A Controversial Proposition: Plan for Startup Failure
The experience of running a business from scratch and achieving a certain level of success gives pride and hope for a better future for entrepreneurship. However, often startups need to keep evolving to suit the changing market environment and eventually be ready for any possible outcomes. A number of startups feel assured about their future roadmap and resist the idea of an exit strategy. However, experts suggest that having a good exit plan can actually increase the entire value of the business.
At some point in the life of a start-up, the founders or stakeholders have to decide whether to persevere, pivot or let a business die based on the value it generates for the target market. For example, Youtube founders decided to get acquired by Google in 2006 and be the primary outlet for all video content. This provided the required momentum and ecosystem to achieve Youtube’s full potential. Similarly, PayPal enjoyed a first-mover advantage in the online payments industry and competed with large banks. Still, its board members decided to get acquired by eBay so that it can achieve the required scale and penetration; as the PayPal model of business needed huge volume maintain its success.
How do you decide whether to persevere, pivot or let your start-up die?
Every start-up business needs to do a market test for its offering after a period of existence. It needs to implement a certain set of metrics targets and a realistic timeline to make a judgment for the future course of the business.
Let’s understand how to decide the business potential in the years to come:
Establish clear metrics that need to be reached
The companies can use sales metrics, financial metrics, customer conversion metrics and digital performance metrics to gain a better picture of the enterprise. Decision making using a combination of different metrics show the current position of the company.
Set a realistic target and schedule
A realistic timeline is everything. Startups need to set a realistic timeline to achieve the target numbers of the performance metrics. The timeline may depend on the various factors such as the funding availability, market conditions, concept awareness in the users.
Test value propositions of company to make the right decision
Based on the measurements of the metrics as explained above, the founders can make a decision about the future path for the businesses. However, usually it is not such a black and white decision; one must analyze the parameters before making a sound, metrics-based decision.
Now, let’s understand the above 3 points in detail.
- Establish clear metrics that need to be reached
The business should focus on right metrics for a better understanding of the company status. Identify the key value propositions to signify the potential of the business – for example, in some business models immediate profitability does not represent a viable parameter to measure, but the gross sales value makes more sense for future growth. Rely on Sanity analytics to improve the business and resist the temptation of vanity metrics. There are different types of metrics that startups should choose based on their business model.
Sales metrics – This can be measured to understand the total value of the product/services sold in the market over the period.
Financial Metrics – Companies should on focus on profitability, burn rate, operational efficiency and gross margin to understand the cost involved in the production, revenue left for scale up, necessary and unnecessary expenses.
Customer related metrics – Key parameters to be measured are the number of subscribers, Customer Acquisition Cost, Retention Metrics, Churn Rate.
- Set a realistic target and timeline
Setting a realistic timeline depends on various factors starting from the market conditions to the larger economic scenario. Also, it depends on the type of offering; for example, if the offering is premium and niche then the timeline to achieve the customer numbers would be long, whereas if the offering is for the mass market, then the time to reach target customers might be shorter. In some cases the timeline is also driven by the availability of funding as adding new features requires more investments.
- Test value propositions of company to make the right decision
Based on the parameters measured explained in the above entrepreneurs should continuously reformulate or realign their value propositions.
Below are the steps to make a choice:
Test the viability of the business
If the company achieves the projected metrics within the decided timeframe and also shows future potential, one must decide to continue with it. However, it might be a right juncture to scale up the business. This can be done in two ways below
- Find external funding to grow the business organically.
- Merge with another business to gain access to the larger market, subscriber base, funding, complementary solutions/technology or the workforce
A business needs to understand the customer priorities so that best value propositions can be designed. If the metrics show a gap in your offerings and the customer expectation or there is a serious market change, there is an indication to pivot your business.
You might have to change your target market, value propositions as per your unique selling points and the market fitment. Sometimes you have to change the business model and revenue model to suit the customer behavior. This sometimes results in a completely new product or service offering compared to the original idea.
For example, Odeo, a network to find and subscribe to podcasts, saw the sudden change in the market when iTunes began taking over the industry. The company decided to make a drastic change and run with the idea of a micro-blogging platform which is now popularly known as Twitter.
Kill and exit the business
Founders and stakeholders need to make a decision to quit and kill the business if
- It is not achieving the growth projected.
- The target market is diminishing.
- There is a disruption in the market completely changing the customer behavior and making your product obsolete.
- There are no idiosyncratic capabilities or qualities that can be leveraged in another market or solutions.
It is always hard to make this choice, but founders must see the larger picture of the current business. Getting emotionally connected without a proper exiting plan can diminish or restrict the company growth. It is important that any entrepreneurs should reinvest resources both in terms of money and efforts for creating better value for the society.
Finally, every company should focus on creating net value for all its stakeholders in particular and for society in general. In an ever changing competitive environment, a wise entrepreneur invests his time and money in the right place, realigning his vision and goals whenever required.