Avoiding the Top Mistakes Made by Tech StartupsAvoiding the Top Mistakes Made by Tech Startups
Most startups fail. Don't let your new venture become one of them. Building a successful business requires an idea, detailed planning, and a healthy dose of perseverance.
October 6, 2022
Many IT professionals harbor the dream of starting their own tech business. Unfortunately, nine out of 10 startups fail. Building a successful business requires an idea, detailed planning, and a healthy dose of perseverance.
It all begins with a detailed business plan. “If you have no plan, plan to fail,” warns John Wensveen, chief innovation officer at Nova Southeastern University and executive director of the Alan B. Levan/NSU Broward Center of Innovation. He acknowledges that while creating a business plan is a complex and tedious task, the document is essential for long-term viability. “All too often, companies go into business without a business plan and eventually find themselves in trouble because there's no formal structure to achieve success.”
A well-thought-out business plan serves as a map for reaching positive results. “The document can be consulted to see if the company is deviating from its ultimate goal and it can be used to guide its future direction,” Wensveen explains. A business plan also provides a tool for raising funds as well as to measure business performance. “Without such a plan of action, it's likely that the company will fail,” he notes.
Fatal Flaws for Startups
Tech startups with high hopes often launch operations with bloated payrolls. “Eager to demonstrate growth and flush with new funding, they add new headcount too quickly -- especially in sales and marketing -- before it's clear how their product delivers value to their target customers and what their go-to-market strategy should be,” says Alberto Yépez, managing director and co-founder of Forgepoint Capital, a multi-stage venture capital firm.
Scaling too quickly increases a startup's burn rate, reducing the time it has to demonstrate key metrics for its next funding round and other milestone events, Yépez explains. Such a startup can also trash trusted customer relationships by failing to deliver goods or services as promised. “That burned cash won’t come back, and neither will that customer,” he cautions.
Conversely, limited funding forces some struggling businesses to assign staff members tasks that fall outside of their skillsets. “These responsibilities often suffer from poor execution and may have severe consequences for the startup,” says Thomas Dolan, co-founder of 28Stone Consulting, an IT and fintech consulting firm.
Many startups also neglect to protect their intellectual property. In their rush to go to market, some founders unwittingly disclose their core technology, or offer their core technology, to potential investors and other external parties. Such activity triggers deadlines for filing patent applications, says Kyle Graves, an attorney at law firm Snell & Wilmer. “If these deadlines pass, patent rights for the technology are lost forever, both to the chagrin of venture capital investors and to the joy of emergent competitors.”
The best way to recover from any mistake is to simply look forward, recognizing that over the long run there will be opportunities as well as obstacles. “Historically, many tech startups never got off the ground, or failed once they did, because the ... founders didn't recognize potential barriers or neglected to act upon them,” Wensveen says. It's important to incorporate flexibility into the overall strategy and to not create a plan rooted in hopes and fantasy. “Be realistic, conservative, and aim for steady moderate growth,” he recommends.
Treat each client interaction and client engagement as a project instead of a product-feature discussion, advises Prashant Kelker, partner and Americas lead, digital sourcing and solutions, with global technology research and advisory firm ISG. “See what can be learned from each project and how that informs the entire value proposition,” he says.
Remember, too, that IT is currently transitioning from standalone products to a product-service continuum. Emerging frameworks, such as product service system (PSS) and performance-based contracting, will help move the discussion away from technology and toward outcomes, Kelker notes.
It's also important not to waste time on relatively trivial matters. “Scaling quickly to add a bunch of logos and headshots to your website is not a recipe for success,” Yépez cautions. “It's only when startups take a careful, attentive, and collaborative approach with their first customers, and then build for scale, that sustainable and repeatable value can be achieved.” Startups that grow incrementally and logically are the ones that someday become industry leaders and enduring household brands, he says.
The tech startups of today and tomorrow are far different than their predecessors when investors poured cash into businesses with reckless abandon. The keys to future success include a solid business plan that encompasses flexibility, diversity, the right management team and organizational structure, and a supportive corporate culture, Wensveen says. “Constant training and development for all levels of employees, steady and moderate growth strategies, reasonable capital requirements, and a long-term vision are also keys to long-term success.”
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