Nine out of ten startups fail, and every start-up that thrives will go through tricky periods. What separates failures from successes is how founders and their exec team choose to deal with these problems.
Whether things are already collapsing, or you just want to be prepared for the inevitable twists on your road to scale, this article should provide everything you need to start addressing your problems, limiting the damage, maintaining board trust, and manoeuvring your business into a position to keep scaling.
Startups fail for a lot of reasons, and there are hundreds of post-mortems online recounting what exactly founders think went wrong with their business.
They don’t just fail at the pre-seed stage either – less than half of startups will successfully complete their next round regardless of stage. This means scaleups fail as often at Series D as Series A.
CB Insights actually went through all of these post-mortems and crunched the numbers to work out the top reasons for startups failing.
Source: CB Insights, The Top 12 Reasons Startups Fail, 2021
As you can see these key problems cover quite a broad spectrum – from insufficiently thought-out business plans and market iteration, to relationship problems.
But these issues don’t just trouble failed startups – plenty of successful ones will have faced them too! For example, Paypal had its fair share of regulatory hurdles, and Uber is still working out its own cash flow problems.
Sometimes there might be no saving the business, and discovering there is no market for your product after two years of development is generally pretty disastrous. Yet many businesses still manage to turn things around (and even repackage parts of their failed product into something very successful, as Twitch did when they launched themselves out of the failed Justin.TV).
If you are interested in some slightly more detailed real world examples, you can always check out our case studies page. There we’ve broken down some of the challenges scaleups have come to us with, and how the businesses tackled the problem with advisory support. For example, during the first part of the COVID crisis, we helped a business navigate a successful pivot away from a failed product and relaunch with a new GTM.
So from troubleshooting the problem, to keeping your investors onside through disappointing financial results, we’ve put together this guide to get you started beating your business’s problems and get you back on track.
The first step of fixing any problem is working out exactly what that problem is. Sounds obvious we know, but a frequent culprit of failed attempts to fix these issues is that the initial work wasn’t done to gauge the true scale and scope of the problem.
A good example of this is with scaleups struggling to raise funds. CB Insights data suggests that 38% of businesses crumbled because they ran out of cash or couldn’t persuade investors to fund them. But while no-one can dismiss the real challenge of raising VC, often when investors aren’t biting, it’s a sign that they have spotted other problems with the business.
For example, they might be concerned that your team is not experienced enough, that you need to do some more market iteration, or that your scaleup doesn’t address a large enough market for them to make a profit on their investment. (If you would like a full breakdown of what VC investors actually judge businesses on, you can check out our article The Investment Memo – How VCs Evaluate Your Business).
The main point is that often what appears to be the glaring problem is actually just a symptom of a slightly different or perhaps deeper issue – and addressing the wrong thing is usually more expensive and less effective than taking time to identify and resolve this root cause. So if investors aren’t biting, it may be a sign you need to look further than your pitch deck for explanations.
Good troubleshooting then, is the key to success here.
Making sure you have access to the right support is another vital part of overcoming your challenges. When things start to go wrong, your business becomes a ticking clock and you can’t afford to spend time on flawed strategies, dead ends, or even weeks spent sourcing and vetting appropriate advice. That’s why it’s important that you have access to the expertise you need to navigate these problems quickly and with minimum waste.
Start by assessing who you have in your business right now, including your team, exec team and board. Are there any skills or expertise gaps that will hinder your business going forward?
Once you have a better measure of the strengths and weaknesses of your team you will be able to find the right support more efficiently and effectively. For example, if your team has the right skills to tackle the problem, but have been suffering from lack of experience, you could bring in an experienced specialist to provide strategic support. Or if you are actually lacking the right skills, you might find yourself hiring new team members, using independent contractors, or hiring interim managers.
If you have discovered you need to make a new hire, but aren’t yet sure of the requirements of the role because you don’t have a settled strategy, you could consider using a specialist in the short term while you identify the requirements of the final job. For example, if you know you need help with your marketing, but don’t know which channels you will be focusing on, or what level of expertise will be required, you could take on an interim specialist with the experience to help you test all of these strategies and set up a business plan. Then once you have a clear strategy and a good idea of which skills you will need long-term, you can more confidently make a permanent hire. This gets you the experience you need, when you need it – so you don’t become one of the 6% of businesses falling victim to a bad pivot – and keeps the business nimble.
Once you have decided what support you need, it’s time to work out timescales and budget. This means balancing how involved you will need the support to be against what you can afford. Advisors aren’t necessarily as expensive as they are often made out to be, and unlike full-time staff you only need to pay them for the time you use. However, you will still have to work out what resources you can redirect into fixing the issue, including advisor fees.
Or of course, you can always give the process a head start and get in contact with us, to help you find suitable support without the faff.
Managing your board and investors when the business is in trouble can be tricky and often unpleasant, but it is vital you keep these stakeholders onside.
