Friday, 20 July 2012

Reasons for Software Companies to Fail

For quickly growing start up or expansion-stage software firms, raising venture capital ought to be cause for celebration. Champagne bottles ought to pop, high fives ought to ensue, and each stakeholder ought to salivate over the ways that during which the business will leverage its money infusion to scale and drive future growth.

And whereas most investments begin that method, it isn’t long before some companies’ euphoria provides thanks to disaster.

Unfortunately, ranging from the notorious “Webvan” of the dotcom bubble, the high tech “dead pool” is infamously affected by several samples of ventures that either had no business accepting outside capital, or had problems that couldn’t merely be solved by more cash. that a lot of start ups fail isn't ground breaking news, of course, as a result of venture-backed start ups are risky investments and have a awfully high rate of failure, by definition.

The a lot of relevant issue is why they fail. In my expertise, it happens for 5 straightforward reasons:

1. The merchandise isn’t vital within the long-term


A lot of nifty, stylish software start ups manufacture nice merchandise that attractiveness to early adopters. They’re adequate within the 1st few years, however they could not translate into mainstream attractiveness because the business begins to scale. And if you haven’t cornered your market or your customers can’t live while not your product, then what’s the purpose of attempting to grow larger with outside capital?

2. The technology design isn’t scalable


It’s one issue to support a couple of consumers early. It’s quite another to support thousands (or millions, if you’re Facebook or Instagram) of consumers. sadly, so much too several businesses assume that their technology will scale with their client growth. When one thing inevitably goes wrong and that they aren’t ready to wear down it, that seemingly tiny issue will sink the whole business.

Imagine what would have happened if Instagram hadn’t been ready to support the million new Android users it received in precisely twelve hours last April. Instead, the popular photo sharing application handled the influx seamlessly and signed a $1 billion acquisition supply with Facebook but per week later.

3. The business model isn’t sustainable


It’s not uncommon for unprofitable firms to receive terribly important outside capital investment (see: Groupon, Pinterest, and Twitter) that permit them still operate unprofitably for an extended time. And whereas UN-profitability isn’t essentially a problem within the start up and early growth stages, not having a profitable economic model in place for the merchandise you propose to sell may be a huge drawback.

A lot of founders assume that the sole reason they aren’t creating cash is as a result of they aren’t selling enough of their software. however if the economic model that supports the business is ultimately unprofitable, then that assumption may be a fallacy. As you sell a lot of of an unprofitable product, after all, you’ll merely be a lot of unprofitable.

4. The senior management team is inept


For almost any business, unhealthy management is unhealthy management. If you haven’t assembled a forward-thinking senior management team which will set the correct course for your business, then the corporate is doomed. Moreover, smart management at one purpose within the company’s life cycle is totally inappropriate (or even bad) management at another stage within the company’s growth. therefore it's essential that the company’s management is often wanting to upgrade itself, and be cautious of complacency. Ultimately, no quantity of outdoor capital will rectify a senior management team’s failings, because it is that the senior team that decides its own fate.

5. The corporate doesn’t understand what it needs to be


Given the correct execution and strategy, nearly any company will scale once they need avoided the previous four pitfalls. however what's it attempting to scale to? does one wish to be a platform? Are you strategically acquiring customers within the hopes that the business can eventually be bought out by a competitor? Too few firms raise themselves what they need to be once they grow old. They lack a vision for the longer term and, as a result, misappropriate the capital they receive from outside investors. Before they are aware of it, the money’s gone and their investors aren’t willing to pony up any further.
The good news? Failure doesn’t got to be a death sentence.

Twitter may be a excellent example. The social network had many catastrophic outages earlier in its early development, largely as a result of the merchandise wasn’t scalable and also the competitive landscape was stiff. however the corporate swallowed its pride and was fast to admit its shortcomings, digging itself out of the aforementioned pitfalls before it had been buried for smart.

That’s the $64000 key to scaling, after all. Yes, raising venture capital will assist you grow your company. however building a good, huge business has way more to try and do with execution and vision. money ought to merely be used to support those 2 things, not as another to smart management and strategy.

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