Answer by Chuck Eesley to What’s the story of who, how, and why Snapchat was made? http://qr.ae/DB3G0
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By Max Chafkin
With almost $1 billion in funding and ambitions to replace petroleum-based cars with a network of cheap electrics, Shai Agassi’s Better Place was remarkable even by the standards of world-changing startups. So was its epic failure.
Here is an interesting video showcasing Spotify working culture. I found it pretty amazing.
Have a look!
What are the pitfalls and traps that lead to the downfall of a start-up?
Start-up culture is growing rapidly in India with start-ups coming up all over the country.
Bangalore, New Delhi and Mumbai remain the key start-up hubs but other areas like Hyderabad, Chennai, Pune, etc. are not too far behind.
There are a lot of positives but the fact remains that 80 per cent start-ups fail in the first three years.
It’s harsh but a fact.
There are multiple reasons why a start-up fails and after going through much of the web, I came up with a list of 10 major reasons that lead to the downfall of a start-up:
1. Building a wrong product
Building a product without actually validating the product idea through potential customers is a bad move.
And so is building a product that solves a trifle problem in a customer’s life rather than one which is the major pain source for them.
2. Not being able to build the right team
Often in a hurry to launch their product early, start-ups tend to build teams with people who have little or no interest in the product idea.
This leads to product failure as the people working never give their best for the product.
3. Lack of unique value propositions
If your product fails to deliver one or more UVPs as compared to similar products available in market already, your product is bound to fail.
Before you start building your product, figure out at least four UVPs which will help you stand out and give a competitive advantage increasing your profits.
4. Lack of persistence
If the start-up founder does not have a strong passion for their product, they will not be able to persist through the bad times, which is a given in a start-up run, more often than good times.
Bad times question the faith of founders in their product.
Lack of faith often leads to discontinuity of the product, which leads to start-up failure.
5. Failing to pivot/change direction
Often due to the love for their initial/first product, start-ups, despite knowing that they are building a wrong product, do not pivot.
This leads to wastage of time, resources and money too, eventually leading to failure.
6. No mentors or advisors
It is always good to have a mentor for your start-up.
Going alone there are more chances of you making mistakes that may lead you to failure.
Mentors can guide you in your day-to-day decisions to avoid falling off the cliff.
7. Slowness to launch
Firstly, every idea dies if it is not implemented on time.
This is because of the simple fact that we start losing interest and start under prioritising as time passes.
In today’s fast moving business world, everyday thousands of products are solving the same problem.
In such a scenario, delaying the launch of your product might actually leave you behind the competition, which will eventually lead to product failure.
8. CEO / founder(s) unable to make decisions
A founder must always be clear of his vision for the start-up.
This helps in making quick and efficient decisions in critical times.
Often start-up founders are not clear of what they want to achieve with their product; about where they want to go etc.
Unclear of their own path, these founders face problem while making decisions, many ending up making the wrong decisions all along.
9. No business plan
You might wonder why I have put this at number nine. But it is indeed comparatively less important than the above listed eight reasons.
Every start-up once sure of their vision, and having got a mentor, must create a business plan to articulate every single aspect like customer segment, distribution channels, cost and revenue models etc. of their business.
Business plans will give you a clear idea of your operations.
Failing to create a business plan might lead you to lose one or other important aspects of your start-up.
10. Unaware of competitors and changing market condition
Having figured out everything listed above helps an entrepreneur kick off the start-up for a sustainable long run. But there is one more thing which should be addressed regularly and carefully, and that is market condition and competitor’s current performance.
Many times, start-ups blinded by the passion for their product, forget to address this aspect of business, thereby launching something which is already there in market or over pricing products which are available at cheaper rates etc.
A good market study, along with competitor analysis, can help start-ups accelerate their growth by providing product and services which are still missing in the market.
Few more reasons
Besides the ones mentioned above, here are a few more that can lead to the failure of a start-up:
- Out of control growth
- Poor accounting controls
- Not enough cash cushion
- Operational ineptitude
- Operational inefficiencies (spending too much)
- Declining market
- Obscure or marginal niche
- Lack of succession and/or exit planning
- Single founder
- Bad location
- Inability to change direction quickly
- Making bad hires
The author Nitinkumar Gove is an entrepreneur, business enthusiast and a start-up evangelist from Pune, India. His twitter handle is @NitinkumarGove.
Many people think that a lack of capital is a major cause of why businesses fail. But after 30 years of running several businesses, I respectfully submit that these are the real reasons, most of the time.
