Starting a tech company can be a very lucrative endeavor. After all, technology is scalable, which means that you can serve 1 million customers with the same team that used to serve 10,000.
Technology is also an excellent setting for establishing monopolies, be it through network effects or the protection offered by patents.
In fact, even though there are more than 140 billionaires in the world, almost half of them reside in Silicon Valley. This fact alone is a true testament to the power of technology.
Nevertheless, starting a tech company is also rife with risks and challenges.
To get a sense of how easy it is to steer your ship into rocky waters and fail to make it to the other side, let’s take a look at a few statistics. Nine out of every ten startups fail, and the biggest reason for this is failing to read market demand. Additionally, the tech startup scene sees the highest failure rate out of all other startups.
So, why is technology such a minefield for startups?
The Challenges of Running a Tech Company
Running a tech startup is no mean feat, there are several challenges involved. Most of them will fall into one of the following categories:
- Marketing challenges
- Financial challenges
- Strategic challenges
- Personnel challenges
- Operational challenges
Let’s look at them in more detail.
1. Marketing Challenges
Marketing entails two key aspects. There’s studying the market and figuring out whether you can cut a niche for yourself, and there’s getting the word out about your company after it has launched. Both these things can be challenging for a tech startup, but for different reasons.
a. Difficulties Finding the Right Target Market
When starting out, tech companies sometimes find it nearly impossible to bring in their first customer.
These fledgling startups still haven’t earned the trust of the market, and in many cases, the solution they provide is so advanced that the users have a hard time wrapping their heads around it.
What is more, potential clients, whether they come in the form of individuals or large corporations, often prefer to do business with the incumbent companies they are already familiar with, which can represent stifling competition.
This is why plenty of startup gurus keep talking about the importance of testing hypotheses, building an MVP, and using actionable metrics.
Even when you manage to find your first few clients, the battle is far from over.
In his book “Crossing the Chasm,” Geoffrey Moore discusses the difficulties most tech startups face in scaling and growing. Their first clients are usually early adopters, tech geeks who like to get their hands on new technology even if it is a bit buggy. However, to grow, tech companies need to transition from selling to said tech geeks to selling to a more mainstream audience.
This transition can be a difficult one, a chasm that devours more companies than it lets pass.
As a matter of fact, the number one reason startups fail is their inability to find the right target market. A lot of tech startups put the horse before the cart: instead of identifying a specific target market with a certain problem and trying to solve the problem with technology, they develop the technology first, then look for problems that can be solved with it.
b. Difficulties Building a Brand
One of the toughest questions startups have to answer is, how do they define themselves? In other words, what differentiates them? Why should customers flock to them instead of the competition?
Even if you have identified the perfect target market, it doesn’t mean much if you fail to communicate your value to customers.
You have to let your customers know what makes you special, and this requires having a unique identity.
For instance, think of Apple, a company that has managed to carve a unique identity for itself in the market.
Now, it is worth noting that building a brand involves more than offering a kick-ass product: You have to build a narrative around your company. Answer questions like: how did your company start? What are your vision and mission statements?
c. Difficulties Keeping up With Technology
One of the biggest problems with the technology sector is its relative instability.
New technology appears on the scene every day, almost exponentially. This means that roughly 90 percent of the technology we will have 50 years from now will have been developed during those 50 years. It also means that what was relevant a decade ago has become obsolete today.
Therefore, it comes as no surprise when you hear that large tech companies shut their doors, unable to keep up with the ever-changing technology landscape.
2. Financial Challenges
Whether we like it or not, money makes the world go round. And, for many tech companies, finances can be a great hurdle.
a. Difficulties Shouldering the Initial Cost
Any startup requires an initial investment, something to get the ball rolling.
For some startups, that can entail nothing more than the founder of the company spending some time on their laptop coding.
For others, the required initial cash outlay can be quite exorbitant. Starting an electric vehicle company like Tesla, for instance, required a hefty initial investment, one that would be out of reach for most beginning entrepreneurs.
b. Difficulties Obtaining Funding
Obviously, tech companies can try finding additional sources of funding, either through a loan or with the help of an investor.
Nevertheless, obtaining funding is a challenging proposition in its own right, one that has tripped up countless entrepreneurs. There are different types of investors, and entrepreneurs need to determine which type would be the best fit for their company, in light of its culture and overall vision.
Moreover, even if your company’s initial investment is low, you will probably need funding at some point down the line.
You might need funding when you start to scale, or you might decide to take in on to stay afloat if the economy goes through a rough patch, sort of like what happened when the coronavirus pandemic hit in early 2020.
While it is important to figure out how to acquire the resources necessary for the success of your business, you also need to be cognizant of the cost inherent to different types of funding. On the one hand, a loan might set you back, eating at your annual revenues. On the other, by selling equity, you might lose control of your company.
So, be sure to weigh your options carefully.
3. Strategic Challenges
Any business, regardless of size, is faced with countless strategic decisions every day. Decision-makers have to figure out how to best navigate the challenges of the market, knowing full well that one bad decision could spell failure.
a. Difficulties With Choosing a Partner
One way tech startups can ensure growth is by partnering up with other companies in related fields. Not only does this bring in more business, but it also offers customers a more holistic solution, making the joint venture more attractive to deal with than each company separately.
