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Why 95 Percent Of Startups Fail (And How To Be In The Winning 5 Percent)

16/02/2016 5:23 AM AEDT | Updated 15/07/2016 12:51 PM AEST
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LONDON, ENGLAND - OCTOBER 06: In this photo illustration the Snapchat app is used on an iPhone on October 6, 2014 in London, England. Snapchat allows users' messages to vanish after seconds. It is being reported that Yahoo may invest millions of dollars in the start up firm. (Photo by Peter Macdiarmid/Getty Images)

It is universally understood that startup founders, drunk on big dreams and dulled by the daily grind, can be blind to business risk.

New businesses based on established models -- franchises, family business and tested ideas -- already report an 85 percent risk of failure within their first few years.

Startups innately intend to disrupt established business models, leveraging new technologies towards exponential gains in efficiency. In short: startups want to make our lives easier. So why do 95 percent of startups fail? And, more importantly, how do you avoid startup failure, and make the winning five percent that succeeds?

Is there a market need for your idea?

'No market need' is the number one reason startups fail, according to their founders. This reason, cited by 42 percent of entrepreneurs in a recent 'Fortune' magazine survey, seems baffling at first glance. How do you miss the fact that no one even needs your idea? The fact that no one would ever buy your product or service, or sponsor any derivative from a community you might create from your idea? Seems like a pretty major oversight, right?

It is. It's also an easy error to make. How does it happen? I've been advising new startup founders for much of my career. In an industry high on hype, market need is often overlooked in favour of how 'disruptive' an idea might be or how much exciting, novel technology it uses.

Even Google, the Meryl Streep of startups, has made this mistake. Remember Google Glass? The product launched as the high-tech spectacles from the world of tomorrow in 2014, only to be withdrawn from sale in early 2015. Sure, making mistakes is all part of startups (and Google can afford to splurge a cool billion here and there). You, however, probably have less in spare change.

So how do you determine market need? Run thorough market research. Startup market research should cover, among other items:

Who are your idea's existing and potential competitors?

Profile of your end-users (even if they aren't paying purchasers of your product). Who are they? Why would they use it? How would they tell others? What are they already doing in their already far-too-busy days? How will you make their busy days easier?

How can your idea make money? And how soon does it have the potential to?

How much would people pay for it (based not on a back-of-café-napkin guess, but on what people are currently paying for similar products)? Yes, this can be challenging if your idea is genuinely disruptive, as your idea's appeal will likely lie in lower cost or exponential efficiencies, or both.

For example, if you are going to launch an online dating platform, how much are people currently paying for a date? Tinder would suggest $0. A face-to-face matchmaker can charge thousands. Does your service have a place in between?

What are your idea's main points of difference?

List at least three. If you're selling your idea as "I know it looks like Facebook/MeetUp/Grindr, but it's different (in this minor or even major way)", the bad news is this: even if it is different, it's probably easily done by Facebook, MeetUp or Grindr, and they have the existing million-plus user base to roll it out quickly and kill your idea.

As Judi Dench's 'M' would say to James Bond: "take your ego out of the equation". Answer honestly, as if your start-up idea was imagined by a stranger -- or even better, by someone you can't stand -- and they are cornering you at a party demanding validation for their impressive idea. Once you've imagined what you think is a good idea, take the contrary view; see it as a bad idea, and see if it survives. It might. If so, push through.

Are you the best person to execute the idea?

In 2009, a colleague at my part-time university job announced they had, in fact, imagined the iPad in the late 1990s. They had written it all down; if I wanted to see the plans, I could.

I don't doubt that it's true. After all, there is no stopping an idea whose time has come, and some philosophers suggest such a poignant idea may occur simultaneously to many unrelated people spanning the globe.

However, are you the best person to realise this idea? What do you bring to the idea? Do you have connections? Tech skills? True grit? A fortune to rival Tony Stark? If you don't, how can you go about acquiring such an advantage? Are you willing to? Can you live with this idea for the next 10 years? Can you become the best person to execute the idea? Again, answer without ego.

Lastly, set your mind to it.

As the wild-haired, time-traversing Doc in 'Back to the Future' said: "If you put your mind to it, you can accomplish anything". Even building a time machine out of a DeLorean. For the Doc, this involved dalliances with the space-time continuum and a bit of stolen plutonium from Libyan terrorists.

For you, however, this is what you need to do:

Make a plan to realise your idea. Build in clear measures for your results, indicators of success or failure. Give yourself a timeline to succeed or fail. Find the team you need to make it work. List the skills you must acquire. Grind 80 hours instead of a state-mandated 40, and build that DeLorean.

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