Is it the idea? the team? the execution? the funding? What, and who, is most to blame when startups fail? CB Insights set out to find out…
Startups are hard. We all know that. Especially disruptive, scaleable tech startups, which hold the promise of a new horizon, yet are most likely to be dashed on the rocks of ruin.
In some ways though, the ‘start up’ bit is easy. Raise some money and/or throw in your own with some cofounders and off you trot. So much software these days is free or at a low cost, you can bash out your MVP, use some social media, perhaps get yourself some coworking space, maybe some staff, a website… Ta Daaa, you’re a startup!
So if it’s fairly easy (theoretically) to get going, why do so many fail? What things should startups look out for, to make sure they are one of the few that survive, and indeed, thrive?
CB Insights published a report this month into why startups fail, based on 101 post mortems.
Top of the list is ‘No market need‘.
42% of failures cited this as their number 1 reason for failing. In other words, the customers were telling them they weren’t going to pay for whatever service was being provided, in sufficient numbers. They were running down the wrong rabbit hole, and there were no rabbits there. Well, not enough that will pay.
The number 2 reason? Running out of cash. Which is the same reason as #1. You need to allocate funds wisely, and be sensible, but overall if you had enough customers willing to pay you to solve their problems, you’d find a way to stay in business.
#3 is “wrong team”. Businesses are run by humans after all, and if they can’t get on, or work together, or have complementary skills, then things can be tougher than otherwise. But you should be able to get rid of the bad people, and hire better ones (“the best people on the bus, in the right seats, and the other people off the bus“, as Jim Collins wrote).
#4 is “being outcompeted”. Someone else beat you to it. Their product is better made or sold or solved the customer problem better (there’s that ‘customer problem’ thing again).
#5 was “pricing/costing issues”. Do you offer a free trial, for how long? What packages will then be on offer? How good is your on-boarding, and conversion of free to paid? It’s a dark art, and also a science.
Most of these and other reasons are all versions of the same essential issue – not understanding the customer and their problem.
Interestingly, the venture capitalist Bill Gross gave a TED talk in 2015 on this subject. He flipped the question around – what was the main reason startups succeeded? His research showed that the single biggest reason was timing.
Too late, and you’re dead. Too early is better than too late, but it can be hard. Being early feels a lot like being wrong – you need perception to realise the difference.
Getting the timing right, when the customers and industry are ripe for the disruption you bring, is gold.
Timing, says Gross, is more important than getting the right team together, or the brilliance of your idea, plan or business model, the execution of strategy or your adaptability or resilience.
Rebekah Campbell, Hey You and Posse founder, writing in the Fin Review last week argued that her biggest startup mistake was raising money in the first place. Don’t raise money at all, she said, just get out there nice and lean, and stay close to your customers. ‘A fool and their money is easily parted‘, as the saying goes. Better to earn money from your clients, the best validation you can have.
Then again, there is no such thing as failing, say some, only ‘flearning‘ (failure through learning). True. But your investors may not take kindly to you flippantly saying, ‘Sorry I lost you all your money… but I sure learnt a lot!‘
We can debate this until the cows come home, but in the end, it’s all about the customer. Don’t even think of setting up a startup until you have discovered that big, hairy global problem your customers are going to pay you to solve.
The rest should then follow naturally.
The full top 20 list is below:
Source: ‘The Top 20 Reasons Startups Fail‘, CB Insights, 2nd February 2018
A version of this article first appeared on the author’s Damburst blog.