Why Do 57.1% of Startups Fail within the First 12-18 Months?

November 20, 2023

Insights and lessons learned from serial entrepreneur, Gregory Shepard

Philanthropic, optimistic, dyslexic, entrepreneurial, autistic – there are many words to describe Greg Shepard, but – having met him recently – ‘inspirational’ is top of mind.

A 20-year Bay Area startup veteran and serial entrepreneur with 12 liquidity events, two of which were sold as part of a $925M USD transaction that won four Private Equity awards for transactions between $250M-$1B USD, Greg now devotes himself to inspire and support young entrepreneurs.

Having overcome many obstacles himself, including poverty and struggles with neurodivergence, Greg has seen founders fail over and over again, often for the same reasons, and he decided to do something about this.

In many ways, Greg and I share a similar passion. Having seen many founders fail over the years, I am proud to have launched Alacrity and L-SPARK to address the high failure rate and enable young business leaders around the world to create industry-best new companies with the support of key local and international resources.

Fact: 90% of startups fail

When looking back at his own lessons learned and researching why, how, and when startups fail, Greg realized that founders keep making the same mistakes and that these mistakes CAN BE avoided. To address this, he developed the BOSS (Business Operating Support System) Methodology and Framework and launched Startup Science to empower entrepreneurs and increase the overall startup success rate. It provides founders with everything they need to navigate the startup lifecycle.

Partnering with Alacrity Canada and L-SPARK, among many others, Startup Science provides the necessary tools, ecosystem, and knowledge to help founders succeed.

A Valuable Conversation with Gregory Shepard

We recently had the opportunity to sit down with Greg where he shared valuable insights:

Greg, if you were giving an elevator pitch to an entrepreneur, what advice would you offer?

First, you need to understand the kind of founder you are, whether you are a visionary founder or a subject matter expert founder. Visionary founders, like myself, look from the outside in, from 30,000 feet – defining things – whereas subject matter experts look from the inside out, refining things.

Second, ask yourself what kind of market conditions you are in. If you are in a bull market, then go after make-money sales propositions, but in a bear market everybody is trying to save money.

Third, to succeed, you need a talent stack, or these five guiding principles, as I like to call them:

  1. Focus: To avoid getting distracted.
  2. Drive: The ability to visualize where you want to be, as if it’s already there and it’s just up to you to arrive at the location that you’ve imagined. It’s like crossing the finish line in a race.
  3. Enthusiasm: It’s something you have to be excited about. The journey AND the destination and ALL of the things you are going to learn along the way.
  4. Discipline: This is the most difficult one. It’s like a muscle. Discipline pushes you when drive fails, and it forces you to do those things that you don’t want to do first. Discipline is the solution to procrastination.
  5. Optimism: It’s the biology of hope. It’s the seed of enthusiasm. It paints a picture of your goal and makes it feel real.

That’s the talent stack that you need to make sure you have the ability to make things happen!

In addition, you need to understand where you are and where you are going. It’s like a GPS that requires this information to be able to guide you to your destination. You have to understand the lifecycle and know which phase you are in: Vision, Product, Go-To-Market, Standardization, Optimization, Growth, or Exit.

This is the advice I would give founders.

For scale-up CEOs, what can you share with them about your most valuable datapoints? What is Greg Shepard’s dashboard to track progress as a scale-up CEO?

It’s important to understand that there are three valuation drivers, Growth, Margin, and Retention, which align with functional areas:

  • Product & Engineering
  • Sales & Marketing
  • Customer Service & Support
  • Shared Services (IT, accounting, HR, etc.)

Growth aligns with Sales & Marketing. Retention with Customer Service & Support, Margin with Shared Services, and Product & Engineering spans all three of them. That’s the dashboard at the top level. Underneath are your lagging indicators, such as Income, Profits, etc.

The problem is that most people look at their financials, but that’s like driving down the highway and looking in your rearview mirror. To drive your business forward, you need to focus on leading indicators/KPIs and assign them to each functional area.

A common mistake I see is that founders forget to include cycle time and – as a result – run out of money. What is the cycle time from contact to contract, and from contract to revenue?

It’s also important to separate R&D from maintenance costs to determine when a product reaches a stable state. You want to see the cost of innovation going down and the cost of maintenance leveling out to reach economies of scale.

Bad hiring decisions are also all too common. When scaling a business, hire practitioners that are willing to roll up their sleeves, instead of costly VPs who start hiring others underneath them as soon as they’re onboarded.

Growing a business is hard. 57.1% of founders fail within the first 12-18 months. The rest fail because of mistakes they made in those early months. I like to compare this to being pregnant. When that unborn baby is being ‘built’, you don’t drink or smoke, you eat well, and you take care of yourself. It’s the same thing with a new business. You must treat it as if you’re pregnant and carefully watch it in the early days to make sure it turns out to be a healthy baby.

A lot of founders put themselves out of business by growing. Standardize before you grow. If not, the problems that you missed start to compound and worsen as you grow.

Greg, in your opinion, when is the best time to monetize your hard work as Founder or CEO?

It’s important to know the two stages of the innovation lifecycle: Value creation and value capture.

During the value creation period, you are focused on your vision and your product, and you are trying to create value to persuade others to invest. This is not the time to get money out of your business. Up until optimization, you don’t know if your business is going to scale or fail. Hence, founders should not take money, or very little, until they see economies of scale.

Let’s say your customer acquisition value is five. For every dollar you put in, you make five dollars. This means, for every dollar you take out, you are losing five dollars. It’s like your retirement fund. You don’t draw from it until you’ve stopped working to earn compound interest.

What would you say about selling a business? When is the right time?

Businesses are acquired by companies to either make or save money. In a lot of cases, the buyer will be selling your products to their customers. They have already acquired their customers, having paid the customer acquisition cost.

If you are – during this process – selling up the slope, you are eating away the money that they want to make by acquiring your business. Make sure there’s a lot of potential for the acquirer. Sell the hope! If you get too close to or reach the peak, you can’t negotiate for premiums. You’d only get the value that is in the numbers, but not the value that is in the imagination!

Altruistic Capitalism

Greg is particularly interested in supporting underserved and marginalized communities fix environmental and sustainability problems. He believes that “we need to turn towards a model of Altruistic Capitalism.”

“Put simply, we need to leverage our capitalist system for altruistic outcomes, where bold new perspectives are invited to the table and underserved and marginalized communities are recognized for their ambitious inventions and innovations that will make our country (and world) a better, more sustainable place.”

Struggling with seven neurodivergent conditions, Greg sees business opportunities differently, but he chose to convert his struggles into challenges so that he could overcome them.

Timing in life is important, but without the guiding principles Greg mentioned during our conversation – focus, drive, enthusiasm, discipline, and optimism – no business will succeed.

To learn more about Greg’s journey and achievements, visit gregoryshepard.com.

 

Wesley Clover invests in a range of technology companies, and they bring impressive innovation to markets and clients around the globe. I/O is our way of sharing some of the best insights. I trust you will enjoy them.

Terry Matthews, Chairman