1. An unwillingness to get “down and dirty.” In the beginning, the owner needs to be willing to do everything that needs to get done.
2. Underestimating the time commitment. Running a business is not 9 to 5. Corporate hours are out the window.
3. No follow-through. It pains me when fellow business owners don’t follow through right away when enquiries come in. People want an answer, not tomorrow, but right now.
4. Horrible cash flow management. This one almost did me in. It’s human nature to overestimate how much money we have, or how much we think will be coming in, and underestimate expenses. Unless it’s absolutely essential to the business, the answer is NO. Ask for a deposit on new accounts and offer as many payment options as possible (PayPal is a must). You need to get as much cash in as quickly as you can once a contract is signed.
5. Bad tax management. Don’t hire an accountant. The vast majority could care less how much tax you owe. Hire a tax professional who can structure your business for the least amount of taxes legally owed. Many businesses with great revenues still go under because of taxes.
6. No value proposition. Saying that you will be an IT consultant isn’t good enough. What value do you bring to the table? Are you faster or better, and in what ways? What is your specialty (or specialties?) Do you offer a guarantee? Are you more flexible, more available? Will you save me money and / or time? If so, how? Can you prove it?
7. No sex appeal. By this I mean there is no enthusiasm, personality or positivity. People are not drawn to indifference.
8. Big mouth. Ego must be replaced by confidence. There’s a big difference between the two. Don’t strive to be “important”, strive to be “relevant”.
9. Horrible online presence. While the hype is about social media, it’s your web site where people will make the buying decision so you need to focus on that first and foremost. You need to be on the first page of google with a site that’s inviting and easy to use.
10. Reluctance to apply for bigger jobs. It often takes as much time to write a quote for a $100,000 contract as it does to write one for a $500 contract.
11. High maintenance clients. Clients who eat up all of your time and don’t pay their bills on time need to go. Most businesses think that any client is good. I totally disagree. A number of customers years ago almost put me out of business. Treasure your best clients, make them feel important. Get rid of any client who, in the end, costs you money and prevents you from securing and keeping high quality clients.
12. Hiring people you don’t trust. Jack Welch said “if you don’t trust them, get rid of them.” Hiring a “bad employee” can destroy your business overnight.
13. Working to please the client. No – instead, work to please you. Your standards will always be higher than those of your clients. Set the bar higher than where they set it. Then – if you’re happy, your clients will be happy. (Whatever you may think about Apple, that is essentially how the company grew).
14. Trying to compete on price. Don’t do it, or you will become a commodity (lowest price wins). Compete on value-added. Stress your “smallness” because your flexibility and availability are advantages over large corporations.
Cory Galbraith is CEO of Galbraith Communications and The Paradigm Institute.
Editor’s note: Peter Relan was VP of the Internet Division at Oracle, founding head of technology at Webvan from 1998 to 2000, and founder of the YouWeb Incubator program in 2006 and the recently launched 9+ accelerator program. Follow him on Twitter @prelan.
Webvan is well-known as the poster child of the dot-com “excess” bubble that led to the tech market crash in 2000. Business schools around the nation study Webvan’s overly ambitious rush to the biggest IPO to date in Silicon Valley, as a prime example of what to avoid doing while scaling. Ironically I recall guest teaching the first case study on Webvan at Stanford, the day before the market crash in 2000. While it’s true that the impatience to go public helped steer Webvan off a cliff, the once darling company made two other critical, but often overlooked mistakes.
Are those mistakes being repeated a dozen years later in the slew of activity — even excitement — in the home-delivery space? If not, why? Is it simply a matter of investors needing a decade to reconsider home-delivery plays? Or is there more to it? Are today’s home delivery specialists realizing that they can avoid these mistakes to slowly but surely conquer an untapped market?
Mistake No. 1: Wrong Target Audience Segmentation And Pricing
Webvan’s go-to market strategy in each city was: the quality and selection of Whole Foods, the pricing of Safeway, and the convenience of home delivery. In other words, it was a mass-market strategy (unlike Whole Foods which is an upmarket strategy). The target audience therefore was not selected to be “price insensitive.” If you advertise yourself at Safeway pricing, you will attract a price-sensitive audience. Whereas those who go to Whole Foods are more price-insensitive: They believe they are getting a higher quality of selection and product, so price matters less.
