Why Do So Many Tech Startups and Scaleups Fail? (Part I)
And How to Succeed
Some years of experience in the Tech industry have given me a chance to observe crucial fallacies even the most successful and well-intending Tech Start and Scale-ups can get trapped in — and how to mitigate or avoid these traps altogether. I love to work in Tech — the drive, the speed, the excitement are unique. Therefore, I share my thoughts quite bluntly to provide real insights that are not sugar-coating potentially dangerous developments.
Lack of Clear (Or Suitable) Positioning
I cannot overemphasize this point enough: without clear positioning, your business will be like a herd of sheep without a shepherd. Positioning really is the baseline for future success, and there are many things that can go royally wrong.
Lack of Positioning Altogether
Let’s start with the most obvious one: You have no clear positioning at all. Just like a person can never please everyone without becoming boring to everyone, a business cannot appeal to all customers either. You need to define a clear positioning of your product in the market. Otherwise, you cannot optimize your product roadmap to your position in the market, it will be really hard to define an Ideal Customer Profiles and your GTM reach out will be arbitrary at best. Investors cannot grasp what role your business is aiming to play in which market niche (let alone TAM calcs will be quite tricky, etc.).
The Perils of Positioning in the Middle Segment
Another trap can be positioning in the middle segment. The middle segment is the hardest to position yourself in: neither do you have a clear advantage in terms of superior products, nor do you offer better prices. Similarly, I find the pricing positioning really tricky — eventually, there will be someone with a better product who can underbid your prices and wait until you’re out of cash — this is usually what can be observed in price-competitive market consolidations.
Thoughts on Pricing and Positioning via Pricing
Equally dangerous (there are exceptions, though) is positioning in the wrong market category, as well as its impact on pricing and Go-to-Market strategy. For instance, you have high prices and your product is rather on the premium end of the spectrum, but you try to avoid the premium niche and sell your product to prospects via “fair prices”. If your product inherently makes sense in a certain niche, e.g. premium, you have to own it — or change your strategy, offering, roadmap and Go-to-Market strategy. You can’t sell jewels for a handful of bucks, nor can you charge a premium for a basic product.
I could go on about this point, but will leave the details for a separate article on positioning.
How to Tackle Positioning
So, now what? Understand the market and market context, e.g. are you operating or do you want to operate in a saturated or a blue sea market? What does the competitive landscape look like? Which customer pains are you trying to solve? Who is having these pains and how can you optimally solve them? You need to double-down on research, talk to real customers and prospects and understand the market. Then, critically look at your current business positioning and strategy and adjust where needed.
Remember: You cannot be everything to everyone, or you will be nothing to anyone. Be the right business partner for the right market niche and the right customers, providing the right solution for them.
Pretending to Be Something You Are Not
I will keep this one short, as it is closely related to positioning, but definitely important enough to deserve its own paragraph. If you pretend (I don’t mean pretend like cheating, rather as a well-intended wish to fall into a certain category) you are something you are not, it is likely not going to play out well in the future. For example, a hardware-heavy or consulting-heavy software company tries to be a SaaS company and applies SaaS-like metrics — this basically equals lying to yourself. Your time might be better spent on finding the right position and strategy for your unique business.
Own your business model and identify the right metrics to measure success. This can apply to B2B vs B2C, operating in a blue sea market versus operating in a highly regulated or saturated market. You can do all of it, just make sure to adapt your business model and strategy to the business reality out there. If you are a hardware/software supplier or provider with a hybrid business model, it might not be realistic to believe in SaaS-like growth (when every customer of yours heavily depends on consulting, it will certainly limit your scalability, and you will always need equally more consultants as you gain customers). So, what to do in this example? Either, own it and apply the right growth metrics and strategy, or look for ways to drive scalability, e.g. through turning part of repetitive consulting work into on-demand content or outsource some “light consulting” to your software.
Creating Complexity Monsters, Quick-Fixing and Compromising Scalability
This point is one I am very enthusiastic about. One of the greatest challenges in startups transforming into scaleups is striking the right balance between delivering results fast, but also building a sound foundation for scalability and future success. This applies to basically all departments. Each function has its own challenges and effortful, but important processes and foundations to set up: may it be a powerful organic marketing machine, a successful, customer-centric sales process or a product that is built on a scalable code structure and product logic.
Short-Term Gains vs. Long-Term Scalability
There are always important short-term goals to achieve, fires to put out and last-minute requests coming up. I still believe it is possible (and crucial!) to set aside the time to build a strong foundation for your future success. Encourage your team to think both short-term and long-term, as well as ingrain some long-term/foundational goals into your OKRs, for instance. Examples can include code refactors, reworking parts of the product to open it up to scale new features, or investing time into strong organic positioning, even if you might be still mostly thriving on paid marketing.
If you don’t do the work early on, it is going to shoot your business in the leg. Refactors, for example, become harder with every line of code you add.
