Mega corporations have economies of scale working to their advantage. They can buy from suppliers in bulk and pass the benefits to the buyers. The mom and pop stores cannot compete on price, period!

Instead, these stores must compete on personalized service. Customers are not going to pay a premium because they like “mom and pop stores” and are feeling charitable towards them! Customers pay more only because they get better service. Mom and pop stores must invest heavily in customer relationship management. All employees must be oriented towards having a service mindset.

Poor Choice of Location

Mom and pop stores are also heavily dependent upon their location. Their core competency is service, and they lose when competing on price. Hence they must operate in upper middle-class neighborhoods. People in these neighborhoods tend to have working spouses. Hence, neither has the time and families tend to appreciate the personalized service provided and are willing to pay a price for it.

To the contrary, most mom and pop stores come up in low class neighborhoods because the rentals are lower. Low class neighborhoods have people with lot of free time but less of money. They do not value personalized services. In such cases, the organization is likely to fail because of poor understanding of demographics.

Ignoring Feedback

The heart of the mom and pop stores is customer relationship management. They must live by the maxim that the customer is king and cannot possibly do any wrong! What actually happens is that mom and pop stores are managed by people that do not have a service mindset. Instead, they try to fleece customers. Since the customers are face to face with the owner, they often express their displeasure. The owners often overlook this displeasure. This is a huge mistake. Flexibility is at the core of the small business. They must pay attention to the opinions of their customers and adapt quickly.