Startup Issues

Phases in New-Venture Start-ups

 Prestart-up Phase
 Begins with an idea for the venture and ends when the doors
are opened for business.
 Start-up Phase
 Commences with the initiation of production/ sales activity
and the delivery of products/ services and ends when the
business is firmly established and beyond short-term threats to
survival.
 Post-start-up Phase
 Lasts until the venture is terminated or the surviving
organizational entity is no longer controlled by an
entrepreneur.
Why Start ups Fail?

 Product/Market Problems

 Financial Difficulties

 Managerial Problems
Causes for Failure
Product/Market Problems
 Poor timing
 Product design faults
 Wrong Choice of Equipment/ Technology/ Project
Capacity
 Inappropriate distribution strategy
 Unclear business definition
 Overreliance on one/one type of customers
…Causes for Failure
 Financial Difficulties
 Initial undercapitalization
 Underestimation of Capital Required for the Project
 Assuming debt too early
 Lack of Understanding/Arrangements of Accounts
 Venture capital relationship problems

 Managerial Problems
 Concept of a team approach
 Human resource problems
 Business Life Cycle: Known Crises

First Three years: Seven to Ten Years:

o The Starting Crisis o The Prosperity Crisis
o The Cash Crisis

Three to Seven Years: Ten Years onwards:

o The Delegation Crisis o The Finance Crisis
o The Leadership Crisis o The Management- Succession
Crisis
Initial Problems
Obtaining external financing
 Obtaining financing
 Other or general financing problems

Internal financial management

 Inadequate working capital
 Cash-flow problems
 Other or general financial management problems
 Ignorance About Taxation
 Excessiveattention to profits and sales growth rather than cash-
on-hand (Over investment in raw material stock, rising
outstanding amount)
…Initial Problems
Sales/marketing

 Low sales
 Dependence on one or few clients/customers
 Marketing or distribution channels
 Promotion/public relations/advertising
 Other or general marketing problems

 Product development
 Developing products/services
 Other or general product development problems
…Initial Problems
Production/operations management
 Establishing or maintaining quality control
 Raw materials/resources/supplies
 Other or general production/operations management problems
General management
 Lack of management experience
 Only one person/no time
 Managing/controlling growth
 Administrative problems
 Other or general management problems
 Unplanned expansion in time and stages
…Initial Problems
Human resource management
 Recruitment/selection

 Turnover/retention

 Satisfaction/morale

 Employee development
 Other or general human resource management problems
Economic environment
 Poor economy/recession
 Other or general economic environment problems
Regulatory environment
 Insurance
 Internal and External Problems
Experienced by Entrepreneurs

Source: H. Robert Dodge, Sam Fullerton, and John E. Robbins, “Stage of Organization Life Cycle and Competition as Mediators of
Problem Perception for Small Businesses,” Strategic Management Journal 15 (1994): 129. Reprinted by permission of John Wiley &
Sons, Ltd.
 Determinants of New-Venture
Failures
Entrepreneur Rank Venture Capitalist Rank
I—Lack of management skill 1 I—Lack of management skill 1

I—Poor management strategy 2 I—Poor management strategy 2

I—Lack of capitalization 3 I—Lack of capitalization 3

I—Lack of vision 4 E—Poor external market conditions 4

I—Poor product design 5 I—Poor product design 5

I—Key personnel incompetent 6 I—Poor product timing 6

I = Internal factor
E = External factor

Source: Andrew L. Zacharakis, G. Dale Meyer, and Julio DeCastro, “Differing Perceptions of New Venture Failure: A Matched Exploratory
Study of Venture Capitalists and Entrepreneurs,” Journal of Small Business Management (July 1999): 8.
 The Failure Process of a Newly
Founded Firm

1. Extremely high indebtedness (poor static solidity) and

small size

2. Too slow speed of capital, too fast growth, too poor

profitability (as compared to the budget), or combination
of these

3. Unexpected lack of revenue financing

4. Poor debt service ability

Planning for Survival and Growth
 Entrepreneur attitude, psychology, behavior, more
important than functional knowledge of management
 Crises primarily due to internal causes (the
entrepreneur)
 Planning is a pre-requisite of success : more important
for MSMEs.
 Myth - Entrepreneurs are high risk-takers, too much in
hurry and do not plan