Complexity Monsters and Other Dangerous Product Species
Finally, try to avoid building complexity monsters at all costs. This especially relates to product & engineering, but can also apply to other departments: I am thinking about e.g. CRMs no one can work with, or spreadsheet monsters flooded with cryptic macros. In Product & Engineering, however, it is easy to create complexity monsters, but incredibly hard to tame them.
For example, by just adding one functionality after another, providing options to choose from for everything, or solving everything with extremely complex and over-engineered solutions can become a real issue in the future. I always recommend living by the KISS paradigm, keep it simple and stupid. After all, your internal team, as well as your customers, need to understand your product. A warning sign that you created a monster is for example a feature or product, that no one really wants to even touch — scared of breaking it. I know, it is really hard. But, especially in this case, I recommend that you sit down, do the work, wreck your brain and tame the monster before it’s too late.
Taming the Monster
Generally, try to build products that solve the pain of your customers in a way customers love, but do not over-engineer or add complexity when it is not needed. If you are a product person, do not be afraid of cutting half of your designs and scope, ruthlessly reducing complexity and questioning everything to come up with a lean, viable, and valuable solution. All thoughts towards complexity reduction (and, I know, it is tough), will pay off in the future and compound towards scalability, usability, and empowering your team and customers.
Underpay, undervalue or burnout talent
A lot of businesses claim that their people are everything and success is rooted in awesome team effort. While this is a great thing to say, you also gotta treat your people right. If you don’t, there will be another company just around the corner, willing to do so. I can only recommend avoiding this at all costs — great talent is hard to find and even harder to retain. Don’t lose your best people due to avoidable issues.
Ignite the passion
That means, for example, to let them work on what they are truly excited about. This is not to say that every job has some boring or unpleasant tasks to be done. However, if your business is not only consisting of 5 people, there will be ways to allow your employees to work on what they are really excited about and good at. Trust in your people and you will be rewarded with peak productivity, loyalty and a motivated team.
Of course, fair pay also plays its role in the talent attraction and retention mix. I would argue that if you are a startup and your financial options are just limited, your employees will understand. You can still provide smaller perks or company shares in these cases. However, there are also really well-funded companies, simply not willing to pay fair salaries. It happens so many times that an employee asks for a fair raise, and businesses just don’t grant for a range of arbitrary reasons. As soon as said employee quits, the unavailable money becomes available all of a sudden — but then it is usually too late. Why not just pay fair salaries right away and retain talent? It is much more expensive to wait for a replacement, for months, and often, the new employee is asking for more money to begin with. There are also two arguments around salary that just do not make sense: Raises are not granted because of the percentage increase, but what if that employee started with a way too small compensation? Don’t be scared of significant raises if they fit the market value and performance of someone. Secondly, do not argue your way out of a raise due to team structure. Salaries should be based on performance, not on how much the majority in a team makes. Or, how do hiring managers want to hire a senior person to a junior team they you can’t get over team structure? If you want to be successful long-term, just be fair, pay a fair compensation and value our team monetary and otherwise.
Do not risk losing your best talent for short-term gains
Equally important is that you allow your employees to have work-life-balance early on. Startups, scaleups and tech companies in general rarely run out of ideas, new products or GTM strategies, so there is never a shortage of work to be done. However, if you are in the long game and want to be successful for years to come, don’t burn out your talent for short-term gains, a.k.a. just this one special client (it is never just 1, it is gonna be all of them), just this pitch, only this feature needs to be shipped and your business will be in ARR paradise. There will always be new important customers, investor pitches and products to build — play the long game and try to not compromise your people for a handful of short term wins (Of course, there will be more intense phases and the hustle is also part of startup life, but keep it in a reasonable spectrum).
Never compromise on culture, a.k.a. don’t hire a**holes
Some additional thoughts in hiring and talent retention: Please, please, please, never compromise culture and when hiring. What I mean by that is simple: do not hire a**holes. One negative or sneaky person in your team can destroy the entire teams’ morale and poison the environment. It is just not worth it. I believe in hiring people from diverse backgrounds, walks of life, people with diverse opinions and perspectives, and also people with no relevant work experience, who are curious, willing to learn and smart. CVs, previous titles, even experience are often overrated — being a reasonable human being isn’t.
Make your new joiners’ lives easy
My final thought on this summary, try not to play favorites or cultivate some type of inner circle, the first 20 employee family or the like. Do you want to scale? Do you want to attract new talent? Do you want to set up that new team? Then don’t give favorites or any sort of 2-class team a chance — it is going to repel new joiners and your initial “startup family” is also eventually going to leave you. Be open to new people and hold your team accountable to be the same. Also, do not give bullying a chance.
Theres more to come…
Thanks for staying with me through some of the toughest obeservations I made in the tech industry!
If you want to know more, stay tuned for Part II — talking — among other topics — about shifting from a marketing-led to a sales-led or product-led strategy, prioritising right, creating a viable and customer-centric roadmap, maintaining innovation and avoiding the risk of becoming arrogant and complacent as a business.