The United States is a leader in invention and innovation, but other countries are slowly catching up. Because of this, tech firms must become better equipped to compete with their respective domestic and international rivals. Thus, one of the key questions that we have to ask ourselves is:

Why do young tech firms fail?

At HafeziCapital we have identified five core reasons why newly established tech firms fail. These key reasons are a major component of the company failure and are crucial elements within the interior decision making process.

The Business Model

Business models have become very cliché nowadays because people believe that they are irrelevant or secondary to the technology. We would argue that they are at minimum as important as your technology or service offering. They are like train-tracks to a train, and keep your company performing the key elements required by your customer, and resource providers. For many established businesses their business model is what keeps them alive and performing above par. Thus, one of the key reasons that young tech firms fail is the lack of a sustainable business model.

Lack of Focus

Every new product or concept should have a specific purpose within the market space. Emerging companies are too focused on being too many things to too many people and thus lose product and business focus. Each technology should solve a specific set of problems that clients are willing to pay for. Within your Gamma or Delta testing phase it is very important to understand how clients use the technology and if they are willing to pay for it. Thus, one of the key reasons that young tech firms fail is the lack of focus.

The Organization Factor

When you are a small star-up the lack of financial resources forces you to focus on spending too much time on elements that are not deemed as key for your corporate success but necessary for company’s survival. Back office issues such legal, bookkeeping, accounting, HR management, supply chain management (SCM) or collections become secondary to product development and sales. However, knowing how information flows and who is responsible for what are key elements of a well-run firm. Thus, one of the key reasons that young tech firms fail is the lack of a sustainable organizational structure.

The Money Factor

The financial factor can be divided into two major components, namely the lack of it and the inability to manage it properly. Many star-ups do not understand the real cost of development. Entrepreneurs are by nature optimistic and thus when it comes to developing market entry strategies their numbers are generally very optimistic. They are overly optimistic on the sales side and overly conservative on the development side. Many companies start the development process but soon find that they are undercapitalized. At this stage finding financial products comes at a premium of either time and/or share loss.

The other major problem is the mismanagement of capital. As a young technology company you have to understand what the key elements are to archive success. Success is achieved by providing a metric to the things that are key to your overall survival. If you have a limited amount of financial resources, raising capital is a key element of your company’s survival, but obtaining a patent might be secondary to raising capital. Understand the elements that keep your company alive so you can fight another day. Thus, one of the key reasons that young tech firms fail is the lack of capital or management of the capital.

Me-too Technology

Technologies that lack a real differentiation factor in the market space are prime candidates for failure. Companies have to create a real differentiation in the market space between their specific product and the other products within the market space. Companies compete on a myriad of differentiating factor such as function, price, perception, quality, and time and place utility. The aforementioned factors can be mixed in a myriad of manners that provide you countless way in which to compete on. Therefor your product has to have a defined market positioning that is clear to your channel partners and end users. Thus, one of the key reasons that young tech firms fail is the lack of product differentiation.

Conclusion

The five key reasons why young tech firms fail has a major impact on your organization success. One way to minimize the risk of failure is by brining in HafeziCapital to develop or review your business model and help with market positioning, pricing, organizational structure, and market entry strategies. The impacts of these decisions have a direct effect on ability to raise capital in both the Angel and Venture Capital (VC) phase.

Key Reasons why young tech firms fail is the lack of:

  1. a sustainable business model
  2. business/product focus
  3. a sustainable organizational structure
  4. capital and ability to manage it
  5. product differentiation

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