So, why don’t all tech startups just go into partnerships with other companies?
For one thing, there’s always the risk of partnering up with an unsuccessful company or one working in an obsolete field.
After all, since technology is an ever-changing terrain that requires businesses to remain flexible, partnering up can create an unwanted rigidity of sorts. What happens if the products offered by your partner become obsolete a few years from now? Do you still stand by them, or do you cut your losses?
To make matters worse, it’s not always clear which technologies are just passing fads and which are there to stay. So, choosing a partner can be tricky and will always contain a probabilistic element.
b. Difficulties With Scaling
Many companies are so eager to start doing business that they fail to plan for the long term. They sell a few products and think they have made it. However, this is very myopic.
Tech companies should come out the gate with a plan to scale. This means planning and designing their products with the future in mind.
How does being forward-thinking change things?
First, there is the issue of maintaining service. When a business serves a handful of customers, it is relatively easy to keep things going seamlessly. But, as the number of clients increases, this may overload the company’s capabilities.
However, some other, more practical issues that may arise:
- Will the servers be able to handle this increase?
- Are there enough customer service agents to help clients with their problems?
- Does the company have enough employees to handle this increase in the first place?
- In case of a rise in the employees, will there be enough available office space for them?
Other factors that might be affected by a company’s attempts to scale include security, integrations, and technology migrations.
Decision makers have to consider all of these eventualities as their business develops.
4. Personnel Challenges
Companies are only as strong as the people working in them. So, you want to hire the right people, but you also want to make sure that your employees work together well.
a. Difficulties Hiring the Right Talent
One of the biggest challenges facing any tech enterprise is finding good employees who are both competent enough to have the prerequisite technical expertise, and passionate enough to get the job done right. Simply put, you need experts on your team.
Over and above, the fact that technology evolves quickly means that your employees must be self-learning and able to stay up to date with the latest developments.
For example, if your company is developing an app or a piece of software, you want qualified employees who are both experts in current coding languages and capable of learning new ones on the fly.
You want your team to take ownership of their work and be self-driven enough that you don’t have to keep looking over their shoulders.
To make things even more difficult, the individuals who do have all the desired qualities tend to be pursued by countless companies, each offering ridiculous salaries and extravagant perks, which startups probably can’t afford.
At the other end of the spectrum, there are some tech companies that overcorrect, hiring too many employees before the need for them arises. As a result, not only are most of these additional employees unvetted, but the company’s resources get stretched too thin from paying one too many salaries.
In fact, hiring employees before they are needed, a practice known as overscaling, is responsible for the failure of 74 percent of high growth internet startups.
b. Difficulties Establishing the Right Culture
It’s not enough to find the right employees; you want to make sure that they work together well as a team. Put differently, you want the talents of each employee to complement those of their teammates.
Therefore, you want to start by figuring which crucial positions in your company you want to fill. Some essential roles that will probably be present in any tech company are CEO, head of marketing, and head of engineering. Your company will probably also need a CFO.
Depending on what your company does and what stage it is in, i.e. development, startup, growth, or expansion, you will need different roles.
For example, companies in the growth phase might need someone to work in PR and someone else to work in design, whereas those in the expansion phase will be in the position to consider hiring regional managers.
Now, aside from finding the right people to fill the required roles, you also need to establish your company’s culture. To build and manage a successful business, you want the culture to be one of:
- Commitment to the work
- Willingness to innovate
Obviously, there are several other aspects you want in your organizational culture, but what matters in the end is that it brings the best out of your employees and inspires them to work together as a unit.
5. Operational Challenges
A company’s operations can be a source of strength or weakness; efficient operations translate to better products, happier customers, and higher net profits.
a. Difficulties Managing Projects and Time
For any given project, there are three critical variables: cost, quality, and time. Usually, focusing on two factors means that the third one gets tossed by the wayside.
With that said, the one factor that many tech enterprises fail to manage successfully is time.
The reason here is that some tech companies obsess over perfection to such a degree that their blind pursuit of quality causes them to waste valuable time.
Alternatively, others fail because they are abysmal when it comes to estimating how long a given task will take, being either overly optimistic or having no reference frame to use in the first place.
b. Difficulties With Managing Security
Almost all tech companies have to deal with cyber risks. This should come as no surprise, as tech companies rely on the internet in one way or another, which leaves them open to attacks from malicious individuals.
To make matters even more dire, plenty of such enterprises operate in the B2B space, which means that the costs of a successful attack can be exorbitant.
To begin with, tech companies deal with their clients’ sensitive information, which is in danger of being exposed. Secondly, if a company’s operations are halted or derailed, this could have a cascading effect on the businesses it serves.
As daunting as these challenges may seem, the reward for taking them on can be lucrative. After all, tech companies are always a high-risk, high-reward proposition.
One way you can mitigate the effects of these challenges is by simply asking for help.
Other people have succeeded in building and running a tech company, and they have had to face the aforementioned challenges before. They can be an excellent resource for you to lean on, guiding you and imparting upon you their hard-earned wisdom.
The tips above will give you an idea of what to expect, so you’re more prepared when you start your own venture.
Guest Submission by Lisa B Michaels. Opinions expressed in the article are of the author.