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The One Simple Equation That Explains Why Most Startups Fail


Why do 90 percent of businesses fail? Of course, there may be many factors involved and each startup fails in its own unique way, but new research suggests that most fail for one single reason. Fortune magazine recently published a study by CB Insights that examined 101 essays by founders of failed startups about what went wrong. The top five reasons for failure were:

  1. Not enough market for the product — 42 percent
  2. Poor cash management — 29 percent
  3. Wrong management team — 23 percent
  4. Beaten by the competition — 19 percent
  5. Prices didn't cover costs — 18 percent

The first reasonable conclusion you might draw from this data is that startups should really consider outsourced controller services from the very beginning before their finances get out of hand. The second might be that “not enough market” can't possibly be right. After all, most business plans include a section on “Market Analysis” with details on the outlook and the competition. Why would you try to launch a business if there was no market for it?

You wouldn't. No market really means not enough revenues. It's likely that in many of these instances, the market was there but the company wasn't reaching customers who valued them enough to stick around. The result is churn where customers leave as fast as they are acquired and the cost to acquire new ones is never offset by sufficient repeat business and referrals.

The Equation

When startups fall into this cycle, many end up booking any revenue they can find in desperation and starving themselves by going after the wrong customers. The equation that defines this fatal mistake is:


CAC stands for Customer Acquisition Costs and CTLV is the Customer's Transactional Lifetime Value. Here are some suggestions on how to calculate both sides of the equation and see where you stand.

Filling In the Numbers

The cost of acquiring customers involves all over your sales and marketing activities. This is a big unknown for many startups at a time when they feel incredible pressure to raise consumer awareness. Don't underestimate marketing and sales costs or overestimate consumer enthusiasm.

CAC = M+S+O / NC

M+S+O is the cost of marketing+sales+overhead and NC is the total of new customers over a given time period. The more customers you can direct toward low-touch conversion channels, the smaller your CAC and the stronger your position.

Transactional lifetime value is a bit more complicated, but the numbers are easier to nail down. Because it's based on actual transactions, you will quickly see where you need to devote your attention.

CTLV = ((T x AO) x AGM) x AL

T is number of transactions over a specified time period

AO is the average order amount

AGM is the average gross margin

AL is the average lifespan of your customers

Flipping the > to a <

You'll need to drive down CAC or boost CTLV to stay in business over the long run. Some activities that lower CAC include:

  • Inbound marketing
  • E-commerce
  • Contract renewals
  • Freemium models that encourage upgrades

On the other side, activities that increase CTLV include:

  • Customized pricing
  • Blogs, videos and webinars that show how to get more value from your services
  • Strategic partners for lead generation
  • Bundles to solve customer problems proactively

How Outsourced Bookkeeping Helps

Startups often don't have enough experience to recognize warning signs when finances start to go off track. That's why if you are going to outsource anything, finance and accounting is the area you should consider first. Bring in professionals who have seen it all and can give you sober, unbiased view of your position.

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