How Technology Startups Fail

By Peter Lindfield, published in the Telegraph-Journal 6th July 2012

With the recent decline of Research In Motion and the earlier failure of Nortel on the Canadian technology landscape, questions are being asked about the health of the knowledge-based sectors of the Canadian economy.

The viability of Canada’s technology sectors is directly proportional to the success of its startups and early stage companies. Even these early stages of growth, too many technology firms are failing. We need to identify the reasons for these failures and understand why we haven’t taken the necessary actions to improve survival prospects for entrepreneurs.

Starting and growing any business is a challenging undertaking. Substantial research over the last 30 years of Canadian technology companies have revealed that while entrepreneurs tend to focus on technology, many have serious gaps in business skills. In these studies, three key factors have been identified that conspire to accelerate technology startup and early stage company failures: inadequate management skills, underdeveloped operational competence – especially in sales – and dysfunctional governance.

These findings highlighted that in many companies that failed, poor management planning decisions reveal a lack of awareness of changing competitor and market conditions as well as a misreading of markets. This failing usually involved overestimations of the size of the customer base. Product development often included little or no input from potential customers and the development cycles themselves were often far longer than planned. Poor planning and organization in some startups and early stage firms delayed the establishment of a viable customer base and without the capacity to generate revenue, these firms quickly burned through their cash. Others spent their time attempting to establish distribution networks even before they had products or customers. Some entrepreneurs were preoccupied with raising money but neglected customer relationships and organizational issues, while other misjudged the market and simply ran out of options.

Many technology startups had substantial problems with managing sales organization, planning and financial control. An inadequate knowledge of such critical sales management functions as distribution channels, compensation and territory development hindered revenue growth and reduced margins. Unmet sales forecasts eroded confidence in the company’s management and encouraged unnecessary risk taking. Many firms had identified markets rather than actual potential customers. High salesperson turnover reflected the consequences of hiring inexperienced personnel, but inadequate recruitment skills ensured that the problem could not easily be solved.

Governance is a clear challenge. Goals and expectations of management and boards of directors were often not shared, particularly with respect to exit timing and conditions. Too many board members lacked operational experience. An insufficient number of board members were independent and boards tended to be overrepresented by finance specialists. Board members often had no clear understanding of sales or practices associated with productive interactions with customers. Inexperienced finance specialists or lawyers were sometimes placed in positions of responsibility on boards of young firms.

Studies also revealed that more Canadian venture capitalists and angel financiers lacked operational experience than their American counterparts, many of whom are serial entrepreneurs. Investors who did not fully understand the nature of the business in which they were investing, tended to under-invest. Canadian lawyers and accountants similarly lacked operational business experience.

According to research undertaken by the now-defunct Science Council of Canada, the most common reactions of boards of directors of startups and early stage technology companies to impending trouble were changing key personnel, especially the CEO, attempting to raise additional financing, or changing the target market. These board reactions rarely addressed the real issues faced by the firm.

Improvements in management expertise, operations skills and a movement to good governance are all within the realm of the possible for startup and early stage companies. Large, successful firms have long ago identified excellence in management and a professional approach to selling as critical to their continued survival. In recent years, good governance has become an indispensable factor in a company’s success. We urgently need to redouble our efforts to support innovation where it is most fragile and where it has most promise.


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Filed under Entrepreneurship, Innovation

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