Why Startups Fail and What To Do About It
READ THIS BEFORE YOU RUIN YOUR STARTUP
NOTE: This article includes new terms I developed for the purpose of creating better startup language around the latest challenges we face as entrepreneurs. A list of these terms and their definitions are also listed at the bottom of the article.
I’ve started several companies in several countries.
I’ve consulted over a thousand startups worldwide, personally.
I’ve read over 4,000 (mostly irrelevant) business plans as a consultant to startups or as a judge for business plan competitions.
I’ve worked in venture capital and private equity.
This year alone I helped create (from design, to production to fulfillment) over 100 new products that are sold in the market now or will be soon.
So fun. Variety is the spice of life.
This article includes some insights into what I’m seeing from my side of the island. I’m not claiming this is a catch-all. I hope it can help you think better about what you’re thinking. I include info that I think will make the difference between greater success or hardship for startups today. I’m selfishly writing this article so to answer questions I receive over and over and over. I know it will only create more questions. Writing anyways.
I’ve noticed that successful startups have something in common today that is different from the last century:
Startups today build a tiny audience to sell to that they’ve been warming up for a while before selling anything.
- This is the opposite of traditional business where products find markets.
- Today, markets find trusted voices with shared interests without making purchases.
- In fact, the term “markets” may be too broad because today we can know and speak with the people inside these groups regularly, instantly. They are people. (Novel concept.)
- Today, successful startups find people with shared interests and then make products for them if they want them.
Oh and by the way, it’s hard to explain the miracle we are experiencing on a grand scale now that the markets, the customers, the people, have names (they are not just mass markets). Consumers can chat with creators — the founders.
If you’re not talking to your people, you may be missing out on the greatest opportunity for your business the world has known.
The closeness of startups and markets is like going back in time.
Hundreds or even thousands of years ago, I imagine, everyone knew everyone because everyone lived and worked together within walking distance on the day-to-day level.
Today we can experience local closeness globally with our customers, but without geographical constraints: Glocal.
This is nothing short of revolutionary economics.
In fact, more and more, products that try to find markets don’t find them — these startups fail fast. The startups that have people before even making or selling products are thriving.
There’s another word for it: bonding.
Startup bonding is when markets become audiences become friends become clients.
Is this a surprise to you? Welcome to the 21st Century.
If this is a surprise to you, be open minded. Think. Rethink. You have many possible futures dependent on the choices you make today. Serial entrepreneur and icon Richard Branson put it this way:
“Entrepreneurial business favors the open mind. It favors people whose optimism drives them to prepare for many possible futures, pretty much purely for the joy of doing so…A business is simply an idea to make other people’s lives better.”
This article is designed to help you prepare for many possible futures.
Successful startups today can begin with a tiny audience before making and selling a product.
The Tiny Audience Strategy
A tiny audience buys a product and then spreads it to others.
The startups that enter the market cold — a surprise splash that immediately disappears— are dead before they start. Things get worse when startups start running FB ads to a broken business model.
In the end, every startup is different. But in the beginning every startup is the same.
…or is it?
I used to believe that startups were the same in the beginning if they started from scratch and an idea. Or at least, they had a similar hope with smart execution. That’s not always true anymore.
Even smart execution by startups is failing today because customers have unlimited choices. The abundance of choices are available instantly and produce equal or close-enough solutions.
For example, I purchased a hardcover and softcover of the same book recently. The hardcover came from the USA. The softcover came from India. I was surprised. I only knew it was from India because of the markings on the price tag sticker on it and then expecting it closer. I had no idea who I was buying from or from where. I just searched Amazon, clicked what I wanted, got what I wanted. It’s a small world. They both showed up on the same day!
Ubiquitous access is either a massive opportunity for entrepreneurs or doom. You choose.
As the great French write Antoine de Saint-Exupéry explains — “If you want to build a ship, don’t drum up the men to gather wood, divide the work, and give orders. Instead, teach them to yearn for the vast and endless sea.”
