6 Reasons Why Startups Fail
It is a fact that nine out of 10 startups fail. More often than not, the reasons are laid bare in a ‘failure post-mortem’, where the founder posts a blog and reveals where it all went wrong. Unfortunately, failure post-mortems often show that running out of money was never the only issue. Instead, it was just the final nail in the coffin and a symptom of many other failings.
The website ‘Autopsy’, has a list of 130+ startup failure stories where readers can view failure post-mortems. See ‘I’ve got 99 problems but a bit (code) ain’t one’ for some humour. Other reasons were: “lack of problem-solution, no real team, too much ego”, “crappy business model, tried to do too much, lack of focus”, “I couldn’t get enough reviews”, and “we were naive idiots”.
In addition, venture capital database CB Insights has compiled an exhaustive list of 156 Startup failure post-mortems. Familiar themes are: burnout, failure to pivot when necessary, legal challenges, location problems, not listening to customers, and launching too early or too late. However, the same top reasons continue to appear again and again.
6 top reasons why startups fail
1. No one wants the product
Of the startups polled by CB Insights, 42% cited “no demand for the product” as being the number one reason for failure. Surprisingly simple, yet this shows how many startups manage to create a product without even understanding their market? Treehouse Logic said, “Startups fail when they are not solving a market problem. We were not solving a large enough problem”.
2. Running out of ‘runway’ money
‘Runway money’ is the amount of money needed for a startup continue to operate in the red.
Paul Graham believes that the classic way to run out of money is by hiring a lot of people. His advice, “a) don’t do it if you can avoid it, (b) pay people with equity rather than salary, not just to save money, but because you want the kind of people who are committed enough to prefer that, and (c) only hire people who are either going to write code or go out and get users, because those are the only things you need at first.”
3. Team issues
There are two elements here. The first can be not having a team. In some cases, being the only founder meant that there was no one else for sanity checks and balances. The second is not having a team with a diverse enough skillset. A common issue was that there were too many technical people, but no one to market or sell.
4. Fighting co-founders
Serious disputes between co-founders is unfortunately a common reason for the demise of startups. One such company, Parceld, cited their reasons for failure on Autospy as “technical co-founder quit & pulled the code out from under me”. Tricia Meyer, managing attorney of Meyer Law recommends creating a founder’s agreement as soon as a startup is created. It is essential to address the following questions: how and when will each partner get paid, how will partners decide on certain business conditions, how will disputes be handled, and what if there is deadlock?
5. Strong competition appears out of nowhere
There will always be direct competition in the market, but what happens when a new competitor is better and different that you? Personal finance startup Wesabe was launched in November 2006, but shut down in July 2010 due to competition from Mint. Marc Hedlund, Wesabe founder, believes that Mint (launched in September 2007) monitored where Wesabe made mistakes in their launch and early stages, and then worked hard to make Mint a much easier tool to use. Ultimately, users had a better experience using Mint because it did all the work for the user, whereas Wesabe made the user manually enter their finances.
6. No marketing or sales expertise
A key theme coming from failed tech startups seems to be that there are many passionate, talented, and skilled technical people, but no marketing or sales knowledge. Rdio, a web streaming music service created by Skype founders in 2010, is one such example. It launched months ahead of Spotify in America (Spotify was delayed entering the American market due to international licensing issues), but despite it being a beautifully designed product, it couldn’t define its USP and was quickly put in Spotify’s shadow. “No one was looking over marketing whatsoever,” one former employee said. “Ultimately, that was the beginning of the end there.”
Takeaway
While there may be no magic formula for a successful startup, surely the first step would be ensuring that there is (a) demand for the product and (b) a large enough market to ensure scalability. After that, covering all of the basic steps like having a creative and driven sales and marketing team, a signed founder’s agreement, a team with diverse skill sets could help you on your way to becoming the one startup out of 10 that succeeds.
