Don’t fail (for the wrong reasons)

Waze for startup sinkholes

Earlier this week, CB Insights updated their data set for the reasons why startups fail. What struck me is how avoidable some of the top reasons were. Butchering the data slightly, the reasons fit into 3 broad types: team-related troubles, use-case related issues and a few miscellaneous occurrences. There are ways in which you can lay foundations and build businesses so as to avoid, at the very least, use-case related issues and likely a few of the team-related pitfalls.

Source data: www.cbinsights.com
Reason type: my own interpretation

First though: a disclaimer. Clearly this is an oversimplification of the complex environment that startups face. This is in-part evidenced by the non-mutual exclusivity of the reasons listed here. Also, the light red bars that you see above are for reasons where a more granular level of detail is required to understand the key reason(s) type(s) for failure.

Stop to think for a second about “no market need” being, by far, the most common reason for startup failure. 42% is a staggering figure…for something that can be tested. In the case of developing a product/service that is 10x better than existing products and incumbent offerings: customers are already purchasing goods and services which is a pretty strong indicator of a market. The next steps are then to calculate market size, the market-expanding potential of the new venture and then take a look-in-the-mirror assessment of whether you’ll be able to deliver that order-of-magnitude improvement. In the case of pure innovation, assessing markets is tougher but hardly impossible as in both cases there is absolutely no substitute for customer research.

At Forward Partners we have, and we expect our founders to have, a maniacal focus on customer wants and needs. Customer research at the very beginning of a venture, during idea creation, before any tech build is essential. It’s also a practice that if questions are asked in the right, open-ended way, will enable you to extract information from customers that they aren’t or are having trouble with articulating. Something as simple as asking a few skilfully worded questions to a random sample of 40 people could avoid the standout, primary reason for startup failure down the line.

“Poor product” as a reason for failure is another avoidable pitfall. Understanding customer needs through research is relatively easy to do and costs next to nothing. This should actually get easier when a business is up and running as, through interactions and transactions, businesses build up a proprietary data set which can be used to inform decision making. Whilst analysis of data does become more expensive as businesses grow, it’s an incredibly important strategic tool. Last week Mattermark featured a fireside chat with Aaron Levie, CEO of Box, that covered this well. The more you know about your customers, the more confidence you can have in launching new products and services which ultimately increases the chances of significant value creation over the long term. The most poignant example of this within the chat described the ability of Netflix (who know everything about their customers) relative to HBO (who know little) to develop hit shows. Clearly Netflix have a massive advantage.

The most significant reason-type for startup failure is team-related, unsurprisingly. Even if you have a strong team, great investors on board and solid decision making processes there’s always a risk that you simply get things wrong. We systematically underestimate the unknown and the unexpected will continue to occur. Nevertheless, an important part of risk mitigation is getting excellent people in place early on. Whilst it may sound counter-intuitive, that’s why Forward Partners are happy to back solo-founders. After we help founders research potential customers and develop a resonant prototype — they have a far better idea of what their business might look like in the medium and long term. This feeds into a superior understanding of the skills that are required in filling out their management team 1.0. Finding people that you click with can be difficult but the process is far easier if you know what you’re looking for in the first place. Also, if you’ve done the work to prove that a market exists, you have an offering that resonates with a targeted group of customers and a plan to grow fast, you’ll end up having to give away less equity too.

There’s no excuse to fail for avoidable reasons or because there hasn’t been a body of work to put solid foundations in place. There will always be phenomena out of founders’ control that can and will affect their businesses negatively (and positively) but many of the traps and sink-holes are out in full-view. Avoid them.

This article was originally published on the Forward Partners blog on December 9th 2015