The Mistakes That Lead To Startup Failures
Many of our clients are early stage brands who don’t want to end up in the pile of startup failures. They come to us because of our deep understanding of scaling, marketing and entrepreneurship.
We love to glorify the startup world. We love the excitement of the startup stories. But I think most people relish the freedom startups provide their founders. Let’s face it, telling people you meet that you have a startup increases your coolness factor.
Don’t take my words or tone as a criticism. I am a veteran of five of my own startups and have helped on dozens of others. Plus, I mentor at a university entrepreneur program and several local incubators. So I have seen the good the bad and the ugly.
But for every startup that succeeds, there are nine that die a painful death for their founders. And make no mistake, starting a business gets very personal and emotional. So if it fails, there is a period of loss that takes time for the founder to recover.
CB Insights did a great analysis of why startups fail. They have been analyzing startup failures for several years. In fact, they have analyzed over 242 failures in 4 years. There is some very good insight in this analysis
From my own experience with startups, I have put together the most common mistakes that cause startup failures.
The Biggest Reason For Startup Failure
Building a business when there is no demand for your products is the single biggest reason for failure.
When you build your business plan for your startup, you should always ask what problem does this business solve.
The biggest flop that comes to mind in this genre is Juicero. This was a complex solution that solved no real need. They took cold-pressed juicing and tried to put iOT technology into an overpriced machine that provided zero benefits for the user. The whole business was a disaster from the start. Yet, they were able to raise gobs of money.
Misinterpreting what other business leaders have said causes some of this misdirection. When Tim Cook from Apple stated “We Make Products People Didn’t Know They Wanted And Now Can’t Live Without.” he wasn’t referring to trying to create demand for a new market for a product.
For every product Apple rolled out, demand for a market already existed.
There were MP3 players when Apple created the iPod. They solved the clunky interface and library organization problem and made the product aesthetically cool. But the market existed.
We were already using cell phones when the iPhone took it to another level by integrating features we used on a desktop computer. So be careful when interpreting what other leaders say.
The Next Biggest Reason For Startup Failures
Not having enough cash.
Money is expensive, and money is hard to get.
Trying to convince investors to fund your startup is not as easy as the press makes it out to be. The reality of capital raising is that it is a numbers game.
For the average startup, it takes over 90 presentations before you will secure your first investment.
The average business using crowdfunding raises only $100,000.
The average startups spend 29 hours a week on capital raising activities. That is time away from growing the business.
Money and time are finite. Use them wisely and conserve as much as you can. The critical metric that will drive investment in your startup is proving growth. Investors want to know that there is a demand for your startup.
The app TBH acquired 5 million users and 2.5 million daily active users in 9 weeks. That was enough for Facebook to buy them. Their entire lifespan was less than a year, and they were acquired at a high valuation. They spent their time aquiring users, not raising capital.
The third Biggest Reason For Startup Failures
No Difference From Competitors
There are always going to be competitors for any startup. Competition is healthy and necessary.
What is it that your startup is doing that is different from other competitors? Because if your competitors can say the same thing about their business that you can say about yours, you don’t have a business.
Fresco was a photo-based news startup that failed after raising tens of millions of dollars. They were young, hip and cool. Everything you would expect from a startup today. The problem was they didn’t have a unique approach to delivering the news. Why would people change from reading the BBC, NY Times, CNN or USA Today in favor of Fresco? The answer is, they didn’t.
The Fourth Biggest Reason For Startup Failures
A dysfunctional team
I have said it a million times. Don’t hire people who are smarter than you are. Hire people who share your startup’s common vision.
Too many times startups bring on the biggest names they can find as investors, advisors, and operators. Their thinking is this will provide credibility to their business and help them grow.
What ends up happening is a lot of smart people jockeying for position to be heard. Everyone wants to be the smartest guy in the room instead of solving the problems at hand. So you end up with dysfunction and no agreement on the important decisions.
ArsDigita was a classic example of this. A successful company killed by people who wanted to be the smartest without understanding what the company was. The worst part of this story is that ArsDigita was profitable from the first day. There was no reason for this failure.
The last Biggest Reason For Startup Failures
Failing to pivot the business in time
Nothing ever goes according to plan. The classic example of this is Myspace. Prior to Facebook or Twitter, Myspace had the user base. Yet they failed to see where the users were going and invest in the interface to provide a better user experience.
Paying attention to how users are engaging with your brand is important. You should always be looking for ways to improve, enhance and update to stay in step with your customer base.
Startups can be exciting and fun. But failing is not. Many times when founders begin heading down the path of bringing their idea to life, they stop listening. It is important for founders to pay attention to feedback and users to avoid many of these pitfalls.
Time and money are always tight, so use them wisely and keep them focused on what is important. A great fun office is not as important as an additional few thousand users. We work with startups and early stage brands every day. Our job is to prevent them from ending up as another startup failure.