[ecpottinger]

My dad had great ideas for businesses. Yet each one he started failed for him. Why, because he has such unrealistic view on how long the payback period will be. He even founded with a partner what is now a national company, but at the time it did not make a big profit in the first year, so he sold his share of the business. He had "Get rich Quick" fever, and never saw that bussiness rarely become an overnight success.

[rrrrrrrrrrrryan]

One of my finance professors mentioned that ~70% of business fail in their first two years, and ~90% of those failures are purely due to a lack of working capital, not due to any fundamental flaw in the business plan. If they kept doing the same thing and just had more money and time, things would have eventually worked out.

People start businesses for emotional reasons, not logical ones, and vastly, vastly underestimate the amount of money they'll need to get the thing off the ground. Entrepreneurial people are inherently optimistic, (and they have to be), but he said their estimates were typically off by ~5x. If you think you need a million dollars of runway, you probably need 5 million. If you think it'll take a year to achieve profitability, it'll probably take 5 years.

[yunohn]

> due to a lack of working capital, not due to any fundamental flaw in the business plan. If they kept doing the same thing and just had more money and time, things would have eventually worked out.

Ironically, that’s what VC funding aims to provide - capital to extend runway and improve scale quickly.

Whereas the reality is VCs support negative unit economics and absurd customer acquisition costs.

[moonchrome]

> One of my finance professors mentioned that ~70% of business fail in their first two years, and ~90% of those failures are purely due to a lack of working capital, not due to any fundamental flaw in the business plan.

Having seen my share of failed businesses - I'm very skeptical of these numbers.

[mindwok]

Also skeptical. How would you determine if a business would have succeeded if it had working capital to continue?

[rrrrrrrrrrrryan]

Imagine you're starting a restaurant.

When you start a business, your costs basically fall into 3 categories: initial costs (like furniture and stove-tops), fixed costs (like rent and bare-minimum employee wages), and variable costs (like raw input ingredients and additional labor to handle additional business).

As long as your revenue is growing each month, and you're making money on each individual sale (as determined by your variable costs), you'll eventually achieve profitability.

When I say most new businesses have no fundamental flaw in their business plan, I mean that most businesses make money on each sale (e.g. they're not selling burgers for less than the cost of ingredients and the labor to prepare it), which is not that surprising. What is perhaps surprising is that the business is also usually growing each month and they're on a path to eventual profitability, yet they run out of money and fail anyway. When starting a business, you're not convincing investors and debtors that your business model is sound (most are), but rather, that your business model is more sound than most other businesses that they can invest in.

[friendzis]

This assumes that working capital management is magic and is not part of making business. If it was not the case, cloud hosting like AWS would have failed before even starting. And yet here we are, spending more per unit to free working capital.

[chii]

If the theoretical unit economics works out, _and_ that the market size allowed for the scale that those unit economics required?

[dtgriscom]

... skeptical in which direction?

[bitcoinmoney]

Seems like same numbers from e-myth book. The reasons though are entirely different. Businesses fail because owners don’t get out of technician mode.

[OJFord]

unicorn-hopeful startup buseinesses might fail for that reason; millions of businesses thrive with technician'/whatever relevant to the business owners.

'Bootstrapped' as we now say, 'mom and pop' as many here might say, or just 'small to medium businesses' as we used to say.

[toss1]

Yup, just about every time I've read of an 'overnight success', it was indeed an a very rapid path to success . . . after a decade or two of slogging it out in the trenches of obscurity.

There are a lot of moving parts, a lot to learn, and timing/luck are also factors. Until they all hit at the same time, it looks like a flop. It takes time to find, learn, or assemble all the key bits.

Sorry your dad's impatience was so persistent. Sense of urgency is important, but impatience is deadly. Thanks for sharing such a clear example.

[hgomersall]

So far, my experience has been that business as a start-up is basically about surviving long enough to make a profit. Of course, some ideas are just bad, but I'm convinced loads of start-ups that failed could have been made to work given sufficient time. This doesn't work so well if you take a pile of capital, but if you go for organic growth it is more plausible to survive hand to mouth for a while.

[bruce511]

>> Of course, some ideas are just bad, but I'm convinced loads of start-ups that failed could have been made to work given sufficient time.

Are some businesses under capitalised? Sure. Could "loads" be saved with more capital? Well yes, for some definition of "loads".

But annedotally I'd suggest that "most" are just bad ideas. Or perhaps more accurately "incomplete ideas".

To be a success business you need; A) a product B) a market for the product (ie people who would actually dip in their pockets) C) that you can reach via marketing D) that can afford the product.

The vast majority of business ideas have A, a few do B but its very rare that they consider C or D.

As techies we're all about A - build it and they will come. But a successful business needs all 4 - miss one out and you fail.

[hgomersall]

Incomplete is probably a better assessment. Survival until they make it is probably really about survival until they learn everything they need to know and develop the sales channels etc to be able to make it.

[birdyrooster]

Interesting to think that the company which he divested from may have made it because of his exit.

[petemc_]

Unless you have some information you're not sharing, this is a pretty horrible thing to say.

[tnel77]

I don’t feel like it’s horrible. If one of your founding members is focused on getting rich quick while the rest are trying to invest in the company long-term, then his departure very well could have helped the company ultimately succeed.

[anonymous_sorry]

Is it horrible to suppose that someone might not be well-suited to the task of driving a business from nothing to a national concern? Because I personally suspect that of most people, including myself, and don't think of myself as particularly mean-spirited.

Also, the offspring of the man in question identifies an aspect of his temperament that led to things turning out the way they did.