The Great Startup Filter — Why Do 90% of Startups Fail, and How Can You Be One of the Winners?
It’s common knowledge in the startup ecosystem that 90% of all startups fail. What we mean by this is that, of all the founders that begin building a product, only 10% come to a meaningful exit or acquisition. I’ve dedicated my career to helping entrepreneurs get through what I call “The Great Startup Filter” and become one of the few that make it big. I’ve addressed the top reasons startups fail, and ways to overcome them, in the video below:
In a survey by Statista, they found that the most common reasons startups fail are because:
1. They failed to address a real market need (42%)
2. They ran out of cash (29%)
3. They didn’t build the right team (23%)
4. They were beaten out by competitors (19%)
Failing to Meet a Market Need
All to often, once founders have come up with their idea, they rush to get it built and out the door and fail to truly validate their solution and ensure product-market fit. They view market research, customer empathy development, and user-experience design as wastes of time. They simply focus on pushing out features as quickly as possible, without understanding whether and how those features solve real problems.
In my book and my online course, I dive deeply into how to understand your customers’ most critical problems, how to uncover an opportunity, and how to develop and validate a solution that solves their problems better than the competition. I’ll do my best to summarize the model in the simplest form.
Start by understanding the problems they face. Do this by spending time with them and creating real human connections. When you identify a problem, find out how much time and money they spend to solve the problem, what solutions they currently use, and how those solutions fail at meeting their needs. Identify specific deficiencies with existing solutions to uncover potential opportunities. Repeat this process with as many similar people as possible to see if it’s really a big enough problem.
Problem + Urgency + Deficiencies + Ubiquity = Opportunity
Then, collaborate with them to come up with a valid solution to that problem in a way that addresses the deficiencies in the competition. Iterate quickly and gather as much feedback as you can to validate that your solution will sufficiently solve their problem. Create a landing page and test ads to validate demand with the market at large. If you get positive results from in-person and online validation efforts, you’ve got a solution that has legs.
Concept + Addressed Deficiencies + Feedback Loops + Demand Validation = Solution
Running Out of Cash
It’s a common misconception that most startups fail simply because they didn’t raise enough money. An inefficient business will be inefficient at any scale. This means that as inefficient companies raise money, they will inevitably spend all of that money wastefully, and at some point will crumble under their own weight.
In my book, course, and consulting business, I always stress the importance of deferring the high cost of developing technology until the problem, solution, user experience, and business model are crystal clear. Measure twice, cut once.
In agile development, we say that the cost to fix a problem increases with time. That is, the cost of changing your product is much cheaper to do when it’s written on a napkin than when it’s baked into code. Do your up-front research, and follow up with tight feedback loops to make sure that your product and business model are fully validated before you take on the high cost of developing the finished product. Once the first version of the product is released, continue to iterate in short cycles to ensure you’re increasing fidelity on what works, and not investing anything into something that doesn’t work. There is nothing less efficient than building the wrong thing.
Failing to Build and Manage the Right Team
In my consulting business, I too often see founding teams with no experience developing technology products. While I understand it is difficult to find a good technical cofounder, you must have someone on your team who understands the intricacies of building technology products. If you aren’t able to find a technical cofounder, you need a Fractional CTO or technical advisor on your team. At the very least, you need to hire a senior developer or chief architect who can ensure your product is built to scale with solid architecture, and can call BS on any outsourced developers who may be putting lipstick on a pig.
Whether you decide to outsource development or build your own team, there are trade-offs. With outsourced teams, you can stand up a new team and begin development very quickly, but you run the risk of dealing with “Yes Men” who build precisely what you ask for, rather than what your product needs. They’ll keep pushing out features on top of poor architecture because no one has the incentive or the courage to stand up to you. They’ll accumulate technical debt because they’re getting evaluated by features delivered, rather than the quality of their code.
With internal teams, you’ve got the benefit of tribal knowledge and better understanding of the customer/problem/mission, but you take on the additional burden of hiring and managing people. You’ve got to deal with creating efficient and effective workflow processes, professional development, and management. You’ve certainly got to make sure you’re hiring the right people who are aligned with your mission, rather than people who are simply looking for a paycheck.
Beaten Out by Competitors
In business, you’ve got to know what game you’re trying to play, and how you’re going to win. That’s the essence of strategy. Too many founders are so focused on their own product, that they forget to look around and see how they stack up to competitors. Other times, they focus so much on copying their competitors that they fail to do anything truly unique and differentiated.
A great product strategy is one that is laser focused on the things you can do better than anyone else. Don’t waste your time and money building sub-par features just to keep up with the Jones’. Find a way to create an incredible experience with a limited set of features, and leverage or integrate existing solutions that take care of the commodity features. For example, if you’re trying to make a better eCommerce experience, don’t recreate Shopify. Instead, create your own unique layer on top of a Shopify integration. Let Shopify do what it does best, and instead focus on what you can do best.
I like to use a model I call Whales and Piranhas, which I cover extensively in my course. In this model, the whales are the giant companies that have enormous resources, but provide a more generic solution. The piranhas are the undifferentiated, commodity products that are so similar that they can only compete on price. You want to avoid both of these and find open water. To do this, you need to find an under-served market segment, and provide a unique and exceptional solution to that specific niche.
Failure to Find Great Mentors and Advisors
Last, but not least, too many startup founders become so focused internally, that they fail to find good mentors, coaches, and advisors. I’ve been guilty of this myself many times, as we tend to become so focused on our business that we let our networks degrade. It’s critical that you leverage the power of your network, connect with other founders, and find great coaches and mentors to sit on your board. You may think that you’re solving a totally new problem, but I guarantee at least 80% of the problems you face have been solved before. Imagine how much time, money, and stress you can avoid if someone can give you the right answer or stop you from making a fatal mistake before you go down that path. I’ve been a startup advisor, fractional CTO, and product strategy consultant for almost 15 years, so I’ve seen a thing or two.
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