“Up until now, the focus has been on dozens of markets of millions, instead of millions of markets of dozens.” ― Chris Anderson, Author of The Long Tail quoting Joe Kraus, Founder of JotSpot
Markets of dozens.
- Don’t ask how you’re going to “drive demand.” Instead, share the dream they yearn for already.
- Show your audience how your brand can make their dream come true — no matter how small.
Your app that teaches me how to meditate is one thing. The benefits of a happy, peaceful life I can receive if I download your app is another.
Startups today can have incredible advantages over the competition if they bring their ideal future customers along the journey with them from idea to implementation.
- Today, startups can begin with an audience built around a common interest.
- Then the startups can sample the audience and create products for them that they readily buy because they wanted them in the first place.
- Or, the audience actually didn’t want the products. The audience wanted whatever products are produced from the startup’s founders.
- These founders share value daily online to the audience and have a regular online relationship.
- (Social media isn’t the right word — most people use social media selfishly. The value share happens in many places today, so it’s hard to give it a label when rented platforms are used for giving and you own your own platform.)
- In other words, it doesn’t matter if someone else is selling it, the tiny audience wants it from you (the startup).
- The daily, micro-conversations drive the products and the sales of the products.
As Peter Drucker said, “The aim of marketing is to make selling superfluous.”
Essentially, there is no selling, just sales with the tiny audience strategy.
Startup author Guy Kawasaki put it this way — “Don’t be discouraged by the size of your network — inspire one person and you are doing good.”
The tiny audience strategy doesn’t have to stay tiny — if you can reach the one, you can reach the relevant mass.
12 concepts that will fix many of your startup problems if you implement.
If you read this with the desire for continuous improvement, you’ll leave with more questions about your business than answers. Share this article with your co-founders so you’re all on the same page before you go messing with your model.
12 Reasons Why Startups Fail — and What To Do About It
“Instead of freaking out about these constraints, embrace them. Let them guide you. Constraints drive innovation and force focus. Instead of trying to remove them, use them to your advantage.” — 37 Signals
1. Why Startups Fail According to Data — But, This Study Is Missing The Point
A Study Was Done by CBINSIGHTS to See What Made Startups Fail. This Is What They Found.
“After we compiled our list of startup failure post-mortems, one of the most frequent requests we got was to use these posts to figure out the main reasons startups failed. Startups, corporations, investors, economic development folks, academics, and journalists all wanted some insight into the question:
So we gave those post-mortems the CB Insights’ data treatment to see if we could answer this question. After reading through every single of the 101 postmortems, we’ve learned there is rarely one reason for a single startup’s failure. However, we did begin to see a pattern to these stories.”
- No market need
- Ran out of cash
- Not the right team
- Get outcompeted
- Pricing / Cost issues
- User un-friendly product
- Product without a business model
- Poor marketing
- Ignore customers
- Product mistimed
- Lose focus
- Disharmony among team / investors
- Pivot gone bad
- Lack passion
- Failed geographical expansion
- No financing / investor interest
- Legal challenges
- Didn’t use network
- Burn out
- Failure to pivot
2. What do these 20 reasons for startup failure have in common?
All of the 20 reasons listed above for startup failure would likely not have created a failed enterprise had the business generated sufficient sales.
Lackluster sales. Excuses for failure in business have one thing in common: they aren’t making timely, profitable sales. No money. No cash. No dough. No business.
“Proformas rarely perform; missed projections are more often the norm. Still, we skew them up high, we miss but we try, for proformas which rarely perform.” ― Ryan Lilly
Benson Garner, renowned business model strategist explains — “Profitable sales or letting somebody else finance your dream? Letting somebody else finance your dream only delays the inevitable. Unprofitable sales eventually catch up with you leaving you with angry investors/financiers and your dream still unachieved to boot.”
Generating earned income is the lifeblood of a sustainable, profitable startup.
3. What about businesses that get a bunch of users and don’t have any sales or profits? How do they stay in business? What’s their game?
A startup that doesn’t have sales and doesn’t plan on having sales in the near future is literally building their business as their product — if not, their business is a hobby or a dream postponed.
