A phenomenological exploration of technology start-up failure in Sri Lanka.

• Author: Wimal, Kesara

INTRODUCTION

As a main critical driver of social and economic growth, entrepreneurship can be identified. As a result, policymakers are paying attention to entrepreneurs and new ventures. Entrepreneurs are key drivers of any kind of economy, not only because they are generating jobs but also because they create innovations (Acs, Audretsch, & Lehmann, 2013). Start-ups are coming out as the main outcome of entrepreneurship activities. Basically, a start-up is a young company set up to develop a new product or service and bring one or more entrepreneurs to the market. The traditional start-up tends to be a shoestring activity because of its essence, most entrepreneurs raise their initial capital from themselves or their friends and families (Roberts, 1990). Start-ups face high volatility and high rates of failure, but a minority of them remains effective and impactful. By providing an effective and efficient solution, most start-up founders aim to address a big pain of the current society, and most recent start-ups combine technology into their solutions (Kohler, 2016). The initial start-up phase is somewhat traditional, and they begin to develop a minimum viable product (MVP) after performing interviews and validating market requirements. The life cycle of a typical start-up is expected to be three years or a bit longer, so a sustained effort is needed while minimizing uncertainty (Birley, 1996).

There is another key term that is always coupled with the term "start-up" which is "start-up failure". The term is clearly pessimistic but it's important to explore why start-ups are failing because only a few scientific studies attempt to address the characteristics of failure, particularly in the early stage (Giardino, Wang, & Abrahamsson, 2014). Some eight out of ten new companies have struggled in their first three years. Nine out of ten start-ups that are venture-backed fail to yield positive returns. 99% of the pitches they see are turned down by venture capitalists (Feinleib, 2011). Most of the time start-up founders are following the glory instead of the market, which is why they are blind to understanding the hidden obstacles. Most software product businesses fail to make a worthwhile return on their financers, founders, and employees' investments. Failures in distribution, marketing, and delivery implementation are widely known, but failures in product creation are less evident, while in some cases, it can be the main reason (Crowne, 2002).

Tech start-ups leverage innovation and entrepreneurial creativity to bring new ideas to market. They are typically founded by individuals with innovative ideas, seeking to establish new businesses (Kalyanasundaram, Ramachandrula, & Mungila Hillemane, 2021). Sri Lanka's ICT/BPM industry led the country's service exports in 2019, with tech start-ups playing a significant role in contributing to the national economy and societal well-being. Given their crucial impact on the economy, academics and policymakers should focus on improving the conditions for tech start-ups in Sri Lanka (Samarasinghe, Sandanayake, & Samarasinghe, 2021).

The primary objective of this research is to identify, understand, and analyze the critical factors that are impacting the failures of tech start-ups in the Sri Lankan context, as well as to give a brief understanding of how to avoid such factors for future start-ups: 1) Identify the critical factors for the failures of tech start-ups in Sri Lanka. 2) Understand the lived experiences of technology start-up leaders with the causes of technology start-up failure in Sri Lanka. 3) Present the study findings to support entrepreneurs to build tech companies by focusing on success and diminishing failures.

Understanding the essence of small business failure has been an ongoing activity of researchers. The study shows that the causes of failure have changed over time (Simmons, 2007). Previous literature suggested the presence of correlations in factors affecting small business success or failure, irrespective of the time that the small business operated. Kline and Perry noticed that management abilities led to the success of small companies (as cited in Simmons, 2007).

Stinchcombe (1965) claimed that small ventures have fewer resources than more mature companies and less leadership experience managing the firm. Between 1991 and 2000, an empirical study of 11,259 technology startups found that 36% of technology start-ups survived the last four years, but only 21.9% survived the last five years (Song et al., 2008), resulting in severe losses to stakeholders. According to the U.S. Small Business Administration (2006), around 550,000 small businesses close annually in the United States. Collins (2005) noted that there was a correlation between sound leadership characteristics and the performance of the organization. Small business leaders face leadership challenges while launching a new business first and then expanding it (Mellahi & Wilkinson, 2004). Small business failure analysis has traditionally concentrated on external and internal causes (Rasheed, 2005). Government controls, labor competition, and the decrease in demand were external factors, while financial capital and leadership were internal factors (Mellahi & Wilkinson, 2004). The company life cycle often affects variables that could affect the understanding of leaders during the various stages of the growth of an organization (Wheatley, 2006).

