As the name suggests, startup bubble is a newly started-up entrepreneurial venture, which typically denotes a recently emerged and fast-growing business. Due to the innovative business models and incentive offers, startups have been attracting public and investors’ attention since the 90s.
If you go back and study the pre-dotcom bubble era, you’ll notice that in the late 1990s, dot-com was the most attractive startup types. It was very easy for them to obtain venture capital as investors thought the emerging trend is going to earn them good ROI. However, most of the dot-com startups failed to materialise their dreams due to complications in business models and could not bring in sustainable revenue. This phenomenon is usually referred as the dot-com bubble or dot-com collapse.
Though the concept of a startup is as old as the history of business, this specific term went internationally famous after this dot com bubble.
Startup Success Rate:
Unfortunately, the success rate of startups is microscopic. Some studies indicate 9 out of 10 while others indicate 3 out of 4 startups fail. We might see this difference the basis of ‘definition of failure.’ According to a study published in Wall Street Journal (2012), there are various definitions of failure.
“If failure means liquidating all assets, with investors losing all their money, an estimated 30% to 40% of high potential U.S. start-ups fail. If failure is defined as failing to see the projected return on investment—say, a specific revenue growth rate or date to break even on cash flow—then more than 95% of start-ups fail”.
According to a separate study by the United States Bureau of Statistics, about 60% of all Startups survive for three years while only 35% survive to 10 years of age.
Moreover, the startup success or failure rate also varies from industry to industry and sector to sector. Some are very volatile while others are stable; therefore you’ll come across different percentages. However one thing is sure, a tiny proportion of startups can materialize the full potential and achieve the dream goals. The rest are gone either in the first year or maximum of 3-5 years.
The Local Perspective:
To look at the status and success rate of the local startup, we contacted Plan9; stated to be Pakistan’s largest tech incubator with a vast network of professional mentors. It enjoys good network with industry and also manages an exchange program.
When contacted about the success rate of startups incubated at Plan9, the response from Team Plan9 was;
“We define startup success as the startups who have gotten investment, are still functional (have sustainable revenue model) and have got good teams”. Going by the definition, more than 50% of startups incubated at the Plan9 are successful.
- Number of startups incubated: 102
- Number of startups graduated: 84
- Valuation: $ 70 million + (Combined)
- Investment Raised: $ 3 million + (Combined)
Why Do Startups Fail?
Since we know that a slight percentage of startup ventures succeed, it becomes even more important to study the factors that lead to their failure. It’s the study of these factors that can help entrepreneurs in better planning and avoid committing those mistakes.
In 2014, CB Insight conducted a survey of 101 startups and asked their founders to list down the biggest reason behind their venture’s failure. Interestingly, the number one reason for failure (cited by 42% of polled startups) was the lack of a market need for their product.
Now, this is a quite apparent reason for failure. If no one is willing to buy your product or service, failure is the obvious result. This should be an eye-opener for those startups that build things people don’t want with an irrational hope that they can convince the market to buy them.
Besides, the polled founders also cited as lack of sufficient capital (29%), a wrong team for the project (23%), and superior competition (19%) as top practical reasons for failure. Refer to the rest of the causes in the chart.
In another study conducted by data marketing firm Fractl, researched over 193 blog posts and researchers (mostly by founders) to come up with reasons behind their startup failure. Despite certain limitations, the data does offer some real insight into the practical reasons.
51 startup founders cited complex business model as the fundamental reason behind the failure. It was followed by cash, product development, HR, marketing, and market development issues. Please refer to the given chart for a detailed overview of the factors of failure.
When asked about the reasons behind the failure of the local startups, Nabeel A. Qadeer of Plan9 summed up the story in the following points.
- Weak management team – lacks the required domain knowledge and skills
- Poor execution
- Does not have complete faith in their idea
- Lack of complete focus on startup – too much attention to product detail causing a delayed entry into the market
- Little or no market for the product – insecure about their idea
- Running out of cash
So, entrepreneurs need to not only work on brilliant products but also bring in good resources to make a working business model. Marketing, investment, and customer development require attention as well.
The secret to Startup Success:
Though we cannot claim that a single rule may work for all but the basics are the same for every success story.
- Vision — A clear picture of the idea and goals
- Focus — Putting the right amount of focus on the right thing. This can be done by setting SMART (specific, measurable, achievable, relevant, & time-bound) goals.
- Unique product/idea/concept —-
- Good team – Hiring people who know what they have to do
- Passion – Loving what you do
- Selling skills – The ability of a startup to sell its idea to secure investment
- Capital- No business can survive without financial support
- Marketing – The ability of a startup to market the product/idea and create awareness about its need for the market
- Strong leadership — that is good enough to manage people, resources, and market
- Learning – For an entrepreneur, learning is a process that should never end. She/he should learn from the market, others, own mistakes, and through books.
- Networking & Mentoring – The ability to meet and take help from the right people
Is Startup a Bubble?
What is a bubble?? The bubble is defined as something where assets have prices that cannot be justified with any reasonable assumption. Now you may define ‘reasonable assumption’ in your preferred way, but historically bubbles have occurred when, in a particular industry, ROI doesn’t justify the amount of investment, given the higher level of risk.
Many analysts and venture capitalists are predicting a tech bubble in 2016 or shortly. Dubbed as tech bubble, they cite numerous examples endorsing the fact. A majority of investors in the United States are concerned about the profitability and sustainability of the tech IPOs. From eToys to FriendsFinder, Vonage to Twitter, many names could not satisfy their investors on the balance sheet and income statement.
In his article for Fortune Magazine, Jeff Bercovici gives a series of events shaping up this bubble. You may read his article “Yes, it’s a Tech Bubble” on INC.COM website.
Since the (tech) startup trend is quite new in Pakistan, we reached out Dr. Umar Saif to comment on this perception of the bubble. Should we fear any local tech bubble?
In responding to “is startup a bubble,” he said: “Absolutely not. The world is growing towards tech innovation, and this is just the beginning of technology in Pakistan. A few years ago when Plan9 came into existence, it was thought as a foolish idea that will shut down very soon, however, four years down the lane it has only matured and flourished to the point that more incubators have been set up and are following the precedence that was once established by Plan9. So I believe, this trend is here to stay for a very extended period.”
His optimism may have its background and logic, but we can name just a few Pakistani startups that have gained market and investor trust so far. The real problem arises when a startup fails to create demand for its product, sell it well, and satisfy the investors. We hope that local tech industry matures and we have our type of Silicon Valley. However, this will require untiring efforts by government and the private sector.
Our local investors need to play their due role in boosting up the investment environment and help young enthusiasts in achieving their dream. At the same time, incubators and mentors need to educate tech-entrepreneurs to grasp the essential skills of performing well on the ground. Startup founders need to bring in the right people and work on creating demand for their products. The fundamental reason behind sluggish growth (or failure) is their inability to create awareness among the masses and drive curiosity.