When startups fail, one of the most frequently cited reasons is running out of cash.

This explanation, while seemingly straightforward, often masks deeper, more fundamental issues that lead to the financial shortfall.

Understanding these root causes is crucial for entrepreneurs aiming to avoid failure. A pre-mortem analysis and the ‘5 Whys’ technique, can help to discover the real reasons behind potential failures, enabling startups to address these issues in a proactive way.

It’s true that many startups fail because they run out of cash. However, this is a surface symptom rather than the root cause of failure. Cash flow problems are often the result of underlying issues that, if addressed early, could prevent the eventual financial crisis. To get to the heart of these issues, startups must go beyond the obvious and conduct a thorough analysis.

A pre-mortem analysis is a forward-thinking strategy where a team imagines a future scenario where the startup has failed and works backwards to determine what could have led to that outcome. This exercise helps identify potential risks and challenges before they become critical problems. By anticipating these issues, startups can develop strategies to mitigate them, increasing their chances of success.

The 5 Whys technique, developed by the Japanese entrepreneur Sakichi Toyoda, is a simple yet powerful tool for root cause analysis that also helps to perform a good pre-mortem analysis. It involves asking “why” five times (or as many times as necessary) to drill down into the fundamental cause of a problem. Here’s a simple example of how both techniques – the 5 Whys and the Pre-mortem analysis – can be applied to come to the root causes of a startup’s failure:

The startup could fail because we run out of cash.

Why can we run out of cash?

Because we do not have enough working capital.

Why could that be the case?

Because our revenue might be lower than expected.

Why would we have that problem? Because our product didn’t attract enough customers.

Why would we not have enough customers?

Because our market research was inadequate.

Why could that have been the case?

Because we rushed the product development phase without validating our assumptions.

Through this process, it becomes clear that the root cause is not merely a lack of cash but a series of strategic missteps, starting with inadequate market research and a rushed development process.

By systematically applying the 5 Whys, startups can uncover a variety of underlying issues such as poor market research, flawed business models, team issues, ineffective marketing strategies, operational inefficiencies or unrealistic unit economics. Without a deep understanding of these potential ‘start-up killers’, founders may develop products that don’t meet customer needs or preferences, leading to poor sales and insufficient revenue.

The same principles can be applied to larger firms embarking on innovative initiatives. By performing pre-mortem analyses and using the 5 Whys, established companies can anticipate potential pitfalls and address them early. This approach ensures that new projects are grounded in solid research, clear business models, and efficient operations, thereby increasing their chances of success.

By conducting a pre-mortem analysis and applying the 5 Whys, startups – but also bigger firms that are initiating a new project – can identify and address these root causes before they escalate into critical issues. This proactive approach allows for the development of robust strategies and contingency plans, thereby reducing the likelihood of failure.

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Why every startup should do a ‘pre-mortem analysis’

Business owners consider turnover as a fundamental metric for the growth of their firm. However, beyond this surface-level figure lies a deeper narrative that distinguishes one company from another.

While two firms within the same industry may show similar turnover figures, the underlying dynamics of their revenue streams can be vastly different. The quality of turnover is an important differentiator between companies that might look similar at first sight.

Shaped by many different factors that go beyond mere numerical elements quality turnover also embodies elements of sustainable growth, customer loyalty, innovation capabilities and strategic decisions of the firm’s leadership. Let us list a number of dimensions that have an influence on the overall revenue quality of a business.

First, the origin of turnover shows crucial insights into a company’s customer acquisition strategies. Turnover derived from extensive marketing campaigns may lead to immediate results but could lack the longevity that is typically the result when you have sales by organic customer referrals. When lots of marketing money is spent to acquire new customers, the customer acquisition cost (CAC) is high. Newly acquired customers will boost turnover in a given year, but the question remains how long those customers will remain a client. In other words, will the marketing dollars lead to a higher turnover in the long run? A lot will depend on the repeat purchases of those new clients which are dependent on the ‘value for money’ that one gets from buying the product or service.

