Startup Failures Are Going To Skyrocket in 2018

What started as a global pandemic is becoming a full-fledged apocalypse. Funded seed and ‘A’ round startup has always faced a tough battle to break through into full-fledged growth companies. Startups that can’t break through and sort of mope around have been called Zombies. I see more and more zombies every day and the rate is increasing exponentially.

Startups Are Easy — Later Stage Fundraising is Tougher

It has never been easier to launch a startup. I know this makes me sound old but incubators, lean startup principles, we-work spaces, even Amazon web services have made it surprisingly simple and that is causing an increase in zombie startups. A recent study shows that using Amazon We Services (AWS) as a development platform increased the rates of companies attaining seed and ‘A’ round funding

The Wall Street Journal reported that the gap between funding rounds has increased and this is causing more failures. Angel money skyrocketed from 2010 to 2014 but later stage deals did not grow as fast. Now that all early stage funding is down, this means a lot of 2012–2016 seed and ‘A’ round companies desperate for more funding and finding tightening pocketbooks. VC staffing didn’t increase so ‘A’ stage companies got less VC time and attention. Failure rates are skyrocketing and about to get much worse.

If you think it is hard to start a company then you may be surprised how hard it is to kill one. Periodic seed injections, massive sweat equity and a few sales here and there means a small, group of fanatics can keep a company going for years hoping that one last pivot, news story, product release or sale is the key to breaking out.

The toughest thing to accept or even know is when you are in a Zombie. I had this exact issue. A startup I was involved with was producing revenue and sales but I couldn’t get it to a real inflection point so we just didn’t have a future. The market evolved in ways we could not have predicted when we started it and we couldn’t pivot our way through it. It was hard to swallow. This is a real problem. Zombies lock up valuable financial and intellectual capital. But knowing when to quit is a million times more difficult than knowing when to start. Never give us is inspiring but it isnt always right.

Academics, the startup and venture communities and I could fill volumes on the reasons why startups shamble around and don’t die but also don’t break through or get growth funding. In a tough fundraising climate in 2018 there are some critical areas to watch out for.

Product Vision is killing your startup

Here is a familiar pattern. I talk with a founder who talks passionately about what a great solution to a large, real problem they have built. They talk about where they are as a company and where they need to go. Now ask them where they are spending their time and limited money? More product development. Developers? 5–20. Sales people? Themselves and maybe one or two more. If you push them on money it becomes clear what they are focused on is protecting the development team they put together.

See the problem here?

Once you have a minimally viable product you need to test the market. If you get market acceptance and feedback then it is time to really focus on sales. This means a real, pivot to sales and marketing. This pivot is as difficult as any product, technology or market pivot any startup has ever had to do because it means rewriting the DNA of the company and, often, the founder. This means most of the founder’s time and as much of the spend as possible needs to be focused on customer and/or revenue growth. If a venture capitalist didn’t fund your ‘B’ round based on version 15 of your product then version 16, 17 or 18 isn’t going to do the trick either. Most founders cant and shouldn’t make that transformation. I will get into why and the alternative in a few minutes.

I blame the myth of product-driven inflection points more than a little of those on two sources; Steve Jobs and Instagram. Remember that Steve Jobs didn’t “Steve Jobs” his way from failure to worldwide dominance. Yes, Apple built a few world-changing products (among a litany of product failures) but that man and his team were among the best sales and marketing experts in the world. The mythos around him emphasizes product quality so much that the story about the nuts and bolts of sales, channel, marketing, etc gets a back seat.

I have met Instagram — you sir, are no Instagram

Instagram is the worst possible startup example. Instagram was officially founded in October 2010 and sold to Facebook for $1B in April 2012. They had three investment rounds $500K (if only I had a tie machine) $7M and $50M for a $500M valuation. The sales to Facebook was a month after the third round. They had 35 employees and no revenue. You will never be Instagram. If Facebook wasn’t successful at making teenagers roll their eyes or move the company a couple of years earlier and later or a couple of zip codes farther away from Marc Zuckerberg and Instagram wouldn’t have been Instagram. You cannot replicate that. You don’t have the contacts and you don’t have the luck. If you do, buy lottery tickets and go on vacation and think about how to help Bill Gates save another 122 million lives. It is a better use of your time and fortune.

I know it is hard but try not to think of these examples or Google or Uber or Snap when building your startup. There is little to learn from them.

In spite of what they claim, founders who don’t like sales like to focus on what they do like and are good at and that is product. A strategy guaranteed to fail is to try to using your product roadmap as a sales pipeline. This means chasing whatever deals will talk to you and then agreeing to enhance the product to suit them. This is slow, resource intensive, unscalable and doomed to fail. You got some market acceptance so go find all the customers like that one and close all those deals. Then start selling new types of customers. The fact that more than a few startup entrerenuers read these last few sentences and are shaking their heads is evidence of the delusion of product visionaries.

A Sales VP Is Not A Sales Strategy

Founders cannot just hire a salesman or junior level sales executive to do sales, hit the road with her and then assume that sales will take off. It’s a halfhearted effort. Sales stars become sales stars because they focus on selling not transformation and selling. Companies transitioning to a sales & marketing focus are not there yet. Switching from a product-focused startup mentality to a full-fledged sales and marketing driven growth company won’t work with half measure.

For sales to work the full energy of everyone associated with the company has to be behind it. Your startup succeeded because the founder had everyone focused on testing for product and market acceptance. This pivot dwarfs the ones you drove shifting product strategy because that did not change the fundamental makeup of the firm. Now you need someone who can steer this fast moving and massive ship in a completely different direction. More often than not this means hiring a growth focused CEO or COO general manager who can marshal the troops I the right direction. This includes the startup founder. I write before about whether a founder should stay CEO or hire an outside CEO or COO. I also talked about how you should never hire a COO that isnt a transformation expert.

Your hockey stick may cost you

If you do not have sufficient capital at this point then you are going to have to face paying for sales and marketing by cutting product. Scream bloody murder if you like. Add comments about the wonderfulness of sanctity of innovation but you need real market traction to raise more money.

Too many early stage companies go back to the funding well with the same basic team and no compelling adoption or revenue metrics to back up the hockey stick in your deck. Leadership means making difficult often painful decisions. VCs are right to demand to see some evidence that the market and the market acceptance you hoped for materialize. Treat the people who got you there well but if you cannot afford them and a full-fledged sales and marketing focus then make the tough call and succeed instead of failing slowly.

The most painful situation to me is where a zombie really, truly does focus on scaling what the market said is working and then fails. Most of the time it is execution. What if it isn’t? Assumptions about market acceptance are just that, assumptions. All your passion and hundreds of hours making your pitch doesn’t make that pitch so. But at least if you put everything and I mean everything behind it you will finally know.