Prior research on the underlying factors contributing to the failure of small businesses has yielded inconclusive and context-dependent results, as indicated by extant literature. The examination of small business failures in Uganda (Tushabomwe-Kazooba, 2006) reveals that politics and taxes are prominent causal factors, whereas two separate studies on Indian (Goswami, Murti, & Dwivedi, 2023) and South African (Fatoki, 2014) start-ups fail to mention these aspects. The objective of the current study was to explore the variables affecting the failure of technology start-ups. The findings of the current study might add to previous research by enhancing the knowledge of the causes of technology start-up failure in Sri Lanka.

This study aims to critically analyze the factors contributing to technology start-up failures in Sri Lanka through an examination of the lived experiences and perspectives of technology start-up leaders, with a goal of supporting entrepreneurs in building successful tech companies by emphasizing crucial factors. The following research questions (RQ) are:

RQ1) What are the critical factors for the failures of tech start-ups in Sri Lanka?

RQ2) What are the lived experiences of technology start-up leaders with the causes of technology start-up failure in Sri Lanka?

RQ3) How this study can support entrepreneurs to build tech companies by focusing on the critical factors and diminishing failures?

LITERATURE REVIEW

The word entrepreneur is derived from the term "entreprendre" in French, meaning "to undertake." The basic definition of entrepreneurship doesn't align with current entrepreneurs' mindset, and the modern concept also focuses on solving significant problems to enhance the world. Like creating social change or creating an innovative product that challenges the status quo on how we live our lives every day (Frese & Gielnik, 2014). The characteristic of an entrepreneur and a start-up founder is not always similar. For an entrepreneur, it is important to get paid for the effort or money he has invested. But startup founders often do not think at first about the process of sale because they want to produce greater income in the future (Sethi, 2014).

Start-up founders are often called visionaries because of their greater vision to be successful while building something impactful to humanity. Working on technology for a start-up, or taking venture capital, or getting some sort of "exit" is also not relevant. The only important thing is progress (Graham, 2012). A start-up is "a human institution designed to deliver a new product or service under conditions of extreme uncertainty" as Eric Ries said in The Lean Startup (2011).

Start-up tech companies face a very competitive market. They must offer highly creative products in the shortest time possible. Resources are limited and the time to enter the market is short, so having the right specifications is extremely essential. Nonetheless, software specifications are generally not transparent and start-ups are struggling to understand what they should build (Melegati & Goldman, 2016). Tech start-ups, operating under limited funding and facing high uncertainty, often face immense pressure. Consequently, they tend to prioritize speed to market over long-term codebase health, leading to the accumulation of technical debt (Besker et al., 2018).

Definition of start-up failure

"It's fine to celebrate success, but it is more important to heed the lessons of failure." (Bill Gates, n.d.) Although 50 million new ventures are launched worldwide every year, according to the European Association of Business Angels, 90% of them fail (Bednar & Tariskova, 2017). The process may have already been undertaken by many of those with the greatest entrepreneurial skills, leaving a disproportionate number of lower potential entrepreneurs next in line (Kuntze & Matulich, 2016). Some studies introduce starting a start-up as a game because of the uncertainty and required continuous effort and also most of the scholars are saying failures are the pathway to success. As startup failure has been seen both positively (e.g., McGrath, 1999) and negatively (e.g., Dickinson, 1981). Although monetary and emotional costs express the negative effects of failure, their positive effects are less noticeable, being related to learning, experience, and other cognitive constructs (Mitchell, Mitchell, & Smith, 2004). For at least two decades, start-up failure has been a subject of research. It has been examined at many stages of...