Over 90% of Startups Fail! Shocking News: ‘Premortem’ and other Management Tools Can Reduce Enormous Financial and Psychological Damages

“Hello, Ram please come in. We are meeting after a long time. I have been meaning to speak to you and other classmates to plan a celebration for our start-up champion Lakshmikant’s entry into the ‘Unicornians Club’,” said Hari, who was the Vice-Chairman of his family-owned company.

“That will be a prolonged wait, Hari.” 

“Why do you say that?”

“Because Lakshmi (wealth) is gone, the start-up has failed, and  ‘Can’t' rather Kant is not meeting anyone. 

“How tragic! But he had raised very large amounts of funds. Was he cheated by someone?”

“Not at all. It was all his doing. He ‘burnt the money’ and the firm went bust.”

“You are joking. Surely, no one burns money intentionally.”

“You’ll be surprised by how many do. It wasn’t just Lakshmikant. According to reports, more than 90% of start-ups fail and the main cause is because they are burning money.”

 "Business is always risky and failure is, in some ways,  implicit. But failures on such a large scale are a mystery. Your description of burning money is a patent exaggeration. You have been always doing that.”

“I knew you would have doubts, Hari. So I brought  a newspaper clipping that carries  a warning by revered Mr. Ratan Tata: “Startups that burn investor money-------won’t get  a second chance.” (Emphasis added)

“I admit that I’m not up-to-date on start-ups. Tell me, what is this concept of burning money?” 

                                

Cash-Rash-Crash

“It's not such a new concept. It originated in the dot com era. It simply means that entrepreneurs give up cautiousness and spend money liberally (that is burn it) before any strong earnings. Their aim is to scale up through capturing new markets. The ‘cash burn rate’  is now a measure of management’s dynamism. If the attempt succeeds, new funds can be raised and the losses can be recouped through higher earnings. A few like the  Binnys of Flipkart succeeded and became giants but the rest are bankrupted. These cases are now described as the victims of a new phenomenon  - Cash-Rash-Crash.”

“Did the news of the 90% failure rate come after Lakshmikant entered the arena?” asked Hari.

“No. The news first appeared in May 2017 and was based on an IBM survey. Lakshmikant started in early 2018. Also In a 2020 report, Investopedia reported that the start-up failure rate in 2019 was 90%.”Lakshmikant had a chance to rethink and slow down.

“If such a frightening failure rate was known, why did Lakshmikant rush in?” 

“Lakshmikant is not the only one. There are thousands in India and a million the world over. The lure of being next Bezos or Binnys coupled with easily available venture capital excites many. Hope never dies. Moreover, the successes are flashed across the world, but failures remain in the dark, just statistics,” Ram said.

“Is there research on the causes of failure, so that entrepreneurs can be careful?” 

“Yes indeed! Many studies have been conducted. Some have listed over 100 reasons. But as Peter Drucker observed, it’s not the system or employees but the top management's responsibility to ensure the smooth running of companies. And for start-ups, entrepreneurs are the top management.” 

“But shouldn’t these entrepreneurs’ grasp of business intricacies be tested and training given to fill the gaps? Failures of firms on such a large scale mean enormous financial losses and unimaginable psychological miseries to the staff, suppliers, associates, and their families,” Hari said.

“It is indeed a must. But self-management is more important. An entrepreneur with cash in hand and an ‘ingenious’ product he thinks he has ‘invented’ is hardly in any mood to ‘learn’. They are under a sort of a spell and don’t listen. Steve Jobs, in the first phase, was going his own way and had to leave the Board of Directors of the company that he founded. Recently, Travis Kalanick, the founder of Uber, apologized for his mistakes and left the Board. He openly admitted that he needed some leadership training. Some other stalwart entrepreneurs  have also vacated Boards on account of their mistakes.”

Ram continued, “Now, this is the phase to impart training in ratios and cash flow analysis, strategy formation, evaluation. There are also models for bankruptcy prediction which should be checked once in a while. The most useful tool in start-up cases is the ‘premortem’ - a tool devised by eminent McKinsey experts, Koller and Klein. Doctors do a post-mortem to identify the precise cause of death. In the case of premortem, those involved are told before the launch that the project is dead. Each one must give a possible reason. People who are afraid to speak before the inventor/entrepreneur demi-god can then speak openly. They may even vie with each other to identify the most important cause. Many weaknesses in the product, pricing, services, and other business aspects have a chance to be corrected. Another tool or idea is to have a mentor, just as the kings in the past used to have a saintly person who could warn them when they sensed evil. Such tools/methods would certainly help reduce the frightening rate of failure of start-ups. Finally, all of us entrepreneurs, et al, should remember the saying: 

“Knowing others is intelligence. Knowing yourself is wisdom. Mastering others is strength but mastering yourself is true power.”