When putting money towards a company as an investment, both the investor and company hope for some sort of success. However, the hard truth is, many companies simply do not pan out. Many failed companies have a variety of common problems. Prior to investing, here are a few pitfalls that doomed companies typically face:
- Insufficient market demand: Without proper research, having the best product in a niche market may not matter. If demand isn’t there, a company will ultimately fail. This is common in the biotech and healthcare industry, especially when dealing with rare or obscure diseases. Simply put, it just isn’t profitable. It’s important for a company to either have a big market, or have the ability to charge more if they have fewer potential clients.
- High burn rate and/or debt: Debt isn’t necessarily a bad thing – thousands of companies take on debt in anticipation of growing next year. The key is to make debt manageable. This varies by company and industry. Many biotech companies take on a significant amount of debt in the hopes a product becomes FDA approved (in which their stock price will explode). Many other industries like manufacturing or real estate don’t have the luxury of an enormous debt to income ratio. All debt is not created equal – it varies based on industry, prior history, and collateral.
- Wrong management team: A poor management team is typically a result of either inexperience, or no track record of C-level executives working together. Many new tech companies have very young founders and CEOs that lack appropriate experience for running a company. Additionally, when looking at management, make sure they are objective and impartial when it comes to decisions.
- Out-competed in the marketplace: Being first to market with a new product or service is very important, but it isn’t everything. The company that works more efficiently or offers a better overall service will ultimately win out. Occasionally, a secondary company can take notes from another company’s initial release in order to see what they can do better.
- Failed marketing efforts: High growth companies need to have a strong digital marketing team in order to keep up with demand. Marketing has come a long way since buying ads in newspapers, or posting billboards across the city. Social media, SEO, and email marketing campaigns need to be cohesive and concise in order to get a company’s message on point. Failure to do so can lead to wasted money and efforts, translating into insignificant sales.
- Ignoring customer feedback: New companies have to listen to complaints and compliments from their customers. Failing to do so results in poor word of mouth. Enormous companies who have less-than-admirable reputations have the benefit of already being billion dollar behemoths. Startups do not have this luxury. Pay attention to customer emails or Twitter and Facebook pages. Valuing customer concerns, and publicly showing that you care can help enable success.
- Cost and production concerns: You have to see where a company is spending money. For instance, if a company provides software as a service (SaaS) in a competitive industry, should they invest in sales or development? Being first to market is important, however you don’t want to put forward an unfinished product. It’s an important balance where to put company resources.
- Bad market timing of products: Timing is everything – some incredibly successful companies have gotten lucky, and some very unsuccessful companies have gotten unlucky. Occasionally, it doesn’t matter what your business model is – a new mortgage company with a cohesive model that started in 2007 probably never had a chance. Oil and gas companies who opened up shop two years ago likely faced the same fate. In the end, there are occasionally ancillary forces beyond a company’s control.
- Failure to adapt business model: Business models should be discussed in depth, however they should also be flexible. This is especially true for companies that have a renewal-based subscription model. Don’t assume your customer base will always bear a 10% increase year after year. Additional products or trainings have to be offered in order for a customer to justify a price increase.
- Team discord/investor unrest: Team chemistry is vital to a company’s success. Having a group of all-stars won’t matter if they aren’t a cohesive group. A lot of this success depends on the hiring process – it’s important to have a trustworthy recruitment organization. Additionally, investors should have written expectations. Investors that want daily or weekly updates on a company’s success could result in being detrimental to morale.
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