Why do startups fail?
Likely few things in life can match the exhilaration of getting funded for an idea that you helped conceptualize and for which you are building a product or service. It is one of the most realistic ways to live the dream for most of us, as all absorbing and sacrificial as it is.
But we all know the odds of failure are dauntingly high in entrepreneurship, and VC-funded tech start-ups are no different. I’ve been a part of or advised my fair share of start-ups that never found firm footing in the market, never achieved the requisite scale and eventually died either a violent or slow death.
When I read the commonly touted reasons about why start-ups fail, reasons like ‘run out of money’ or ‘missed funding milestones’ are a bit unsatisfactory for me. My experience tells me that that’s the 100K foot answer and the responses seem to have overlaps. To me, the root causes are more interesting to sort out.
So, with that in mind, I’ve reflected on what I’ve seen in my career as repeating cycles in just about all the 6+ startups I’ve worked with (unfortunately all non-Unicorns). I’ll caveat this blog by saying that my experience is heavily influenced by traditional B2B enterprise software start-ups, not fast time-to-value, high sales velocity B2B SaaS start-ups that have the benefit of more data in sales processes.
Top Reasons Why Start-Ups Fail
Here is my take on this age old question relative to B2B enterprise software start-ups. Tried to put this in order of importance but it’s just too hard:
Too much rose-colored glasses, not enough objectivity – I recognize that founders and entrepreneurs by nature should be optimists. If they weren’t, nobody would start a tech venture to take on giants or the status quo. That said, one thing I’ve seen numerous times is a systematic interpretation of events that is overly optimistic relative to data or reality. A lot of this divergence I’ve witnessed comes from founders and early head of sales (typically the wrong ones). I’ve walked out of early sales calls hearing things that indicated a serious pause on the part of the customer, or a concerning objection or requirement, only to have colleagues summarize the meeting as completely positive. I literally have to ask myself, “were we in the same meeting?” Over time, the rose-colored views are the only reports the non-present CEO and board get by the way (until time begins to run out on results that indicate problems). This can be especially true in non-SaaS plays where data is not readily available for observance.
I’ve confirmed this with other colleagues that have seen this play out. It’s not that one needs to be a nay sayer, but being realistic and having a good blend of objectivity is important early on. I would say the more EQ you can have in the room in those early meetings the better. It’s important because Time is the most precious asset we have in an early stage startup, so if you're chasing down the wrong deals early on, it can be disastrous. Click To Tweet
Too much one way talking / inside out innovation – Closely related to the confirmation bias of rose-colored glasses, is talking way too much during initial sales calls with customers. You know this has happened when you walk out of the first or second meeting with a prospect, and have no idea why they care about something and what is driving them. Too often than not, particularly in the founder selling phase of a startup, the meeting is all about the great thing we’ve built (in excruciating, unnecessary detail) and who we are or who has funded us. The whole point should be to validate and drive to the problem pain point, and let the customer do the talking as much as possible. Even if your messaging about the problem you solve is clearly in your pitch to a customer, it’s usually an initial hypothesis and needs to be refined continually to more specificity for different stakeholders in the sales cycle. This symptom is inside out innovation confirming itself, and it fails to flip to outside in enlightenment.
Eliciting feedback and listening with a purpose in early sales calls is vitally important. Listening with a purpose doesn’t mean just acknowledging an initial response from a customer, but really digging and probing. I’ve found that team member to be lacking in many failed early stage teams. There is either a fear to leave the script and manage the sales call differently, or go into the trenches like that to probe the customer’s environment for early red flags. I’m also a big believer in getting resonance to your world view and big hypothesis early, to get a sense for whether a prospect will come with you on the journey as an initial partner. If I can’t get agreement with a premise (passwords suck for example), I know my odds are low if I’m selling a passwordless solution. Then, I may try to get as much value out of the call as a discovery call as this non-prospect can still help me learn to fill in my ideal customer profile. I may just cut it short, but in some ways, no call is a bad call when you are learning and building qualification criteria.
And yes, there are customers that don’t want to talk, or reluctantly took the meeting as a favor to someone. The attitude is you’re the 10th startup this week so get on with it. Tell me what you do and why you’re going to change the world. Well, there are ways to deal with these customers and it’s still important to get at least 20% of the air time from them even if you have to do 80% of the talking. You’ll be surprised that by the end it can turn to 50/50 and a positive next step.
Burning valuable cycles with the wrong initial customers – This is a broad topic, because it is impacted by so many things. Your first 3 to 5 customers in a traditional enterprise software startup must be co-innovation partners with a lot patience to work through problems with you. Click To Tweet Preferably in one or two verticals even if you have a horizontal solution. There is too much learning and adjusting to initial customer requirements for this not to be the case. Usually there will be a C-level champion (with an early adopter profile) that believes wholeheartedly in what your startup is doing such that they and their team come along with you on the journey. This is important because regardless of how much you spec’d out the product you built, there are always new unforeseen interoperability, deployment or usability requirements to make it production MVP ready. It’s really important to make these customers stay bought in to a process that is likely going to be twice as long as the final sales process you will end up at. Designing a lighthouse program for them with perks is not a bad idea.