I’ve coined a term for businesses that are actually products: BAAP — Business-As-A-Product.
BAAP — Business As A Product. Those businesses that didn’t make any money (yet) and then became unicorns aren’t general businesses selling to consumers like you might think. These businesses are products. That’s right. Businesses can be the product. .
WIP-BAAPs: Work-In-Progress Businesses-As-A-Product
A WIP-BAPP is a business in progress that will become a product for sale.
For example, generally with software or social media platforms, the users and their data are bundled assets that make the BAAP valuable. The founders make money upon the sale of the business, partial equity sell-offs, creative financing or an IPO, etc.
As it’s been said — “If You’re Not Paying For It, You Become The Product.”
Built to flip. The buyer(s) of a BAAP have other ways of monetizing the business, putting the assets to use, flipping it, or burning it to the ground because it was competition to their core business.
However, in another circumstance, if a BAAP doesn’t flip, the BAAP must transition into a business and sell products to meet the cash demands of the investors. When the BAAP in transition can’t sell to meet the demands of the investors, the business fails. Economics.
4. STOP RIGHT HERE AND READ THIS BEFORE YOU RUIN YOUR STARTUP
If you’re reading this article and you’re struggling with sales, you may now be thinking that your business is a WIP-BAAP. If so, you’re probably wrong. If you ever planned on sales as part of your business, you’re not a BAAP. You’re just a startup.
You want sales.
Your business will eventually fail without positive operating cash flow.
Get traction and avoid external financing or capital expansion.
Let me say it another way…
- If you can’t sell now with a minimum viable product to a minimum viable audience, then more financing will scale a broken business model and bury your business.
- Get sales with a business model that works, then scale that model till it breaks.
- Then do it again.
WIP-BAAPs are generally heavily funded by VCs. Every time, ironically, someone invests more money into a BAAP its valuation goes up. That’s the bizarre nature of VC/PE accounting.
Let me show you a funny example that 37 Signals wrote up about the insanity of how valuations are calculated. Look at this…read this knowing it’s sarcastic:
“CHICAGO — September 24, 2009–37signals is now a $100 billion dollar company, according to a group of investors who have agreed to purchase 0.000000001% of the company in exchange for $1.
…In order to increase the value of the company, 37signals has decided to stop generating revenues. “When it comes to valuation, making money is a real obstacle. Our profitability has been a real drag on our valuation,” said Mr. Fried. “Once you have profits, it’s impossible to just make stuff up. That’s why we’re switching to a ‘freeconomics’ model. We’ll give away everything for free and let the market speculate about how much money we could make if we wanted to make money. That way, the sky’s the limit!” — Jason Fried
This is one of the reasons startups fail…they are playing a game that they are not actually in. Meaning, some startups don’t sell and think they have created something valuable and then wonder why they aren’t making any money.
It’s almost silly to say, but it’s necessary:
If you don’t have sales, you don’t make money.
Lesson: Stop screwing around. Deliver your product or service in exchange for dinero.
5. The Mistakes of Bottom-Heavy Financing and Top-Sell Positioning
The strategy from the beginning for a BAAP is to leverage bottom-heavy financing through angels or private equity or venture capital to create a new business-as-a-product for top-sell positioning on a spreadsheet. (“Top-sell positioning” encompasses the various ways a business is positioned in the market for the highest perceived value to the buyer — including bottom-heavy financing.)
“Bottom-heavy financing” applies to debt-backed ventures with little to no sales.
Bottom-heavy financing is a term I developed to describe the heaviness of cash from financing felt by founders resulting in sink-or-swim startups.
Sink-or-swim startups tend to make bad decisions when sales are down (or non-existent). In fact, once-silent investors tend become unwelcome, loud-mouthed bosses from hell perpetuating the sink-or-swim economics inside the already heavy startup. That’s when the boat really starts to take water and you’re on your way to the bottom.
6. What does a bottom-heavy startup with sink-or-swim economics look like?
In real life, a bottom-heavy startup looks like desperate and depressing Series B and C rounds of financing. Series A wasn’t enough. They will say B and C was always the plan to save face and start pounding chests…it wasn’t.
