Why some startups survive while most fail?

In the 1950’s 8 employees of the famed Shockley Semiconductor got into dispute with William Shockley. The employees left and formed Fairchild Semi-conductors. The process repeated many time over with these former employees forming more than 65 companies in less than 20 years. This phenomenon was referred to as the ‘Silicon Startups’ and the location for these companies the Stanford Industrial Park remains the hot bed of the startups in the world.

A similar phenomenon was born in Bangalore when Narayana Murthy started Infosys and thus was born the Indian technology story.

But startups have a very low success rate. For the Information technology sector for example the success rate is close to 38% (Some opine it is less than 10%). This data is from 2005 and appears in the monthly labor review for the US. Globally, this percentage is even lower.

So how does one avoid failure while starting a company? Or why do some startups survive while others fail. Based on my experience of starting a business and running it successfully I have come across five point formula that I feel can help in avoiding common traps for failure.

1. Select the right Industry

Most entrepreneurs make the fundamental mistake of venturing into industries that they are not familiar with. It is very important when you start a business that you are aware of the industry life cycles and business processes. Also the industry selection should depend on the growth stage of the economy of the geography where the business is present.

A good example of this was Infosys that was started just at the start of the technology outsourcing boom. The founders had experience in the industry earlier. The result was phenomenal. I remember this medical colleague of mine who out of enthusiasm opened a fashion boutique. It closed in exactly 6 months.

2. Focus on the financial model

Again another big area of confusion is the finances. Most people would like to start a business with their own savings. Though the thought is noble, often savings disappear soon and one has to start looking for other sources for funding. I think the model should be one where the cash flows start almost immediately and the break-even happens within 12 months. The longer the time for break even the more chances that the business would fail. Also it is best to avoid very heavy investment upfront. Using a rented accommodation or using a home office is a better alternative. Also if the equipment can be leased than bought, it might help reduce the up-front investment burden as well.

3. Be Flexible

Often the business model you had in mind is not the one that presents the most opportunity. So once you realize that there is a better model it’s time to move to it. A good case in point is Naukri. A meeting with Sanjeev Bikchandani revealed that he started Naukri.com as off shoot of his initial venture, which was to create a HR database for recruiters to shortlist relevant candidates. As the launch of his new venture coincided with the growth of the internet, he soon changed the business model to become one of the largest job portals in the country.

4. Add Business value

Often value added services are more profitable than the original product or service. Staying with Naukri.com, once they realized that there was a market for creating resumes and candidates often found it challenging to create compelling resumes, He immediate started value added services which provides resume writing and covering letter among other services.

5. Innovative Promotion

A start up needs very innovative ways to promote itself. Often a startup falls into the traditional promotion trap spending vital money on routes like online advertising or print medium. To beat the clutter a good start up thinks out of the box. The best example of this is Google, which never spent much on promotion except using word of mouth. It is best to remember that the search engine market of that time was dominated by players like Alta Vista, Excite and Ask Jeeves. What differentiated Google were the loyal core followers they had who spread the name by references.

These are some of the parameters that a good start up should look at. But by no means is this a comprehensive list.

So, I would like to hear from you, what are the other critical factors that help a startup survive? How can a new company differentiate. All comments & suggestions are welcome.