This also means ensuring informal sales channels of communication are built in addition to the formal team calls (notice I didn’t say sales calls). The informal channels of communication allow for gathering key information that remain blind spots throughout the prolonged sale process. Because many early sales prospects come from VC warm intros and startups fail to supplement with their own lead generation (a mistake I’ll talk about in another blog), extra weight is given to any customer, even if it’s the wrong customer. That’s a big problem.
Wrong early team dynamic – There are key roles that need to be played in an early stage enterprise software start-up, and they often extend beyond the founding team. The mistakes I see most often center around sales and product management. There is usually a re-start that happens when one of those two functions is not properly developed and it generally burns about 9 months in an 18-month funding cycle. The biggest mistake I see in sales is hiring a rolodex salesperson as opposed to an early stage startup salesperson. The big difference is that the big or mid company salesperson needs sales materials, scripts and tools to already be made. An early stage salesperson could help create it Click To Tweet and could be a half decent product marketer in their off time. They can run with enough domain understanding to be agile during conversations with an IT buyer for example, pivoting to do that probing of different pain points. They have the EQ to continually re-direct the conversation when founder or more technical team members are going the wrong way. The key is to find the pain point resonance. One strategy is to partner them with a strong product manager role type. This partner usually goes to the technical founder or business vision articulation founder. Whatever the case, the team dynamic must be right to enable rapid institutional learning. The mistake I see in product management is often not having a product manager that can dot the I’s and cross the T’s and establish early product development process, and at the same time be value add in early sales calls. It’s very dangerous when a technical founder plays CTO, sales engineer and product manager at the same time –to me, this never works.
The customer learning loop is broken within the company – A dysfunctional team role dynamic also means the rapid learning loops from early customers’ mouths to product management and early marketing (sales tools, etc) never happen. This is why I advocate your early hires be able to play almost dual roles, your first product manager can be a product marketer if basic marketer. Your first salesperson can almost sound like a half decent product marketer. Of course, there are certain combinations that don’t work as well as mentioned above, namely, the CTO being the product manager.
More importantly, what is learned through early customer engagements (in terms of pain points, personas and resonating language) must be reflected on, memorialized and validated across the broader market or a vertical quickly, and messaging/positioning assumptions must be continually challenged. It’s good to start from an initial hypothesis on all of this (positioning, messaging, packaging, pricing, etc), but I’ve found the domain deepening is dramatic when your on the inside and it takes between 4 to 6 months to get a good base. From there, it’s continual refinement indefinitely.
OK, this read is getting long so let me list out the rest in summary form and potentially dig deeper in future blogs. Here are my additional reasons:
Not enough focus, ability to say ‘no’ – this manifests itself in what I call the infamous “hedged strategy”. That only worked when I was on Wall Street in investing. Regardless of what’s on the business plan or reported in board meetings, this is a real startup killer. It manifests itself with talking to too many types of enterprises in the market, pursuing too wide a set of initial customers and requirements, etc. Closely related to MVP but broader. This kills start-ups eventually. I’d rather focus (with calculated risk taking), be wrong and pivot later with clear communication of the learning than try to serve two or more masters at the same time. By the way, I do believe there is a learning window where you need to go broad and can pivot, but that window eventually closes and the GTM must be committed to and focused.
MVP is too broad – this is a common killer. Whereas the prior reason was systemic and includes the GTM, MVP is purely designing product scope as narrowly as possible to get deployment and feedback sooner.
Wrong CEO – sorry but the buck stops here. Most of the problems I’ve talked about above should be identifiable by a good startup CEO and corrected. This is why the term first time CEO must have become a label in my opinion, because at times these patterns or subtle dynamics can’t be seen, and the mistakes must be had before they can be detected. No doubt the job is a hard one, but they are the most empowered person to resolve conflicts and make changes. Wrong CEO also includes cases of having off-the-spectrum neurotic CEOs (from narcissism and micromanagement to being totally disengaged) to glamor seeking founder CEOs (you know you have the wrong startup CEO if they're trying to get to Davos or a Ted Talk before your startup is stable and repeatable). Click To Tweet Up to a certain point, generally before PR becomes a successful brand/traction strategy, the CEO must be heavily operational and preferably, product-centric in stewardship. My personal opinion given the many decisions that require tie-breakers in the beginning.
We’ll wrap this one up there and hopefully this jives with your perspective in some way if you have worked at different start-ups. So yes, these problems do ultimately boil up to ‘ran out money’, ‘missed their funding milestones’ or ‘never achieved product-market fit’, but these drivers and others that must be rooted out and systematically addressed as a start-up grows.