Startup Survival Rates Are Low—Here's How to Build a Successful Startup
Every day over 1,600 U.S. businesses close their doors. Research confirms only about half of all new businesses will survive their first five years.
During my time as a venture capitalist, adviser, board member, and mentor to small business entrepreneurs, I've witnessed the key steps successful founders take as they launch and attempt to build new enterprises. The following are six ways venture founders can increase their chances of success.
How to Build a Successful Startup
1. Conduct Thorough Market Research
Comprehensive market research guides effective marketing. Management guru Peter Drucker once observed, “The aim of marketing is to know and understand the customer so well that the product or service sells itself.”
In-depth market research will reveal whether your new product or service is just a "nice new idea" or offers an opportunity for follow-on products or services and is sufficient to become a significant stand-alone enterprise.
Failure to interview a large number of prospective buyers could cause product features to be included that are of little real value to consumers. It could also mean failing to identify the compelling benefits of your product/service, pricing the product poorly, and overlooking relevant marketing channels.
2. Have a Formal Business Plan
Only one-third of new ventures are launched without a formal business plan. However, according to the Harvard Business Review, “entrepreneurs who write formal plans are 16% more likely to achieve viability than otherwise identical non-planning entrepreneurs." Other studies also confirm the odds for success are significantly enhanced by developing a complete business plan early in the development of a new enterprise, with sections covering product development, management, marketing, and financial needs and expectations.
Most successful founders who have a plan will update it and make improvements periodically, taking into account market conditions and customer feedback. A business plan can be helpful when hiring as well as when seeking business financing.
3. Conserve Resources for a “Pivot”
A pivot means changing the direction of the business when it's apparent your current products or services aren't meeting the needs of prospects, are misdirected at the wrong target market, or when major competition makes success unlikely. The goal of the pivot is to improve revenue and profits and, in some cases, to ensure survival.
Twitter (now X) is an example of a successful pivot. The social media platform was originally a company where people could find podcasts. With the entrance of iTunes into the podcast market, Twitter's founders decided to pivot and turned the company into a social media and microblogging platform that allowed users to share short messages.
Other successful pivots include Play-Doh, which was started as a wallpaper cleaner; Uber, which began as a coordinator of limousines service; Nintendo, whose initial products were playing cards; and Starbucks, which launched as a provider of coffee beans and coffee-making equipment.
As a young company enters a new market it may discover demand is not as significant as anticipated or an adjacent market might be more promising. Hence the original business plan should reserve financial resources for a shift in product and/or marketing strategies. Over 93% of successful startups implement some form of pivot.
4. Hire Quality People Who Have Relevant Experience
The saying “you hire someone for what they've done and fire them for who they are” has often been a hard and disruptive lesson to learn. According to research, 65% of new ventures fail because of people problems.
A Leadership IQ study of hiring managers found that most hiring failures are related to the employee's character: 26% of new hires fail because they can't accept feedback; 23% fail because they're unable to understand and manage emotions; 17% fail because they lack the necessary motivation to excel; and 15% fail because they have the wrong temperament for the job. Only 11% didn't work out because they lacked the necessary technical skills.
Thoroughly vetting prospective employees can uncover underlying character issues. When building your startup team, it's also important to bring in people who have experience in your market. A study of new ventures found that the relevant experience of the founders was a strong predictor of success.
5. Do Targeted and Measurable Marketing
In 1999, a new startup, Pixelon, spent $16 million on a launch party. Four years later, the company folded.
A survey of marketing professionals found that companies waste 26% of their marketing dollars on ineffective channels and strategies, and about half of marketers say they misspend around 20% of their budgets. Many fledgling entrepreneurs are persuaded to waste resources and dollars on marketing tactics that aren't really measurable, such as marketing measures to empower a brand or build goodwill.
Behind nearly every successful product or service is an effective sales and marketing campaign, one that highlights the benefits of the product/service to prospective clients and persuasively positions it in relation to alternatives. In addition, founders who are comfortable going out and personally selling to prospective clients are less likely to engage in ineffective marketing tactics.
6. Seek Advice from a Mentor
Entrepreneurs must lead with agility and decisiveness. In some cases, you may get only one chance to make the right call regarding hiring or firing a key employee, implementing a “pivot,” accepting a financing opportunity, or launching a major initiative. For early-stage enterprises with limited resources, making a call could devolve into a “bet the company” decision.
Having a reliable and seasoned outside mentor to objectively assess a situation can be an invaluable alternative to relying 100% on the instincts and experience of yourself and your leadership team. And a mentor could be one or more individuals with industry knowledge or relevant successful experience who are willing to provide advice and learn about the company and your skill set.
A survey by The UPS Store found that 70% of small businesses that received mentoring survived more than five years. The same survey found that 88% of business owners with a mentor said that having one was invaluable.
Learn from Your Mistakes
New ventures don’t have to be a crap shoot. As Warren Buffett observed, “It’s good to learn from your mistakes. It’s better to learn from the mistakes of others.”
FAQs on Startup Success
How many startups survive five years?
About 50% of all startups survive the first five years.
What are the main reasons for startup failure?
The primary reasons for startup failure are lack of sufficient sales, poor planning, and leadership issues.
How can I make my startup successful?
You can improve your startup's chances of success by conducting thorough market research, developing a business plan, anticipating a pivot, hiring quality people with relevant experience, doing effective/measurable marketing, and finding a mentor.
About the Author
Post by: Thomas W. Harvey
Tom Harvey is a small business expert with decades of experience as the CEO of two startups, an investor and/or adviser to more than 30 emerging companies, and a lecturer on entrepreneurial marketing. He is currently a small business mentor for SCORE and has counseled over 300 entrepreneurs.
Company: Phelps Harvey
Website: www.score.org