The customers who would have made Webvan profitable were those who said, “Wow, I can get quality selection and products delivered to my home: heck I’ll pay anything for that.” Yes, that’s a smaller audience than a mass-market audience, but after all, even smartphones started out as a tool for stockbrokers and corporate executives before becoming mass-market devices. Webvan should have priced at least 30 to 40 percent higher and ignored the customers who didn’t want to pay those prices. A company must be clear on what it is providing and price for it – Webvan was providing a luxury; an ability to order sushi and organic fruits directly to the home, and thus it shouldn’t have tried to compete with Safeway’s prices.
Mistake No. 2: Complex Infrastructure Model
Webvan decided to build its infrastructure from scratch. I was responsible for the hundreds of engineers who built the software algorithms to make five miles of conveyor belts in our Oakland Distribution Center (DC) transport 10,000 totes around the DC daily. After conveying the item to automated carousel pods, which would spin like juke boxes to transfer the item in question into the tote, the entire process would rinse and repeat until the order was completed and integrated at the shipping dock. Additional real-time inventory management algorithms would make sure that if a customer ordered milk on the website, it was currently in stock; software algorithms would route delivery vans to multiple delivery stops while minimizing drive time; and software on Palm Pilots in drivers’ hands would deal with real-time delivery confirmation or returns.
Combining mistakes Nos. 1 and 2 was a dangerous cocktail of the lower margins of mass-market pricing, and colossal capital expenditure associated with complex infrastructure. This cocktail, combined with mistake No. 3, pushed Webvan over the edge.
Mistake No. 3: Too Much Money, Expanded Too Fast
This is the more well-known and final mistake. Most people view Webvan’s capital raise of $800 million as excessive and ill-spent. The pressure to “grow big fast” in those days blotted out all other considerations. This desire for massive, immediate growth was so intense that we started launching in new cities on the thesis that the unit economics of home grocery delivery would be profitable. Our DCs and vans rolled out in the Bay Area, Seattle, Chicago, Atlanta, and each city’s capital requirement was well over $50 million just to start. We touted our 26-city expansion plan, signing a $1 billion Bechtel contract to build several state-of-the-art warehouses worth more than $30 million each.
Today the most popular acronym in the valley is MVP (Minimum Viable Product). In the dot-com era it was GBF, or Get Big Fast. The problem was the Bay Area model was taking a long time to iron out, and in the meantime, all our cities were burning through the cash. Our entire strategy depended upon the reassurance that the Bay Area model would inevitably become successful. Maybe it would have eventually succeeded, but we would never find out: With the market crash of 2000, capital dried up and the company was starved into a forced asset sale to Kaiser Permanente in 2001. The infrastructure in Oakland, as well as the software systems, were bought by Kaiser in order to deliver drugs and supplies to its hospitals.
Are Today’s Home Delivery 2.0 Startups Doing It Differently?
Instacart and Postmates are both avoiding the infrastructure model mistakes. They are leveraging the existing infrastructure of grocery stores, not building their own infrastructure. They focus on two areas, delivery and customer service, and concentrate their resources on excelling in those departments. Good start: Mistake No. 2 avoided.
Instacart prices its items very cleverly. Rather than charging a delivery fee, they simply “mark up” the prices on the items so the “real” prices are not visible. In a certain sense they are following the target audience and pricing mantra I think Webvan should have used: They are focused on convenience-oriented customers who will ignore the mark-ups. Those who follow and remember the hundreds of prices of grocery items are not likely to be their target audience. Plus they charge a small delivery fee of $3.99, which in itself is not enough to pay for the unit economics, but along with the price mark-ups it probably works. And they have an Instacart Express model like Amazon Prime, which makes sure that if you order enough and subscribe for $99/year, delivery is free. Sir Michael Moritz of Sequoia was on the board of directors of Webvan, so he knows the math well and is an excellent adviser to Instacart.
From what I can tell, Postmates doesn’t directly mark up prices, but it recognizes that delivery economics is very central to overall unit economics. So they charge a delivery fee based on their proprietary algorithm for determining how “expensive” your delivery will be. It’s a classic “service platform” model, like AWS almost, where they build in a margin per delivery requested. That way they won’t lose money on orders overall, even though any particular order may not be profitable.
Instacart and Postmates have studied the history of home delivery. They are avoiding mistake Nos. 1 and 2 that Webvan made. Now only two questions remain. How profitable will their models be? And how quickly will they expand nationally. Stated otherwise, will they avoid mistake No. 3? Time will tell. I would love to hear your opinions.