How to avoid failed startups.

As you read this post, a good hundred startups will be born. Half of them will be dead within 5 years. If it’s backed by venture capital, the number is closer to 75%, according to recent research.  Most of the founders of these startups will tell you that they ran out of money, but, as I wrote previously in my Inc magazine column, in my experience there’s a very different reason behind these failed startups.

Failed Startups – The Why

Entrepreneurs – especially new ones – overwhelmingly point to the same reason for their failed startups. They generate capital to get their business off the ground, but then run out before things get going. I’m not so sure about that.

“People who fail on their first venture always say they were under capitalized, and I suppose they’re right in the sense that their capital ran out. But it’s not because they didn’t have enough capital to start out with. It’s because they didn’t use their capital wisely.”

I can always tell when a new business is headed for trouble when I see the founders – flush with investment capital – spending money on non-necessities, making poor decisions for growth, and attempting to move forward without a good business plan in place.

“What they didn’t do was figure out how to generate enough cash flow internally to keep going when the outside capital was gone. The money made them feel invincible. They let a million unimportant things distract them. And then they went out of business.”

There’s a lot to be learned from entrepreneurs who have limited investment capital or are bootstrapping their business.

“In fact, too little money can sometimes be a blessing. When you can’t solve problems or overcome obstacles by spending, you’re forced to use your brain to find a solution. You innovate.”

Skip The Flash – Focus on Growth

In my column I tell the story of how I had to think outside the box to buy out the investors of my first company, Perfect Courier. I was in danger of being bought out by them, and didn’t the capital on hand to act first. To keep from losing my business, I had to get creative. I approached my biggest customer, and worked out a deal that allowed me to buy out my investors.

“Many successful entrepreneurs I know have similar stories to tell. They’re successful because they’re creative.”

And that’s really the secret to keep your company out of the failed startups sinkhole. Stay focused. Get creative. Take risks, sure, but smart risks.

“Of course, if you happen to be one of those first-time entrepreneurs, I can only say this: Forget about image. Forget about making a splash. Forget about everything except getting your capital to last until you don’t need it anymore. You don’t have to give up your dreams. Dreams are important. Just wait until you can afford them.”

You can read my post in its original form at Inc magazine’s website.