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How Do I Become Successful? The Most Important Success Factors For Your Startup

25 January 2022

Contribution by Volker Doberanzke, PhD, Numarics Chairman of the Board of Directors and Professor of Finance and International Management

Studies show that more than 80% of all startups fail. Or to put it another way: Only two out of ten startups become successful. Why is that the case? And are there success factors that founders or a founding team should pay special attention to? Is there such a thing as a formula for success?

Numarics provides answers.

 

The Stats

In Switzerland, the startup scene remains exceptionally dynamic: More than 40,000 new companies were founded in 2019. This puts Switzerland in a top position worldwide in a relative comparison. Most of these companies are founded in the legal form of a limited liability company, the Swiss “GmbH”, (approx. 39%) or sole proprietorship (32%), followed by stock corporations, the Swiss “AG” (20%). This is accompanied by an impressive number of patent applications: According to the Swiss Federal Institute of Intellectual Property (IGE), more than 8,000 patents were filed in 2019. The table is topped by the United States (>45,000 applications), Germany (>25,000 applications), and Japan (>20,000 applications). However, if we look at the relative number of patent applications, Switzerland occupies a lonely top spot worldwide: almost 1,000 patent applications per million inhabitants were filed in Switzerland; the average in the EU is a modest 140 applications.

And young companies also play an important role in the national economy: around 400,000 employees are employed in companies that are less than 10 years old.

And yet, these numbers can't hide one thing: 80% of all startups do not survive the first three years, the renowned U.S. startup incubator Y Combinator found. But why is that? And are there factors that should be paid special attention to in order to lead a startup to success? Analyses shed light on the reasons why startups fail.

The four main reasons for startup failure are briefly outlined below and starting points are provided as to how these factors can be influenced in a success-oriented approach.

The Business Idea  

A central role in the analysis of success factors for startups is assigned to the business idea. Is the idea really innovative or just a short trend? Will I succeed in "disrupting" a market with this idea? The business idea does not always have to be particularly complex. Many simple ideas have led to very successful companies. One example is AirBnB: A simple business idea - the creation of a booking platform for the private rental of living space - made it to the New York Stock Exchange in 2020 with a market capitalization of more than US $20 billion. An extraordinary idea? No, but definitely a novel idea and, most importantly, highly scalable. Scalability, that is, the ability to grow quickly and sustainably, is a crucial success factor for the survival of a startup. If the idea is good, but no significant revenues can be generated, it will be difficult. Or if sufficient revenues can be generated but the costs to provide the product are simply too high. This means that the question must be answered as to how high the technical effort is to build a "scalable" product. The scalability test should be given special attention in the start-up process.  

Market Opportunities

Closely related to scalability is the question of how large the relevant market is for the business idea. Analyzing the future market and competitive environment is absolutely crucial for the success of any startup. It all starts with the simple question: who are my potential customers and how many potential customers are there? In my region, in Switzerland, in Europe and, if applicable, worldwide. Basically, the bigger the market, the better the chances for survival. But be careful: What is the competitive situation? Are there already numerous competitors and if so, what is the so-called "Unique Value Proposition", i.e. the unique selling point of my business idea compared to my competitors. In this context, it is also important to clarify how the market will develop in the coming years. Is it a market with stable demand or is it a shrinking market? And what will the market look like in five years' time? Finally, the question to be answered is how high the margins look for my potential product, i.e. the profit potential. In highly competitive market segments, it can be observed that profit margins usually come under pressure. Here, it is crucial how innovative my business idea is: Is the customer willing to pay what I consider an attractive price for my (innovative) business idea? So the more innovative my product is, the easier it is to push through attractive profit margins. When developing a business idea, a startup entrepreneur should therefore pay sufficient attention to ensuring that the product is also perceived as an "innovation".

The Founding Team

The founding team or the founder is of absolutely central importance. However, the statistics speak a clear language here as well. First of all, it can be determined that " solo founders", i.e. individual persons who found a startup, fail disproportionately often. Teamwork is therefore advantageous. But: Even in a team, things can get difficult. In many cases, the "chemistry" between the founding partners is not right, or they simply lack the technical know-how to implement an idea. The U.S. business incubator Y Combinator sees the composition of a founding team as one of the most common reasons why startups fail. The principle of "test the waters before you make a commitment" therefore also applies to "corporate marriage". For example, a successful startup should have comprehensive know-how in the area of digitization, the interfaces between technology and product, the scalability of app-based processes, and so on. In addition, there should be sufficient knowledge in the area of legal requirements for the corresponding products and at least extensive knowledge in the area of accounting, taxes and liquidity management. In any case, knowledge in the area of "sales and marketing" would also be important. Only if the startup succeeds in winning customers quickly will the chances of long-term survival increase. Basically, "The first ten employees will make or break your startup", i.e. the first ten employees decide on the success of a startup. Often, missing know-how and/or expertise can be brought on board, for example, via an advisory board. 

The Funding

Finally, there is the challenge of funding. The best and most innovative business idea is of little use if I do not succeed in obtaining sufficient funding for its implementation. There are a number of alternatives, which will be discussed in a separate blog (see also the article on "How To Fund A Startup"). Good ideas should always be able to find investors. The basic prerequisite here is that I am able to develop a business plan for my business idea that is as professional as possible (see the article: "No Success Without A Plan: The Business Plan").

 

Numarics provides you with a business operating system designed to lead your startup to success. Our experts and technologies make starting and running a business easier than ever. This gives you a significant advantage right from the start: time to focus on your core business. Numarics as a solution for entrepreneurs is novel worldwide and fits seamlessly into your lifestyle using your smartphone, anywhere and in real time. Dive into the next evolutionary stage of entrepreneurship - you do your business, Numarics does the rest. 

Volker Doberanzke, PHD
Numarics Chairman of the Board of Directors and Professor of Finance and International Management
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