Second, the composition of turnover also reflects the innovation capabilities and product diversification power of a company. Revenue derived from cutting-edge products signals market relevance and adaptability, whereas reliance on outdated offerings can render a company vulnerable to obsolescence. Striking a balance between innovation and legacy products is crucial, ensuring sustained revenue streams. A simple question to answer is what percentage of turnover comes from products that the company did not offer five years ago. A percentage of approximately 20% typically shows a healthy balance where the firm knows how to balance selling older cash cows and new high-potential products.

Next to this, the distribution of turnover across high-margin and low-margin products will affect the profitability of a company. Ideally, the firm is selling only the products with the highest margin. Reality, however, is not so straightforward. Sometimes, a mix between ‘razors’ and ‘blades’ is needed. Some firms have products with a low margin (the ‘razors’) that they need to sell in order to sell complementary products with high margins (the ‘blades’). Think of Pepsico with Sodastream. Selling the Sodastream water maker will be a low-margin sale, but they need to do this to take high margins on the flavors and CO2 cilinders.

Also, the number of products contributing to turnover is a factor to take into account. A high product count may lead to operational complexity, potentially impeding agility, and efficiency. However, a very low product count might create concentration risk, exposing the company to vulnerabilities arising from market disruptions or competitor innovations. Finding the right balance between diversity of products and simplicity in the operations is crucial. The number of products that make up the total turnover is to some extent industry dependent, but it is still a factor to consider. Less products will typically increase the operational efficiency, leading to a better overall margin per product.

Besides, firms should measure which part of turnover comes from ‘easy-to-serve’ and ‘difficult-to-serve’ customers as it determines the scalability of the turnover. If turnover grows with 20 percent, but all growth comes from customers that need a lot of aftersales attention, you can raise the question if this is a positive thing as it will require extra resources such as potentially more FTEs at the customer success team.

Lastly, there is the predictability of turnover to consider. Do we serve clients that will come back next year or are these one-off sales? Ideally, you have a high rate of recurring revenue as the cost to serve those clients is likely to decrease the year after.

A high-quality turnover will be the result of the relationship between many different factors such as strategic choices, innovation efforts, the quality of the firm’s processes, and the efforts to be highly customer focused. As companies strive for sustainable growth, they should not merely have turnover as a KPI but also look at its building blocks that determine the overall quality of a company’s turnover.

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How good is the quality of your firm’s turnover?

Mario Andretti, the legendary Formula 1 racer, once said the words: “If everything seems under control, then you are just not going fast enough.”

This statement has resonated deeply in the business world, where entrepreneurs are often driven by a desire for fast growth and speed. But is this truly the right approach? Is relentlessly pursuing growth without moments of respite really the path to sustainable success?

It is tempting to push the pedal and strive for ever-increasing speeds of growth. Entrepreneurs are often encouraged to believe that if they are not constantly sprinting forward, they are falling behind. Especially today, in a period where technology is putting pressure on business models, the choice is often made to pursue growth and take every opportunity when it is still possible within the current business model.

But let us consider a different perspective: the possibility of controlled growth. Controlled growth does not necessarily mean that there is less ambition or that the entrepreneur is fearing progress. On the contrary, it is about recognising the importance of rhythm and balance in a company’s development. It is about consciously choosing moments to slow down, to consolidate, to strengthen, and to improve.

In a world where speed is celebrated, the idea of controlled growth may seem counterintuitive. But let us examine the benefits of this approach. Firstly, controlled growth provides the opportunity to build structure. When a company is constantly chasing growth, it can easily get entangled in the chaos of rapid change and uncontrolled expansion. By occasionally pausing for breath, companies can take the time to strengthen their organisational structure, streamline processes, and build systems that support long-term growth.

Secondly, controlled growth allows for better risk management. In the race to grow quickly, businesses often overlook potential risks and threats. By opting for a more measured pace of growth, companies have the time to thoroughly assess, anticipate, and prepare for potential challenges that could affect their long-term sustainability.

Additionally, controlled growth allows companies to give their people a chance to catch their breath. Employees are the heart of any business, and it is essential to ensure that they do not burn out from a constant sprint towards growth. By occasionally inserting a period of stability, employees can have the opportunity to recharge, get to know their new role and, ultimately make them more productive and motivated.

