There’s a crack in the foundation of every startup that eventually brings most of them down.
It was 2012 when I was in Haiti standing in the hills looking around at ill-built cinderblock homes and dilapidated huts they used for schools. Distraught, I walked to the end of this one path to find a wooden platform with 5 outhouses. It was falling apart and there were feces and garbage trickling down the hill.
A huge banner across the structure read, “Sponsored by USAID.”
When we talk about 90% project failure rate in Silicon Valley we have to also understand that over 50% of IT projects fail across companies of all sizes. The Bill & Melinda Gates Foundation often accepts up to 100% failure rate, and the US government continues to fund USAID, though their projects, too, have roughly a 90% failure rate.
Every year CBInsights publishes their annual report on the Top 20 Reasons Startups Fail. While some look at each of these reasons as their own unique story, I see one consistent commonality.
For all of the Top 10 Reasons Startups Fail, each stems from the same crack in the foundation: Like a bad knee can throw off the entire body, lacking crucial information about your customers can destabilize your entire business’ viability.
Don’t agree with me? Sit right back with a coffee as I prove you wrong.
1. No Market Need
Simple: Your company did not address a problem your customer (or any customer) wanted to be solved.
Explained: Companies launch to “No Market Need” because they built a product before doing upfront customer discovery and validation. Maybe they only did half-baked market research or looked to just their friends & family for feedback early on. They did not understand that product-market fit isn’t an inflection point but something to be measured throughout every stage of building their business.
Takeaway: Seth Godin said, “Don’t find customers for your product, find products for your customers.” Start with a specific customer, their problems, then solve for that.
2. Ran Out of Cash
Simple: You didn’t solve a problem so great the customer (or any customer) was willing to pay for it.
Explained: Companies run out of money because they do not have revenue and spend on initiatives that don’t pay off. Maybe they believed they had to give away the product for free at the beginning to get users and case studies. Meanwhile, they didn’t realize they had to give it away for free because no one wanted to pay for the solution.
Takeaway: Your challenge early on is to rapidly iterate on customer feedback to find a business model in the cheapest way.
3. Not the Right Team
Simple: You and the people you hired were not willing to do anything to solve the customer’s problem.
Explained: Sometimes founders jump into building a company with the primary motivation being money. That would be foolish. Entrepreneurship is hard, and when it gets really hard, founders need passion to drive them through the steepest challenges.
Takeaway: You should pick a problem that drives you nuts; that causes you so much frustration you cannot go another day without solving it. With that intensity, you’ll bring on team members that love your product, too.
4. Get Outcompeted
Simple: You didn’t understand how to add value to the customer.
Explained: With the power to reach millions around the world, there are niche segments even in the most saturated of markets. A company that gets outcompeted is a company that didn’t find whitespace early on from the perspective of the customer. They may have also been trying to keep speed with a competitor instead of focusing on what they can do really well.
Takeaway: You are a unique snowflake and have something unique to offer when solving this problem. Find customers that value your uniqueness and your different value proposition.
5. Pricing & Cost Issues
Simple: You didn’t figure out what the customer was willing to pay.
Explained: This reason is right in line with “Ran Out of Cash.” The founder bulldozed through market & customer research and selectively listened to only the feedback they wanted to hear. In a conversation with a customer, they agreed with the customer’s praise but disagreed with the customer’s opinions on pricing. The founder did not realize that feedback significantly changes when a customer is pressed to give up money in exchange for value.
Takeaway: You need to force the conversation on pricing early and often.
6. User un-friendly Product
Simple: You misunderstood the effort your customers were willing to put into your product to solve their problem.
Explained: In a survey I did of my peers in the technology startup world, I found:
- 5 of 7 founders believe they can design the product themselves, yet
- 5 of 7 founders struggle to do UX & Product week-over-week on a regular basis.
So the first mistake founders make is designing the product themselves without continuous input from potential customers. The second is not understanding the value of an actual usability professional. And, the third is confusing visual/creative/beautiful design for usable & clear design.
Takeaway: Don’t rely on the user to do more than what they do now to achieve their goal. Involve them early and often so it’s as if they are designing the product you’ll sell right back to them.
7. Need/Lack Business Model
Simple: You didn’t offer something customers would pay for when they have the greatest need.
Explained: Like many of these reasons for failure, this one is not mutually exclusive of “No Market Need, Ran Out of Cash, and Pricing & Cost Issues.” The biggest lie founders continue to tell themselves is “This problem, if solved, makes a business.” They think, “Because this problem bothers me, it must bother enough other people that this is a business.”
Takeaway: If you have a problem that you know customers will pay to solve, you also must know what the customer is doing at the exact moment that they experience this problem. That exact moment is where you need to be with your solution. I explain this more in my e-book. Your business model is predicated on this moment.
8. Poor Marketing
Simple: You didn’t know where your customer hangs out, how to get your customer’s attention and why they’d use your product.
Explained: In marketing, there are many shiny objects and opportunities to distract you. Instagram is fun, connecting with old colleagues on LinkedIn can feel empowering, and starting a YouTube channel can be gratifying. These activities are entertaining but can be incredibly time consuming. And, they mean nothing if they’re not bringing quality leads to your business.
Takeaway: Identify the best marketing tactic for you by triangulating 1) Where your customers are, 2) Where your competitors are, and 3) The marketing tactics that best highlight your advantages.
9. Ignore Customers
Simple: Ignored customers. That’s it.
Takeaway: This is definitely the #1 reason why startups fail.
10. Product Mis-Timed
Simple: You designed a product according to trends and your personal forecasts rather than for your customer.
Explained: When a startup fails for this reason, it sounds like the founders were innovators ahead of their times. I fell for this once myself early on in my career 11 years ago. The reality is the founders designed based on theory or what works for them. They didn’t design based on what would work for the customer right now.
Malkovich Bias: The tendency to believe that everyone uses technology like you do.
Takeaway: Design with the goals and needs of your customer in mind because the technology used to solve the problem will change with time, over time.
Innovation is a Process but people think it’s a “thing.”
Creativity isn’t about imagining something brand new — that’s guessing.
Founders often feel startups are risky and anxiety producing but that’s because they’re guessing at questions to which there are answers. If you want to eliminate guessing wrong and failing, you have to marinate in the entirety of your problem from your customers’ perspectives.
What I’m going to tell you is different than what you hear from popular “Silicon Valley” guidance:
In the early stages, your startup should not move extraordinarily fast. See, anxiety to prove yourself and get started may drive you to plow forward, ignoring important details.
The reality is you’ll eliminate a lot of guesswork down the road if you stick with the problem/customer without jumping into the solution.
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