The phenomenon of consolidation occurring in the enterprise sector is a natural stage in the economy’s transition from a structure of dispersed, developing, and relatively small companies into an economy with a structure based on strong and mature enterprises that set the trends on international markets.
The slower rate at which companies are formed and the simultaneous development of the segment of large, mature companies with a higher employment rate is the result of the synergy of experiences of an infinite number of entities participating in economic life and the relationships between them. An important role in this process is played by companies whose objective is to materialize the solutions that enable the modernization and automation of economic processes. As the economies compete in the application of innovation and the use of Artificial Intelligence (AI), increasing emphasis is placed on the importance of developing competences that are only possessed by humans.
Where do start-ups come from?
Whether an emerging company will be a start-up depends on the motivation guiding its founders. Antoinette Schoar distinguishes between two types of entrepreneurs In her opinion, most entrepreneurs are guided by the motive of subsistence, which is associated with the need to create a job or a workplace for themselves. However, these entrepreneurs are not innovators and are not interested in scaling their operations, which would involve a change in the business model. They are an important part of the economy, but they do not provide it with an innovative impulse.
It is only the much smaller group of entrepreneurs who contribute to technological progress by experimenting and implementing innovative concepts. These visionaries are characterized by greater self-confidence and curiosity, a strong need to create, less fear of possible failure, and extensive or unique knowledge.
According to John Haltiwanger, the share of start-ups created in the United States, with an assumed annual rate of employment growth exceeding 25 per cent among all the newly created companies, is not falling. The founders of such companies assume that they will quickly join the ranks of large and young companies, thus falling in line with the model of the developed economy. According to estimates prepared by Hurst and Pugsley, about 23-28 per cent of companies in the United States are created with such ambitious growth plans.
However, out of this huge mass of start-ups only a small percentage will survive, while remaining an independent company and achieving the ability to generate revenues greater than the operating costs, which allows them to increase employment and to grow. According to Forbes, the likelihood of failure is enormous, as it applies to nine out of ten start-ups. In such circumstances, the achievement of the 10 per cent of successful start-ups constitutes an unbelievable success, while the experience of the remaining 90 per cent provides an important lesson for future entrepreneurs.
Errors that might end in bankruptcy
Analyses of start-up bankruptcy cases carried out in recent years have shown that there are several key reasons for start-up failures. The most important of them relate to the inefficient use of the human factor, and not to market imperfections, as many would probably think.
According to CB Insights, the majority of bankruptcies resulted from an incorrect identification of market needs by the product creators. The creators of the start-ups were implementing their own visions without confronting them with the maturity of the market and the needs of the potential customers. As a result, about 42 per cent of the surveyed companies failed because their product did not satisfy any needs of the clients to whom it was addressed.
Other less frequently cited factors determining the failure of start-ups included the lack of harmony, coherence of goals and activities, and cooperation between the team members. Poor team selection was the reason for the failure of almost every fourth start-up. It turned out to be a serious mistake to build teams whose members are versatile, have high qualifications and extensive knowledge, but are also characterized by strong individualism and lack the ability to work on a common goal.
The problems were often generated by the founders of the start-ups, who failed to exhibit managerial and leadership skills that would allow them to turn a collection of individualists into a team. Moreover, a common error on the part of the founders was excessive ambition and desire to control the direction of the company’s activities, even when they didn’t have the appropriate competences. The start-ups frequently lacked team members providing a counterbalance to the strong opinions of the founders, who were pushing inappropriate development concepts.
According to the statements of teams from companies that no longer exist, lack of financing was the cause of almost 30 per cent of all failures. The shortage of funds was typically revealed after the product had already reached the form of a prototype. The failed companies were unable to secure sufficient funding for commercialization and further activity.
According to CB Insights data, half of all companies fail before they raise USD1m in funding, and more collapse before they raise USD5m. The lack of access to capital from traditional sources, such as bank financing, seems to be justified in the case of companies with such unpredictable cash flows.
For start-ups it is difficult to find investors who would see the investment in the company’s idea as a guarantee of market success and high earnings. The founders of start-ups underestimate the importance of their own initiative in establishing business contacts and in so-called networking, which increases the chance of breaking through with their product to a group of potential investors. They also fail to realize the importance of self-presentation and the development of a proper investment pitch. Venture Capital funds and angel investors who are looking for a good investment opportunity, expect a specific, comprehensive and enticing – but also concise – presentation of the mission and the development concept of a start-up that is seeking their interest.
According to Juliette Powell, the low survival rate of start-ups is the result of incorrect assumptions regarding the process of scaling up, that is, transitioning into a mature company. The evolution of a dynamically growing company requires synchronized actions on many levels, and the implementation of a number of procedures and systems, as well as organizational and management changes. In the analysed cases of unsuccessful transitions, it turned out that the time and scale of the transformation were not adapted to the stage of the company’s life, the product was insufficiently recognizable, the cost of transformation was underestimated, and the target market and the customer were improperly defined.
The teams working on failed start-ups claimed that they didn’t appreciate how important it was to utilize the knowledge of their mentors and to employ competent managers to lead their team’s work, as well as experts specializing in placing the product on the market, and professionals organizing the marketing and sales campaigns.
People create innovations
The creation and bankruptcy of enterprises are natural elements of the economy. They should be seen as a kind of experiment that enables progress. From the point of view of economic development, the most important thing for a country is to create conditions that are conducive to the development of entrepreneurship.
The main factor determining the economy’s saturation with companies focused on creating innovation is the level of support provided for the development of human potential. The higher the level of education, both in terms of hard and soft skills, the greater the likelihood that technologically advanced solutions will be developed. Constructive cooperation, creativity, intuition, creative problem-solving, that is, features only possessed by humans, lay at the heart of innovation.
The dynamic development of the start-up environment is the economic expression of a situation where a thoroughly educated society engages in experimentation relating to skills and knowledge on the basis of solid foundations. The point is that start-up companies should be created and should pursue their primary objective, which is to multiply innovative solutions. Whether they do so on their own, in dense ecosystems, or as individuals in a corporate structure is important. However, in view of the intensifying international race for priority in the field of innovation, the most important thing is to ensure that Poland is among the participants in this race.
The article presents the private views of the author and is not an expression of NBP’s official position.