After analyzing more than 100 post-mortem reports by failed startups, CB Insights compiled a list of the top 20 reasons why founders believe their companies went under. Surprisingly, only a handful of these reasons had to do with the products under development. The vast majority of issues were related to breakdowns among the people who were developing, marketing, selling, and investing in the products.
Those failures were not inevitable. Nearly all of the pitfalls, which included loss of focus, lack of passion, and disharmony among team and investors, can be avoided if a company has the proper sense of focus: if it establishes and aligns its strategies with its “North Star.”
In business, the North Star represents a company’s unwavering definition of its purpose, its products, its customers and potential acquirers. Clarity about a company’s North Star leads founders and companies toward their goals and helps investors envision the company’s future growth. When founders begin building their businesses without establishing a North Star, they risk traveling in directions that won’t yield the desired outcomes—and, in many cases, they don’t realize it until it’s too late to correct the course.
Identifying the North Star begins with a clear definition of what the company does and the key features and benefits of its products. Based on these factors, an ideal customer profile informs the company’s marketing and sales teams as they endeavor to reach the target audience. And, although not all founders view their companies as products, it also means articulating the startup’s ultimate value proposition for potential future acquirers and forming alignment with these companies from the beginning.
Define the Problem or Opportunity
In order to describe their companies in a way that will resonate with potential customers and acquirers, founders should answer two basic questions about the business: What does it do and why does it exist?
Let’s say your company has designed a platform to help small businesses manage shipping and logistics. In what ways does your solution succeed where others fall short? Start by making a concise list of your product’s features and benefits that make it unique and compelling. You should also make it clear whether your company is solving a problem or taking advantage of a market opportunity, and then come up with a short and succinct statement for how your solution achieves that objective.
Uber, for example, realized in 2010 that there was an untapped market of people who wanted on-demand transportation at a low cost. If the company had opted to create an app that connected customers with taxi drivers, it would have solved a problem. But instead of taking advantage of existing infrastructure, Uber hired its own fleet of drivers and developed an app that connected those drivers with its customers, ultimately creating a new market that fundamentally disrupted transportation.
Zero In On Your Target Audience
According to the CB Insights report, 42 percent of startups said that one reason for failure was “no market need” for their products. And 14 percent admitted they ignored customer feedback, the crucial mechanism for continuous improvement. Both are mistakes that spell disaster for a new company.
Entrepreneurs can avoid these common pitfalls by establishing an ideal customer profile (ICP). The ideal customer is the person or entity that needs your product or service the most. Entrepreneurs need to evaluate what that prospect is not getting from existing competitors, or the marketplace in general, and how their companies can best fill that void. Next, turn that information into a compelling narrative by creating a user story: a brief statement from the end user’s perspective that zeroes in on who the customer is, what they want to do, and what they hope to achieve by investing in your offering.
Identifying and studying your target customer base is also crucial in identifying companies that would likely be interested in buying your startup. Finding an organization whose customers overlap with yours can provide insight into what they are currently missing. And, if you’re aiming for an acquisition, your product should fill a need or solve a problem for your potential buyer’s customer base.
Plan Your Exit
According to a Silicon Valley Bank survey, 57 percent of startups view acquisition as the most realistic long-term goal for their companies, while just 18 percent of founders see their companies going public. (Sixteen percent planned to stay privately funded, while the remaining 9 percent weren’t sure).
Entrepreneurs can set their companies up for successful acquisitions in the future by creating an ideal buyer profile (IBP) and forming early relationships with potential acquirers to determine what attracts those companies — whether it be the product, the talent, or the unique business model.
Closely aligning your target customers with those of potential acquirers can also lead to what is known as an attachment rate — a premium price paid based on serving a similar customer base in a way that fills a gap not currently provided. Acquirers always factor in this rate when determining the value of a company. Businesses should also determine when and how they want to exit and at what price they wish to sell their companies. A great company with no buyer to purchase it can lead to extended time horizons, capital burn and dilution.
Taking the time thoroughly to think through and establish a company’s North Star fundamentally changes the approach to starting a business, from the steps you take initially to get it off the ground to how you approach and prepare for eventual exit. The first few years of any startup are defined by pervasive uncertainty. When distractions emerge, morale dips, or unexpected setbacks occur, a company’s North Star can be there to unite the team, keep the company on track, and remind employees why they go to work every day.