Furthermore, controlled growth provides the opportunity to build the company’s culture. A strong and healthy corporate culture is invaluable and can make the difference between long-term success and failure. By taking the time to invest in the company’s culture, leaders can create an environment where employees are happier, innovation is encouraged, and the company’s mission is carried out like it should be.

It is important to note that controlled growth does not mean a company limits itself to a state of stagnation. On the contrary, it is about finding a balance between periods of growth and periods of consolidation, allowing the company to evolve in a way that is sustainable in the long term.

In a world dominated by the cult of speed and growth, the idea of controlled growth may seem like a radical departure from the status quo. However, for many firms, it can be a wise and even necessary approach to building healthy, resilient companies that are ready for the challenges of the future.

Indeed, the concept of controlled growth should be embraced as a strategic move for businesses aiming for longevity. It invites leaders to be mindful of their company’s pace, ensuring they do not lose sight of their core values and purpose amidst the race for growth. In the end, the journey to success is not just about the speed, but about the direction, the resilience, and the ability to adapt and maintain balance in an ever-changing business landscape.

So, let us reconsider Mario Andretti’s statement. Perhaps, we should consider it only in the Formula 1 context and not make it a mantra for business growth. The key to success is not just to go as fast as possible, but to know when to accelerate and when to decelerate. Perhaps the right speed of growth is not always the fastest, but the one that best aligns with the company’s rhythm and long-term vision. And perhaps, just perhaps, that is the speed that will ultimately lead to the finish line of long-term success. Entrepreneurship is typically a marathon, not a sprint.

Read more:
Why businesses should go for controlled growth

Do you know what your business pays in sales and marketing costs to attract one additional customer? Do you know the average profit your business realises from a future customer relationship? Gaining insight into your Customer Acquisition Cost (CAC) and Lifetime Value (LTV) is crucial.

The long-term success of your business depends, at least to some extent, on how the cost of attracting a customer compares to the lifetime value of that customer. Let’s provide an example. You have a company that sells bicycles. To calculate your customer acquisition costs, you need to add up all your marketing and sales expenses incurred in a certain period. Let’s say, for instance, one month. These costs include all offline and online marketing expenditures, as well as that portion of your marketing and sales staff salaries dedicated to trying to sell bicycles to new customers. If the total monthly costs amount to £20,000, you need to divide this amount by the number of customers acquired in that month to determine your CAC. Let’s assume you were able to sell a bike to 50 new customers. Therefore, your customer acquisition cost becomes £400.

Alright – but then what? Why is this number a crucial KPI for so many business owners? Because it becomes interesting when you compare this number with the typical Lifetime Value (LTV) of a customer. The LTV indicates the total long-term profit you make from a customer. In our example, it’s the sum of the company’s profit from selling bikes, bike-related gear, and bike maintenance to this customer, provided that the customer returns to you for these additional purchases and services. You immediately sense that – to have a long-term healthy business – the LTV must be higher than the CAC. And ideally, much higher.

The CAC only takes into account sales and marketing costs and no other expenses. David Skok, an American serial entrepreneur, argues that a company should aim to make the LTV at least three times larger than the CAC.

Does it sound complicated to calculate these metrics? Probably. But some initial simple calculations on the back of an envelope can already give you an idea of how the CAC compares to the LTV in your business. Even if the numbers aren’t 100% accurate, understanding these concepts will help you think more about the importance of long-term customer relationships and efficient spending on sales and marketing.

It is important to revisit these metrics regularly, as they can change over time. A successful marketing campaign might lower your CAC, or an increase in repeat customers might raise your LTV. By keeping a close eye on these figures, you can make more informed decisions about your business strategy.

In addition to monitoring these metrics, it’s also crucial to understand the factors influencing them. For instance, external market conditions, changes in customer behaviour, or changes in your product or service offerings can all significantly impact your CAC and LTV. Regularly conducting market research and customer feedback surveys can provide valuable insights to help manage these factors.

Moreover, always remember that while striving for a higher LTV and lower CAC is generally beneficial, it is equally important to ensure the quality of your customer relationships. High customer satisfaction and loyalty often translate into higher LTV, as satisfied customers are more likely to make repeat purchases and recommend your business to others, thereby potentially lowering your CAC.