Don’t take on financing like a boat takes on water — you won’t float.
Of course, there is an exception to “desperate and depressing Series B and C financing” when the business is a WIP-BAPP. In this case, the product is still being built before an IPO or otherwise.
7. Why Startups Succeed
Sales. You can only get by for so long on cash flow from financing activities. Stop avoiding actual sales activities.
If you’re not making sales are you actually working? Or are you preparing to work? Of course you’re working. Just don’t get confused why you have no money after you work all day and night for a year and you’re broke.
If you’re not working on sales activities, you’re preparing to work.
All business activities are in essence designed to create a customer — a sale.
You don’t make money until you create paying customers.
Everything a business culminates in a sale and then continues with service and value add to the customers to fulfill the promises of the product or service.
Sales transactions create startup transformations.
Revenue from sales themselves are the critical factor in a successful business.
Because without sales, there aren’t profits.
As the great management guru Peter Drucker said, “Profit is not the purpose of a business, but rather the test of its validity.”
Successful startups are strategically aligned for net profit margin from the get go.
Otherwise, slow-to-go businesses that don’t generate profitable sales will eventually be sold, pivot or die as opposed to scale and thrive.
False Positive Business.
I call businesses that look good on paper, but aren’t worth the paper they are written on false positive businesses (FPB).
False positive businesses are hard hard to identify because of accounting. However, if you’re looking at investing in a business, simply ask for the customer list and talk to them. You’ll have a better handle on the viability of a company if you talk to the actual product — the customer.
Businesses think their goal is to create great products and services, but in reality their goal is to create loyal customers.
It could be argued that VC and PE money feels scarce because they’ve been burned by false positive businesses too many times.
Money chases money.
Success begets success.
If you’ve ever had a business that has loyal customers and is seeking capital, you soon realize that the capital was never in hiding, it was just waiting for the right beast to feed.
8. The biggest bets in capital aren’t really bets at all.
Startups try to concept-proof (bullet-proof) their business so that Angels and VCs can’t poke holes in it. This is the problem. When they finally go to market, they are surprised that the market didn’t need a bulletproof business. The market needed something else entirely, but no one asked them.
Asking is bonding.
Sales provide proof of concept better than concept-proofing your business.
Proof of concept could look like taking the time to get advance copies of the product or service out to paying customers before a product launch. Presales. Kickstarter is a great example of proof of concept experimenting.
Start your business with proof of concept, don’t concept-proof your business.
- Proof-of-concept looks like asking, pre-sales, letters of intent an audience prepped and ready to buy on day 1. That’s solid. If you’re going to bet your time on running a business, wouldn’t you think it would be wise to get someone to pay for the product in alpha or beta mode?
- Concept-proofing looks like a research paper inside a business plan about selling to 1% of a multi-billion dollar market. That’s not solid. Concept-proofing looks like statistics, jargon and studies. Googling.
Markets aren’t shooting bullets at bulletproof startups to destroy their so-called “disruptive innovation.” It’s actually worse. No one pays attention to businesses in bulletproof stealth mode. They can’t. They don’t know anything about it. Therefore, no one cares. Apathy is death. Markets don’t actually do anything anyways. People do stuff.
If you wan’t the “market” to react to your startup’s product, bring people along the journey with you.
A tiny audience.
Then, if you deliver on your promises, they will evangelize the product with you. Keyword: “with.”
Brené Brown might call a successful startup vulnerable.
Startup vulnerability creates bonding.
Too often founders say they have “proof of concept,” when in reality they have concept-proofed their business. They have a good answer for every question…except the one about why no one is buying. Ouch.
Proof-of-concept = effective.
Concept-proofing = less effective.
As Covey said, “Seek first to understand, then to be understood.”
Seek first people, then be peopled.
I don’t actually know if that last sentence makes sense, but I like it.
9. Three Principles Successful Startups Understand
“Any fool can know. The point is to understand.”