Your first priority with the board is to make sure that they can trust you. If they lose trust in you, it is likely you will either lose your investors or your job. This means that, however tempting it might be, you can’t hide problems and disappointing results from them. If they discover that you have been hiding the problem when you are forced to tell them later, or when they discover it through a third party, it will be very difficult to retain any sort of working relationship.
So how do you break the bad news to your board?
The first step is to communicate with them in person before the board meeting, within a reasonable window of time from discovering the problem.
It is easiest to address your investor’s concerns in person, or at least over the phone, where you can have a conversation (rather than an email out-of-the-blue). If you choose to email instead of call, you may also give the impression that you are hiding or too scared to own up to your stakeholders directly. However, once you’ve done the difficult bit of calling to break the news, you should follow up with an email containing the important points and any more information you promised them.
You also need to get this conversation out of the way before the board meeting, not least because if you tell all your board members at once during the meeting, you can guarantee it will not be a productive one. By talking to everyone individually first, you can better manage relationships, discuss concerns, and give everyone time to get over their gut reactions, look at the data, and start coming up with solutions (it is good practice to do this even with good news).
By the time you tell your investors and board, you want a fairly good idea of what the problem is, what’s causing it, and hopefully even the beginnings of a strategy for dealing with it. This will help you keep the discussion productive and reduce unnecessary worry – but you will have to balance these priorities against the need to tell your board about the problem reasonably promptly.
It is also well worth talking to your board frankly about your business woes as they may have some of the expertise you need to deal with the problem. Many board members will have a lot of industry experience, and even if they aren’t qualified to help with your specific problem, may well know people who are.
Once you’ve started working towards a solution, we would recommend identifying goalposts and metrics by which you can judge your progress. This will not just help you keep your business on track, but it will also give you evidence to show the board. It’s a really useful way of rebuilding confidence and allows you to provide tangible evidence that you are travelling in the right direction, even if the more usual metrics might be disappointing in the short-term.
Rounds of funding correspond loosely to specific stages in the life cycle of a scaleup. This means that if you have run out of money after your series A, but haven’t yet got the figures for a series B raise, you can find yourself in a tricky situation and really struggle to raise money from investors. So if your business is about to fall victim to the most common form of scaleup failure by running out of cash, you may find yourself with few places to turn.
However, if your business desperately needs cash but isn’t ready for another funding round there are still options.
The first is to take on some kind of venture debt instead. This can be difficult if your business doesn’t have a solid financial base, but can be a cheap source of capital for the right kind of business. This kind of debt tends to be best suited to fuel further growth for reasonably mature scaleups.
If you aren’t in a position to use debt, you might try an extension or bridging round. This is when businesses go back to their current investors, or more rarely new investors, asking for capital to keep them going and growing until they reach the next major long-term financing option.
It’s often quite a hard road, as VCs don’t like to throw good money after difficult results, and you will have to be able to demonstrate to them that your business still represents a solid, high-growth investment – and that you have a firm enough control of your finances that this won’t happen again in six months.
Bridging rounds are most usually led by your existing major investors. This can prove problematic for businesses whose lead investors so far have been angels or smaller funds, as you may find they just don’t have the capital to spare. Unfortunately, other investors are less likely to invest in a funding round if your big incumbent investors aren’t investing, as this sends the signal they no longer believe your business model is sound.
This can make positioning yourself for a bridging round rather tricky. You will need to explain why you need the money and why the business is a good investment opportunity clearly – as well as why the round was necessary. You will also need to be able to show how this money is going to last you to the next round, as your chances of landing a second bridging round are close to zero. Lastly, you will need to be able to explain why your current investors can’t help you, if they are too tapped out to give you that boost.
Bridging rounds tend to be fairly expensive, as they usually occur at your last funding valuation rather than at where your business might be now. This means you don’t want to use one of these unnecessarily if you have other, cheaper, financing options.
In some cases, you may also find that there are government grants or loans you can take advantage of. These don’t cover all industries, but there is a surprising range available.
It is also important you look at costs, and which ones you can cut. This will often be required information for a bridging round, but even if you aren’t going out to look for more investment, working out which costs you can cut now gives you more runway to turn things around.
When dealing with a serious business problem, such as a mistimed market entrance or the necessity of rethinking your product – you are often essentially fighting against time. You just need to keep the lights on for long enough that the market will have changed or your new strategy will be ready. To ensure this happens, you might have to be quite brutal with cutting costs elsewhere in the business.
The key thing to remember is to keep investing in the things which will drive your business growth and tackle the problems, and not be tempted into shrinking all your avenues of spending. If the business is able to limp on for another year, but won’t actually be in a position to grow when the opportunity arises, then there is little point.
It can quickly feel overwhelming when things start to go wrong, but it’s rarely too late to start turning things around.
Just remember not to panic, take the time to map out the problem, be honest with your board, make sure you have the right expertise, and keep a tight grip on your finances.
If you need help feel free to get in contact with us here at Invigorate. We are always happy to talk through business challenges, and can put you in touch with the right person to help.
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