Lastly, the CAC and LTV metrics are not static. They should be continuously optimised as part of your business’s growth strategy. This optimisation could involve refining your marketing strategies, improving your product or service quality, enhancing customer service, or any other initiatives that increase customer value and decrease acquisition cost.

Remember, understanding and managing your CAC and LTV is not just about crunching numbers. It is about strategically shaping your business decisions and practices to foster sustainable growth and profitability.

Read more:
Why CAC and LTV are ‘must know’ concepts for every entrepreneur

Most entrepreneurs are not good at seeking customer feedback. Particularly during the early stages of their startups or when business leaders launch a new product or service, they are often so focused on developing this product or service that they overlook the importance of customer interaction.

While developing a product or service that stands out is undeniably essential, it is much more important to start with effectively communicating with customers to know their needs.

‘TTTC’: this is a magic acronym that every business leader should remember. It stands quite simply for ‘Talk To The Customer’. If you wonder what the root cause of a problem is, if you wonder if the solution fits the needs of customers, if you wonder if your product is still delivering sufficient value to customers after several years, …  TTTC will always come to the rescue.

Unfortunately, many entrepreneurs and business leaders lack the skills to have meaningful conversations with their customers. They might excel in innovation, creativity, or technical skills, but when it comes to customer engagement, they often fall short. This gap in communication skills can lead to a disconnect between the product they develop and the actual needs and wants of their customers. Without an understanding of customers’ needs, entrepreneurs may end up building products or services that do not resonate with their target market or they might continue too long with delivering an outdated product or service. This will most likely lead to wasted resources and – in the end – lower the chances of success.

Engaging with customers effectively can yield valuable insights into their preferences, needs, and expectations, which can inform product development and increase the chances of business success. Customers are a gold mine of information. They can provide real-time feedback, suggestions for improvement, and even brand advocacy if they are satisfied with the product or service. Hence, communication with customers should never be an afterthought but rather an integral part of the business strategy.

This leaves us with one important question. How? How do you talk to the customer in an effective way? To start, the entrepreneur should first consult the first-line employees – those who are in direct contact with clients on a day-to-day basis – as they can give valuable information about what is going on in terms of customer feedback. With these insights, the entrepreneur can then identify which customer segments are the most crucial for him or her to start engaging with.

The biggest mistake that occurs when a business leader talks to customers is asking them the wrong questions. Many people tend to ask leading questions. These are questions that direct people to the desired answers. A classic example is: “Would you be interested in buying our brand-new innovative product?”. Chances are high that the vast majority of respondents will have answered positively as they are pushed towards a ‘yes’, giving the entrepreneur a false feeling of positivism about the product. The solution lies in asking so-called ‘Socratic’ questions. These types of questions involve a form of dialogue where the entrepreneurs will ask probing questions to stimulate critical thinking, uncover underlying assumptions, and encourage deeper understanding. In this way, the customer will give objective data and insights without introducing any bias.

When done correctly, entrepreneurs should even be able to get great and unbiased insights from talking to family and friends. This is what Rob Fitzpatrick described in his book ‘The Mom Test’. If you ask problem-focused questions that avoid bias, and listen effectively to the customer, you can even interview your mother, father, spouse, or best friend and still get reliable answers.

However, ‘talking to the customer’ is not a one-off thing. It should be a mindset where regular check-ins, surveys, and semi-structured interviews are done to get a large amount of customer feedback. Entrepreneurs should strive to create open channels of communication where customers feel heard and valued. Then, a two-way street is created. On the one hand, customers will feel heard and are likely to value the company more. A form of customer intimacy is created. The company, on the other hand, will use the information to create an even better experience for their customers by removing the elements that they do not appreciate about products and services and by trying to improve the reasons why customers value the company’s offering.

If every entrepreneur or business leader regularly talks to customers in the right way, they can use customer feedback to track the overall performance of the company. Because at the end of the day, happy clients are likely to lead to more turnover and profit.

Read more:
How entrepreneurs can improve customer communication