― Albert Einstein
- Startups succeed when founders understand the difference between inventing and innovating.
- Startups succeed when founders understand the difference between marketing, selling and sales.
- Startups succeed when founders understand the difference between markets and audiences.
Understanding these three principles and successfully implementing the concepts will save (and exponentially grow) your startup.
10. Understand the difference between invention and innovation.
“If invention is a pebble tossed in the pond, innovation is the rippling effect that pebble causes. Someone has to toss the pebble. That’s the inventor. Someone has to recognize the ripple will eventually become a wave. That’s the entrepreneur.
Entrepreneurs don’t stop at the water’s edge. They watch the ripples and spot the next big wave before it happens. And it’s the act of anticipating and riding that “next big wave” that drives the innovative nature in every entrepreneur.” — Tom Grasty
Invention: inventing something.
Innovation: commercializing the invention.
I made those definitions incredibly simple to prove a point. For our purposes, innovation is bringing your inventions, your products, to market. However, you won’t be a successful innovator if you only bring your product to market.
To be a successful innovator, your product must be accepted by the market. Start with your tiny audience.
To put it plainly: successful innovators sell.
As Steve Jobs put it: “Innovation comes from people meeting up in the hallways or calling each other at 10:30 at night with a new idea, or because they realized something that shoots holes in how we’ve been thinking about a problem.”
As Wired put it: “‘Inventions’ do not always equate to ‘innovations.’ There are many patents which really do not have a use or have influenced no products or industries. Patents without a “use” are not innovation.”
As Peter Drucker said, “Innovation is the specific instrument of entrepreneurship…the act that endows resources with a new capacity to create wealth.”
11. Understand the difference between marketing, selling and sales.
Seth Godin is the most respected authority on marketing. Read these Seth quotes below. (Also, get Godin’s his new book This Is Marketing.)
“Don’t find customers for your products, find products for your customers.”
“The solution is simple but counterintuitive: Stake out the smallest market you can imagine. The smallest market that can sustain you, the smallest market you can adequately serve. This goes against everything you learned in capitalism school, but in fact, it’s the simplest way to matter.”
“Great marketers don’t use consumers to solve their company’s problem; they use marketing to solve other people’s problems. Their tactics rely on empathy, connection, and emotional labor instead of attention-stealing ads and spammy email funnels.”
- “Find products for your customers.”
- “Stake out the smallest market.”
- “Empathy, connection and emotional labor.”
That is marketing.
What’s the difference between marketing, selling and sales?
“The aim of marketing is to know and understand the customer so well the product or service fits him and sells itself.“ — Peter Drucker
I’ll try to say it simply and differently to help make it stick in your brain:
Marketing makes it so you don’t have to sell.
Marketing is bonding. People want what you offer because they are your audience, they need a congruent offer so they know how to get it.
“People don’t buy what you do; they buy why you do it. And what you do simply proves what you believe” ― Simon Sinek
Selling happens when your future customers haven’t been marketed to effectively — more questions need to be answered for the customer.
Selling starts when marketing is incomplete or has failed. Selling isn’t just making an offer. Selling involves problem solving, educating, listening, adding value and closing with integrity.
“To sell well is to convince someone else to part with resources — not to deprive that person, but to leave him better off in the end.” ― Daniel H. Pink
Sales happen after someone’s questions have been satisfied, they pay money for the promises made about the product or service, and the good/service is delivered.
Sales are what everyday companies measure. You can see sales on the income statement. Money in the bank. The scoresheet is important, but don’t lose site of who those numbers represent. Sales (or lack thereof) help you navigate the future.
“Big shots are only little shots who keep shooting.” -Christopher Morley
Perhaps effective marketing, selling and sales can be summed up with this statement from the great Zig Ziglar — “Stop selling. Start helping.”
12. Understand the difference between a market and an audience.
Have you ever spoken to a market? No. You haven’t.
What is a market?
A market isn’t something you can talk to. In the aggregate, individual consumers make independent choices that we group together. We call these groups markets. In this case, markets respond and make moves. Adam Smith called it the “invisible hand.”
