Why do startups fail?
Likely few things in life can match the exhilaration of getting funded for an idea that you helped conceptualize and for which you are building a product or service. It is one of the most realistic ways to live the dream for most of us, as all absorbing and sacrificial as it is.
But we all know the odds of failure are dauntingly high in entrepreneurship, and VC-funded tech start-ups are no different. I’ve been a part of or advised my fair share of start-ups that never found firm footing in the market, never achieved the requisite scale and eventually died either a violent or slow death.
When I read the commonly touted reasons about why start-ups fail, things like most ‘run out of money’ or ‘miss funding milestones’ it’s a bit of an unsatisfactory answer for me. My experience tells me that’s a 100K foot answer, that often seem to have important overlaps, and that the root causes are more interesting to sort out.
So, with that in mind, I’ve reflected on what I’ve seen in my career as repeating cycles in just about all the 6+ non-Unicorn startups I’ve been a part of, and some that are just plain unique. I’ll caveat this by saying my experience is heavily influenced by traditional B2B enterprise software start-ups, versus a fast time-to-value, high sales velocity SaaS start-up, but I’m sure some of the themes run common.
Top Reasons Why Start-Ups Fail
Here is my take on a lower level view of this question. Tried to put this in order of importance but it’s just too hard:
- Too much rose-colored glasses, not enough objectivity – I recognize that founders and entrepreneurs by nature should be optimists. If they weren’t probably nobody would start a tech venture to take on giants or the status quo. That said, one thing I’ve seen numerous times is a systematic interpretation of events that is overly positive relative to the data or reality. A lot of this divergence I’ve witnessed founders and early head of sales (typically the wrong ones). I’ve walked out of early sales calls hearing things that indicate a pause on the part of the customer, or a concerning objection or requirement, only to have colleagues summarize the meeting as completely positive. I literally have to ask myself, “were we in the same meeting?” The rose-colored view is the report the non-present CEO and board get by the way (consistently until a shock surprise happens). This can be especially true in non-SaaS plays where data is not readily available for proof.
I’ve confirmed this with other colleagues that have seen this play out. It’s not about being a nay sayer, but being realistic and having a good blend of objectivity is important early on. I would say the more EQ you can have in the room in those early meetings the better. It’s important because time and focus is the most precious commodity and if you’re chasing the wrong deals early on, it can be disastrous.
- Too much one way talking / inside out innovation – Closely related to the conformational bias of rose-colored glasses, is talking way too much during an initial sales call. You know this has happened when you walk out of the first or second meeting and have no idea why the customer cares about something (in addition to the what) and what is driving them. Too often than not, particularly in the founder selling phase, the meeting is all about the great thing we’ve built (in excruciating, unnecessary detail) and who we are as a team or who has funded us. The whole point is to validate and drive the problem pain point, and let the customer do the talking as much as possible. Even if your messaging about the problem you solve is in your pitch to a customer, it’s usually an initial hypothesis and needs to be refined continually to a target segment. This is inside out innovation that never flips to outside in enlightenment.
Eliciting feedback and listening with a purpose in early sales calls so important. The purpose shouldn’t be just acknowledging an initial response from a customer, but really digging, and I’ve found that team member to be lacking in many early stage teams. There is either a fear to leave the script and manage the sales call that way or go into the trenches like that to probe the customer’s environment for early red flags. I’m a big believer in getting resonance to your world view and big hypothesis (your premise) early, to get a sense for whether a prospect will come with you on the journey as an initial customer. If not, typically I want to use that sales call as a discovery call knowing that the odds are going to be very slim they won’t fit an ideal customer profile.
And yes, there are customers that don’t want to talk, or reluctantly took the meeting as a favor to someone. The attitude is your the 10th startup this week so get on with it. Tell me what you do and why you’re going to change the world. Well, there are ways to deal with these customers and it’s still important to get at least 20% of the air time from them even if you have to do 80% of the talking. You’ll be surprised that by the end it can turn to 50/50 and a positive next step.
- Burning valuable cycles with the wrong initial customers – This is a broad topic, because it is impacted by so many things. Your first 3 to 5 customers in a traditional enterprise software company must be co-innovation partners with a lot of patience to work through problems with you. Preferable in one or two verticals even if you have a horizontal solution. There is too much learning and adjusting to initial customer requirements for this not to be the case. Usually there will be a C-level champion (with early adopter profile) that believes wholeheartedly in what your startup is doing such that they and their team come along with you on the journey. This is important because regardless of how much you spec’d out the product you built, there are always new unforeseen interoperability, deployment or usability requirements to make it production MVP ready. It’s really important to make these customers stay bought in to a process that is likely going to be twice as long as the final sales cycle you need to end up at. Designing a lighthouse program for them with perks is not a bad idea.
