The Rise and Fall of Tech Startups
Introduction
Software startups are newly created companies with no operating history and are oriented toward producing cutting-edge products. However, despite the increasing importance of startups in the economy, only a few studies attempt to address software development issues, especially for early-stage startups. If anything, startups need development practices of the same level or better than those of larger companies, as their time and resources are more scarce, and one epic fail can put them in serious danger of losing business.
Startup Growth Trends
Looking at the number of new business setups that emerged in the last decade one can only estimate the significance of startups. The subsequent wave of new technologies has led non-startup companies to be more competitive, forcing themselves to undertake radical organizational and innovational renewals, in an attempt to behave more like startups, and stay with the technology adoption curve.
How fast do startups grow in actuality?
Let’s take a look at average revenue by business type by stage.
A comparison of businesses less than two years of age, two to 4 years, and older than 4 years old and how they compare in average revenue between 4 different business models.
What we discovered from our findings is that D2C Product startups grow revenue much faster in the early years and then growth slows down; whereas, the software based startups like B2B Software and Marketplace businesses actually saw their growth rates expedite in the later stages of business.
The highest five-year survival rate for new businesses is mining, at 51.3%¹, while the main challenge to the success of a startup is generating new business². In 2018, there were 30.2 million small businesses operating in the U.S.³ and the number is ever growing.
The Current Startup Growth Enigma
After a good amount of research on changes in the startup market, it seems that the value of tech companies is being re-evaluated by investors, and it also appears that the hypothetical enthusiasm driving the startups' results in 2020 and 2021 may have all but disappeared.
For a great number of startups, near-term market changes aren’t that big of a deal, for they have enough money to make it through and will solve falling revenue multiples with sustained growth. At the same time for many startups, the circumstances are a bit different, they’ve spent heavily on hiring and growth goals, leading to severe burn rates through the end of 2021. With companies raising faster than ever before, even some thrice a year, these startups have birched themselves to growth targets that were intrinsically cash-consumptive.
Consequently, some tech companies find themselves looking at two options; growing slowly, saving cash, or going full ham with it at the expense of cash. But, there’s also the possibility that neither option may work out for them. And how is that?
Startups that raised exponentially with the expectation of rapid growth are now having to downsize their employees for they don’t have enough projects and clients due to unstable market and high inflation rates, and paying idle employees is costing them more than the revenue being generated currently. However, this will harm their growth rates, leading to a degradation of the company’s image and maybe value as well.
Startups that raised exponentially with the expectation of rapid growth and couldn’t meet their expectations, are still spending and running out of cash, just to keep their growth rate stagnant. However, simply spending to grow might wind up a Faustian bargain.
This is the startup growth enigma, which can only be solved by going back in time and starting again with capital at lower prices, or forming a more probable growth plan.
Why Do Startups Fail?
The implementation of methodologies to structure and control development activities in startups is a challenge. Several models have been introduced to drive software development activities in startups, but not quite delivering significant benefits. Software Engineering faces complex and multifaceted hindrances in understanding how to administer development processes in the startup context.
A study showed that only 2 in 5 startups are profitable, and other startups will either break even (1 in 3) or continue to lose money (1 in 3)⁴. Almost 10% of startups fail within the first year⁵.
Why is that so?
We’ve listed here a few major reasons that lead to the fall of startups.
- General lack of research in startups
The number one reason why startups fail is due to misreading market demand — this is found in 42% of cases⁵. Startups should conduct a competitive analysis, and proper market research, to understand market demands and probability of success prior to finalizing the idea of the business.
Mobile-focused streaming service Quibi, despite raising a mammoth $1.8B was shut down in October 2020 just 6 months after launching. As reported in the Wall Street Journal, the founder and chief executive stated that, “…There were ‘one or two reasons’ for Quibi’s failure: The idea behind Quibi either ‘wasn’t strong enough to justify a stand-alone streaming service’ or the service’s launch in the middle of a pandemic was particularly ill-timed. ‘Unfortunately, we will never know, but we suspect it’s been a combination of the two.”
2. Failed to reach target capital
The second largest reason why startups fail (29% of cases) is due to running out of funding and personal money⁶. Money and time are finite and therefore need to be devoted very thoughtfully. In September 2019, Daqri_ an augmented reality startup, shut down after burning through more than $250M in funding and failing to raise a new round from investors.
3. Technical debt
The metaphoric term technical debt was originally introduced by Cunningham in 1992, and has recently caught attention of SE researchers. The concept can be defined as the idea that developers sometimes accept compromises in a system in one aspect (e.g.,modularity) to meet urgent demand in some other aspects (e.g., a deadline), and that such compromises incur a “debt” on which “interest” has to be paid and which the “principal” should be repaid at some point for the long-term health of the project.
On a daily basis, startups go through a trade-off between high-speed and high-quality
Developmental procedures, not only in architectural design but in multifaceted aspects (weak project management, testing, process control).
Conclusion
Startups are undoubtedly able to produce cutting-edge software products with a wide impact on the market, significantly contributing to the global economy. Conclusively, it can be said that while some startups rise and their growth knows no bounds, but simultaneously more than 50% startups on average fail, and that the driving characteristics of startups’ fall were uncertainty, lack of resources, and time pressure. These factors influence software development to an extent that transforms every decision related to the development strategies into a difficult trade-off for the company. Albeit it shouldn’t stop you just from the fear of failure.
Just do it! Be persistent! Bring passion! Grow!
References:
1. US Census Bureau
2. Statista
3. SBA
4. Small Business Trends
5. Failory
6. CBInsights
7. CBInsights
