What Is Causing Startups to Go Bankrupt?


Many startups have a great product that’s viable, marketable, and ripe with potential. But if that was the only indicator of success, then nine out of 10 startups wouldn’t fail. The annals of startup history wouldn’t be littered with instances of companies like Friendster or Color that had fantastic products, but eventually sank.

The truth is that startups often go bankrupt for reasons that extend beyond the viability of their products. Many of them fall prey to missteps that ultimately dry up their cash flow, and cause the company to fold. So what are some of these pitfalls to avoid?

Failures in Compliance

Theranos, one of the most promising Silicon Valley startups, is now struggling to stay afloat after regulators revoked its license to operate a lab in California because of unsafe practices. Meanwhile, Zenefits, once valued at a staggering $4.5 billion, was recently embroiled in a highly public scandal for skirting state insurance training, licensing, and certification requirements. Both companies with tremendous potential – both brought down by their neglect of compliance, among other things.

For years, startups have been so focused on hyper-growth, rapid scalability, innovation, and revenue, that many of them have overlooked compliance. But with regulators increasing their scrutiny, the message is loud and clear – management teams and boards need to ensure that compliance is as integral to the startup’s vision and culture as anything else. Employees need to be aware that preventing compliance violations is just as important as hitting growth or sales targets.

The key is to embed compliance into the organizational culture right from the start. Implement processes and tools to keep track of changing laws and regulations. Institute a chief compliance officer or a compliance champion who understands the impact of regulations that govern your business and industry, and ensure that appropriate controls are implemented. As a startup, you have the unique advantage of being nimble and agile in order to respond to fast changing regulations. By factoring compliance into your product designs and business model, you will not only attract more investors, but also stand out from the crowd long-term.

Inability to Attract and Retain Good Talent

Your business is only as good as its people. Many startups fail because they aren’t able to attract, recruit, and retain the best talent. Others lose quality employees to bigger, more established businesses who can afford to pay better salaries and benefits. So how do you strike a balance, and hire great talent without breaking the bank?

A competitive pay package is important, but when you’re a bootstrapped startup, resources can be limited. The good news is … Next Page »

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Shellye Archambeau is CEO of MetricStream, a Palo Alto, CA-based company offering governance, risk, compliance, and quality management solutions to enterprises in the pharmaceutical, medical device, high tech manufacturing, energy, financial services, healthcare, manufacturing, food and beverage, and automotive industries. Follow @metricstream

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