This also means ensuring informal sales channels of communication are built in addition to the formal team calls (notice I didn’t say sales calls). The informal channels of communication allow for gathering key information that remain blind spots throughout the prolonged sale cycle. Because many of the early sales cycles come from VC warm intros and the company has not figured out a way to create their own lead generation, extra weight is given to any customer, even if it’s the wrong customer. That’s a big problem.
- Wrong early team dynamic – There are key roles that need to be played in an early stage enterprise software start-up, and they often extend beyond the founding team. The mistakes I see most often center around sales and product management. There is usually a re-start that happens where one of those two functions is not properly developed for 9 months in an 18-month funding cycle. The biggest mistake I see in sales is hiring a rolodex salesperson as opposed to an early stage startup salesperson. The big difference is that the big or mid company salesperson needs the sales enablement material and script to already to be made. An early stage salesperson could be a half decent marketer in their off time and can run with enough domain understanding to be agile in many ways and can negotiate an IT conversation on the spot pivoting to different pain points with sales prospects. The key is to find the pain point resonance so one strategy is to partner them with a strong product manager role type. Typically this will be the technical founder or business vision articulation founder. Whatever the case the team dynamic must be right to enable rapid institutional learning. The mistake I see in product management is often not having a product manager that can dot the I’s and cross the T’s and establish early process, as often one or more founders are in the early sales calls. It’s very dangerous when a technical founder plays CTO, sales engineer and product manager at the same time –this to me never works.
- Customer learning loop is broken within the company – A dysfunctional team role dynamic also means the rapid learning loops from early customer’s mouths to product management and early marketing never happen. This is why I advocate your early hires be able to play almost dual roles, your first product manager can be a product marketer if not marketer. Your first salesperson can almost sound like a half decent product marketer. Of course, there are certain combinations that don’t work as well as I mention above, namely, the CTO being the product manager.
More importantly, what is learned through early customer engagements (in terms of pain points, personas and resonating language) must be reflected on, memorialized and validated across the broader market or a vertical quickly, and messaging/positioning assumptions must be continually challenged. It’s good to start from an initial hypothesis on all of this positioning, messaging, pricing, etc (an art I spent time systematizing at one point), but I’ve found the domain deepening to get anywhere close to right takes between 4 to 6 months to get solid and continues indefinitely.
OK, this read is getting long so let me list out the rest in summary form and potentially dig deeper in a future blog. Here are my additional reasons:
- Not enough focus, ability to say ‘no’ – this manifests itself in what I call the infamous “hedged strategy”. Regardless of what’s on the business plan or reported in board meetings, this is a real startup killer. It manifests itself with talking too many types of players in the market, pursuing too wide a set of initial customers and requirement for them, etc. Closely related to MVP but broader. This is acceptable for a certain period of time, but it kills start-ups eventually. I’d rather focus (with calculated risk management and taking), be wrong and pivot with a leader that can clearly communicate the learning for re-funding, than try to serve two or more masters at the same time. By the way, I do believe there is a learning window where you need to go broad, but that needs to be narrowly focused based on funding window and product release time needed.
- MVP is too broad – this is a common killer and whereas not enough focus can be systemic including GTM, MVP is purely product scope and getting deployment / feedback sooner.
- Wrong CEO – sorry but the buck stops here. Most of the problems I’ve talked about above should be identifiable by a good startup CEO and corrected. This is why the term first time CEO must have become a label in my opinion, because at times these patterns or subtle dynamics can’t be seen, and the mistakes must be had before they can. Then of course, there are the cases of having off-the-spectrum neurotic CEOs (from narcissism and micromanagement to being totally disengaged) or glamor seeking founder CEOs (you know you have one if they’re trying to get to Davos or a Ted Talk before your start-up is stable). Up to a certain point, generally before PR becomes a successful traction strategy, the CEO must be heavily operating centric and preferably, product-centric in stewardship. My personal opinion given the many decisions that require tie-breakers in the beginning.
We’ll wrap this one up there and hopefully this jives with your perspective in some way if you have worked at different start-ups. So yes, these problems do ultimately boil up to ‘ran out money’, ‘missed their funding milestones’ or ‘never achieved product-market fit’, but these drivers and others that must be rooted out and systematically addressed as a start-up grows.