Fail in high school and you are usually graded an F; the same is true of startups. Depending on who you ask, there are a multitude of reasons why startups fail.
Each strand of startup DNA contributes its own reasons for failure, but all of them relate directly to one of the ‘3 Fs’:
- Founder failures
- Funding failures
- Flawed business models.
You can’t solve a problem you don’t recognise or whose existence you deny. Acknowledging and understanding why startups fail is critical to success. It allows you to develop a plan.
When I ask founders why startups fail, some show a degree of understanding, but many more have never even given it a thought. One of the inspiring things about founders is their drive and passion, but idealism can often blind them to the common causes of failure.
Delving deeper into why startups fail, 10 primary reasons emerge:
- Founder(s) lack capacity
- Founder(s) lack capability
- Founder disharmony
- Ran out of cash
- Too much funding
- Investor–founder disharmony
- Solving an irrelevant problem (desirability)
- Ineffective business model (viability)
- Poor execution (feasibility)
- External threats/competition (adaptability).
Every failed startup will manifest one or more of these causes. The important thing to note is that most of them can be influenced; that is, most such failures are caused by poor planning, a poor team or poor execution within the organisation. Only on rare occasions is a startup outcompeted. The good news is that if these failures can be understood, they can be avoided.
Founders are the life blood of any startup and contribute disproportionately to their success or failure. If I asked you to think of a startup founder, you would most likely conjure up an image of someone like Steve Jobs or Mark Zuckerberg, yet such entrepreneurs are exceptions rather than the norm. Startup founders are of course as diverse as the ideas they build on. It has been estimated that there are more than 450 million entrepreneurs around the world who are working on startups in some form or another, and more are joining the community every day.
These new founders are often poorly equipped for their journey. They confuse capacity and capability, and to build a successful startup they will need both.
Founder capacity is about how equipped a founder is to face the day-to-day challenges of running and leading a startup. This ranges across the spectrum from their physical fitness to their mental and emotional readiness. Capacity is like the fuel in the tank that allows you to make the journey. Many founders I see who struggle have not focused enough on building capacity; that is, they haven’t taken care of or developed themselves enough.
Founder capability is more easily quantified and comprises the skills necessary to run a startup. This covers technical, communication, leadership, negotiation and conflict resolution skills. Capability is far easier to acquire than capacity, but I would suggest that capacity is more important for success.
It is also widely acknowledged that co-founders, or teams of founders, with complementary skills are more successful than single founders. Yet I have seen many startups implode because of founder disharmony. Choosing a co-founder and learning to work with them is critical. Surrounding yourself with the right people — from board members to advisers — will also have a significant impact on your success.
Failure due to running out of money seems a pretty obvious one. Most failed startups eventually run out of money regardless of the root cause of the failure. This could be because investors have lost confidence in the founders or because the business model has not proven out. Ultimately the fatal pinch comes, at which point there is not enough time to raise additional capital before existing cash reserves run out.
Surprisingly a startup can also fail because it is overfunded. I liken this to giving a starving person a huge meal, causing them to die from overeating. Overfunded startups run the risk of losing their edge and their hustle. I have seen numerous well-funded startups take their foot off the gas and focus more on the new office fitout and the design of their business cards than on continuing to prove out their customer hypotheses and value propositions. In my experience, there is a funding sweet spot for early-stage startups.
Just as founder disharmony can destroy a startup, so can founder–investor disharmony. It is crucial that you choose the right investors and that you bring those investors along for the journey. Having investors breathing down your neck every step of the way or being misaligned for the future direction of the business is something a startup and its founders can well do without.
Flawed business models
The definition of a startup is ‘a temporary organisation in search of a scalable, repeatable, profitable business model’. Founders often confuse an idea or a product with a business model. It is very easy to fall in love with an idea, and even easier to fall in love with a product. Ideas are cheap and they are everywhere! The idea is the seed that births most startups — and that isn’t a bad thing. However, most founders place too much importance on the idea alone. Ideas are interesting, but business models make successful startups. Coming up with a smart idea is easy. Creating a fully blown, viable business model is harder. Most ideas at best identify a market opportunity; and in many cases, even that opportunity needs to be validated.
Business model failures fall into four broad categories:
- lack of desirability: This relates to not understanding the problem well enough and/or solving a problem that the target customer does not perceive as relevant.
- lack of feasibility : There are many ways a startup can fail to execute. It could be because of poor hiring, focusing on the wrong activities or executing too slowly.
- lack of viability: We have talked about default dead or default alive with respect to the critical measures of revenue, growth rates and expenses. Managing cash burn within a business model that ultimately drives to break-even and profitability is essential. There has been a recent dramatic shift in the investor community away from growth startups (companies that focus solely on user growth or other growth metrics — think Twitter) towards yield startups (companies that focus on financial metrics such as break-even and customer acquisition cost — think Google).
- lack of adaptability: Startups are by their nature disruptive, but this doesn’t mean they can ignore competition. External threats such as government regulation can’t be ignored either, especially in highly regulated industries.
Learn from history
From the outset, it’s healthy and prudent to consider how you could fail. There are reasons why other people who have gone before you haven’t been able to climb the mountain. People who climb Mount Everest look at those who went before them and go, ‘Okay, we’re going to take this route because those people fell off the cliff going that way, and we’re going to use oxygen and Sherpas.’ You look at how people have failed before you and learn from them so you can adjust course and not make the same mistakes they made.
The great scientist Isaac Newton said in 1676, ‘If I have seen further, it is by standing on the shoulders of giants.’ These words ring especially true for startups. As founders, we are always innovating around technology, but often we fail to learn from the mistakes that are made time and time again in our businesses. There is a wealth of data and analysis available about startup failure, yet many founders and early-stage investors don’t care to look at it.
About the author
Jamie Pride is a serial entrepreneur and venture capitalist on a mission to help build better founders and a better venture capital ecosystem to support them. His new book, Unicorn Tears, provides an insider’s view into what it takes to make a startup successful and what it takes to get funded.