About 50 percent of all startups will not make it to year five and approximately 67 percent won’t make it to year 10, according to historical data gathered by the Bureau of Labor Statistics over the past 18 years. The good news is I’ve documented why the average company fails.
You Don’t Test Your Product or Service
The last time you hosted a BBQ, I’m sure you surveyed your guests to determine the type and quantity of food they were interested in consuming. You didn’t buy 10 pounds of kale patties with the hopes that they were vegans. Yet, you are building a company without ever asking your target audience what it wants.
You could have utilized free resources that teach you how to read your target audience, but you were too busy frantically building a product that nobody wants.
Tip: Don’t build it until you have sufficient evidence that points to the fact that they are coming. Build it and they will come only works in the movies.
You Ignore Metrics
You make it a point to check into MyFitnessPal each morning to analyze your caloric intake, yet you have no meaningful data on your startup’s fat, sugar, and carb intake.
You could have put together a basic Excel spreadsheet or used the various free and inexpensive tools to measure your performance, but you were too busy chasing high maintenance customers who never converted to profitable clients.
You could have built a monthly financial model, with relevant metrics to measure your progress and understand which customers to chase.
Tip: Different revenue models focus on different metrics. Focus on what matters.
A subscription-based model should focus on churn (% of users who leave) and retention (percentage of users who stay). It is normal to have a 1 percent monthly churn rate while you are getting started. The goal is to decrease the churn rate by ascertaining the reasons users are leaving the service.
An ad-based model should focus on user retention by tracking the percentage of daily active users (DAU) over monthly active users (MAU). The DAU/MAU ratio, which illustrates the percentage of users who log in each day, should stabilize at 50 percent, which implies that half of your users are daily users. Popular sites, such as Facebook, achieve 85 percent daily activation. Ad-based models should also focus average revenue per user (ARPU), by dividing revenue over number of users. ARPU ranges from $4 (Facebook) to $189 (Amazon).
A retail (or pop-up store) model should focus on sales per square foot (SPSF). Warby Parker’s showroom achieves $3,659 SPSF, which is far beyond what most retail stores achieve. Startups should target between $500 to $1,500, depending on the price point of their goods.
To balance the analysis, it is important to look at customer acquisition cost (CAC) and lifetime value of customers (LTV). With a subscription-based model, you hope to earn back your CAC in one year. With an ad-based or retail-based model, this period will be longer as startups will spend money attracting users and foot traffic prior to monetizing.
You Don’t Manage Your Talent
You have an Excel spreadsheet to manage your love life, but you treat your employees like interns.
You could have focused on creating goals pegged to an equity roadmap to motivate and retain key talent.
Tip: Let your founding team understand what is expected of them at the onset. When things go south, you’ll have a benchmark to measure upon.
Most founders issue equity and stock options on a vesting schedule. This typically serves as a motivator and a benchmark. Founders can discuss what is required for continuous employment and vesting.
The employment and vesting criteria should be tied to a base number of hours of performance each week and specific milestones. I wrote about constructing an option pool for employees here.
Below is a basic, high-level example:
Kyle and Kara each own 50 percent of their company, which is contingent on each of them dedicating 70 hours per work to a set group of initiatives.
Kyle and Kara are ready to build a team and use their own employment and vesting guideline for new hires. They carefully create a list of expectations for each new C-level employee and director in order to communicate what is needed for continued employment and vesting. This in turn provides guidance for all future hires.
Remember: There is always a lesson in each failure.
Check out Lean Finance for Startups to learn everything you need to know about startup finance.