Robin Allen from Smart Insights reported results from research recently done by Quartz why 87 bootstrapped (companies that start without venture capital) failed. Allen highlighted the fact that the results show ‘poor marketing’ positioned above pricing issues, legal challenges or burn out as a reason why start-up businesses fail.
The main reason that bootstrapped companies failed was because their business models were not viable. The matter of having a viable business model and business strategy will be discussed briefly in this post.
The result of the study by Quartz why businesses fail is shown in the table below.
|Reasons for failing||Number|
|Business model not viable||10|
|Customer development issues||8|
|No market need||8|
|Disharmony on team/investors||6|
|Not enough traction||6|
|Lack of focus||5|
|Ran out of cash||4|
|Failure to pivot||2|
|Lack of passion||1|
What is a business model?
A business model is according to Magretta (2002) similar to a story – a story that explains how your enterprises works. A good business model answers questions such as:
- Who is the customer?
- What does the customer value?
- How do we make money in this business? and
- What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost?
By having the answers to these questions a start-up business will come a long way to establish if their business idea is viable. A business model on its own will however not provide sustainable outcomes for most businesses. A business also needs a strategy…
What is a business strategy?
Whereas a business model is more concerned with the operational activities, the use of resources and the capabilities of a business, a business strategy had more to do with what the business should do in the future. A business strategy answers questions such as:
- Where are we now?
- Where do we want to be?
- How will we get there?
- How will we stay there and make some money?
Indeed, a business model and business strategy usually come together in a business plan.
The integration of the business model and the business strategy
A well written business plan may serve as a vehicle to combine a business strategy with a business model. As a result, the opportunities and threats identified with the strategic SWOT analysis of the business can purposefully matched with the strengths and weaknesses that was identified with the business model.
Furthermore, if a prospect business owner draft a business plan before starting his/her business, most of the reasons way the business may fail (listed in the above table) may already have been identified and taken care of.
Lastly, most of the elements surveyed regarding business failure can be conceptualized, planned, implemented and measured. A well written and research Business Plan is therefore a necessity for every business, new or established…
Read more: The Reasons Why Start-up Businesses Fail
Magretta, Joan. 2002. Why business models matter. Harvard Business Review, 86-92.