What is an audience?
An audience for our purposes includes people who come together for a common cause with shared interests to learn, or be entertained, or to be served in one way or another. Audiences interact with the startup in a similar way that an audience would interact with a speaker or entertainer. Expect audiences to include both cheers and jeers.
As an entrepreneur, you will be tempted to listen to the jeers. On average, the hecklers are not your audience. Recognize that now. Ignore them.
When I share content and it is rejected by some and received well by others, it actually helps me understand who my audience is better. Instead of thinking the world is ending when you get trolls, understand that those naysayers are not your audience. No wonder they don’t like your sound. They weren’t there for your music in the first place. They were trying to get their car fixed or something — meaning — they weren’t ready for you.
On the other hand, when you’ve identified sincere audience members and information they share can help you improve your product or service for them, you have a choice. You can change or not. It’s not a right or wrong. However, it is unwise not to listen to your true fans.
True fans: “To be a successful creator you don’t need millions. You don’t need millions of dollars or millions of customers, millions of clients or millions of fans. To make a living as a craftsperson, photographer, musician, designer, author, animator, app maker, entrepreneur, or inventor you need only thousands of true fans.
A true fan is defined as a fan that will buy anything you produce. These diehard fans will drive 200 miles to see you sing; they will buy the hardback and paperback and audible versions of your book; they will purchase your next figurine sight unseen; they will pay for the “best-of” DVD version of your free youtube channel; they will come to your chef’s table once a month. If you have roughly a thousand of true fans like this (also known as super fans), you can make a living — if you are content to make a living but not a fortune.” — Kevin Kelly
My favorite quote about listening to your audience comes from Chris Anderson of TED:
“Everybody says they want to hear from consumers. Well, be careful what you ask for: Now they won’t shut up.”
While you do need to filter our people who aren’t in your audience and listen to your true fans, just remember that it’s your startup and you can choose how you run it — for better or for worse. Keep your mental game strong.
Don’t be intimidated by what you don’t know. That can be your greatest strength and ensure that you do things differently from everyone else. — sara blakely
In sum, markets are faceless. Audiences have faces.
Or better, markets are faceless. Audiences have faces on Facebook. :-)
Timing is everything.
“The number one thing was timing. Timing accounted for 42 percent of the difference between success and failure. Team and execution came in second, and the idea, the differentiability of the idea, the uniqueness of the idea, that actually came in third.” — Bill Gross
That said. The timing is now.
Startups succeed with startup bonding.
Separate your audience from the market. Serve them through micro-conversations. Give them what they want. They want more of you.
Recently I did a live training with two of my business partners in Prouduct (It’s not spelled wrong). It’s products you’re proud of. It sold out in minutes. We recorded it professionally and it was going to be free. But for you my friend, it’s free. :-) …
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New Startup Terms
Here are a few of the new startup terms I developed and shared in this article. I don’t care if you don’t like them or disagree. I love you either way. Enjoy! Happy adapting!
Startup bonding — the process in which markets become audiences become friends become clients.
BAAP — Business As A Product
WIP-BAAPs — Work-In-Progress Businesses-As-A-Product.
Bottom-heavy financing — the heaviness of cash from financing felt by founders resulting in sink-or-swim startups.
Sink-or-swim startups — bottom-heavy financed startups making decisions based on their financing instead of the customers.
Top-sell positioning — encompasses the various ways a business is positioned in the market for the highest perceived value to the buyer — including bottom-heavy financing.
False Positive Business — businesses that look good on paper, but aren’t good businesses.
Concept-proofing — bulletproofing your startup idea instead of proving out the concept with customers.
Slow-to-go businesses — startups that don’t generate profitable sales that will eventually be sold, pivot or die as opposed to scale and thrive.
Revolutionary economics — involving sweeping changes to the marketing, selling, production, distribution and consumption of goods and services.
Note: These concepts are new and fluid and I’ll adapt and refine them. I’d love to hear your thoughts in the comments.
Thanks for reading! What questions or comments do you have?