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Start ups fail because they don’t succeed

A recent list of reasons why start ups fail. Image credit: Forbes-Statista

Yes, I know, this is the statement of the obvious, a Lapalissade (although La Palice’s phrase was misunderstood: he said “If he weren’t dead, he would still be envied” but that, in French, sounded as “If he weren’t dead, he would still be alive”).

This post was prompted by a very interesting talk I heard yesterday by the VP of Bosh Management Consulting& Partner Biz, Uwe Kirschner, on how to foster innovation and reasons why it is so difficult for start ups (and big companies too) to succeed. The figure he gave, taken fron a number of statistics, were in the range of 95% with a meagre 1% having an explosive success (the unicorns) (more stats on start ups failure here).

In the graphic you can see one (there are plenty) listing of reasons why start ups keep failing. I am not saying that these list are not useful. For sure, an analyses of reasons (roadblocks) of start ups lack of success can help in trying to avoid repeating the mistakes in any specific new case. However the bottom line is that the high percentage of failure is a direct consequence of a brutal market reality: in order to grab money from the market a start up (as any other company) has to subtract that money from someone else.

One of the perception that I have seen (repeatedly) when discussing innovation, new products/services is that there is an infinite market capacity, an infinite availability of money. Because of this (false) perception it seems that the only point needed to succeed is to create something “great”. By being great it will self-sell and generate revenues. If something is not selling as expected the focus is on making it better.

The reality is that the amount of money, market capacity to absorb new products/service (read pay for them) is basically zero, and the money has to be found by subtracting it to other offers. There have been, and still are, financial sleight of hands to manipulate the market capacity to pay by using debt, collaterals and so on (basically printing virtual money) but in the end this is also reaching a level where it is difficult to push any further (the financial bubbles that recur are an example of what happens once we move to virtual “money”.

When you hear that 5G is going to generate revenues for gazillion $ you should ask where are those gazillions coming from. You’ll soon discover that they are coming from 4G (and 3G) so that the net harvested is actually zero if you are already generating revenues from 4G.

I remember when I was at the Future Centre of Telecom Italia we had a small team that looked into new services and the potential revenues they could generate. At any presentation I always insisted to clarify from where those revenues would be coming, whom will see their current revenues decreased if customers turned to new services. I also remember talking to a sales director of a major sneakers brand who told me that his main competitor where smartphones and telecom operators. At my surprise he explained that youngster were spending more money on communications and therefore had less to spend on sneakers.

The point I am making is that, whatever strategy you deploy to help start ups avoid mistakes, the overall percentage of success won’t change significantly: you can increase the probability of a single start up to win the market but overall you can’t change the fact that we are playing in a finite (and mature) market.

An hypothetical silver bullet (they don’t exist) that would guarantee 100% success would imply the killing of an equivalent number (in terms of revenues) of companies.

About Roberto Saracco

Roberto Saracco fell in love with technology and its implications long time ago. His background is in math and computer science. Until April 2017 he led the EIT Digital Italian Node and then was head of the Industrial Doctoral School of EIT Digital up to September 2018. Previously, up to December 2011 he was the Director of the Telecom Italia Future Centre in Venice, looking at the interplay of technology evolution, economics and society. At the turn of the century he led a World Bank-Infodev project to stimulate entrepreneurship in Latin America. He is a senior member of IEEE where he leads the Industry Advisory Board within the Future Directions Committee and co-chairs the Digital Reality Initiative. He teaches a Master course on Technology Forecasting and Market impact at the University of Trento. He has published over 100 papers in journals and magazines and 14 books.