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Seven Reasons Why Startups Fail

Seven Reasons Why Startups Fail
By Andy Gordon
Date March 20, 2019

Using analysis from 101 startup post-mortems, CB Insights recently published a report on the top 20 reasons startups fail.

It was remarkably dissimilar to a piece I wrote last month on the 19 biggest mistakes founders make. We agreed on only four items: running out of cash, ignoring feedback from customers, lacking a business plan and failing to nail down prices.

CB Insights listed broader and more conventional items than I did, so I thought it would be interesting to give you my quick (and less conventional) take on its top seven.

1. No market need. From the report: “Tackling problems that are interesting to solve rather than those that serve a market need.” Post-mortem quote: Doctors want more patients, not an efficient office.

My take: Founders aren’t as self-absorbed or stupid as CB Insights suggests. Did ride-hailing (Uber) or hotel choices (Airbnb) address clear and obvious market needs? No.

Many times, founders misidentify the problem, creating solutions that don’t meet the needs of customers. Take the above post-mortem quote. Doctors don’t want more patients – they want their workday to produce more earnings.

Seeing more patients is one way, but not the best way. How about creating remote visual consultations? Or monetizing after-office hours emergency calls?

Thinking in terms of efficiency is an incremental approach to the wrong problem. More radical solutions that attack real problems resonate with customers.

2. Ran out of cash. From the report: “The question of how should you spend your money was a frequent conundrum.” Post-mortem quote: [We weren’t] able to raise this additional funding despite multiple approaches and incarnations

My take: There are two things at play here. One is frivolous or unwise spending decisions. That’s squarely on the founders. But the second – not being able to attract additional investment dollars – is more complicated.

Some products just take longer to develop, go through beta, prove out and catch on. I’m convinced a lot of potentially great companies never got the chance to show their stuff because they ran out of cash through no fault of their own.

3. Not the right team. From the report: “A diverse team with different skill sets was often cited as being critical.” Post-mortem quote: I wish we had a CTO from the start.

My take: My favorite combination is two founders – one with loads of business experience, the other with top-notch technological credentials. More than two veers toward leadership by committee, which is not ideal. And fewer than two puts too much of the burden on one person.

4. Get outcompeted. From the report: “Once an idea gets hot… there may be many entrants in a space… Ignoring them [is] a recipe for failure.” Post-mortem quote: It was far easier to have a good experience on [the company’s competitor].

My take: 19% of startup failures are attributed to this. But all the startups I’ve dealt with were keenly aware of the existing competition. And most of them had a good idea of where future competitors were coming from. Some competitors had poorer products but better funding. Other competitors came from overseas.

As an investor, I ask a ton of questions about the competition. I also ask how often the company iterates. It’s one of the best ways to stay ahead of the competition.

5. Pricing/cost issues. From the report: “Startup post-mortems highlight the difficulty in pricing a product high enough to eventually cover costs but low enough to bring in customers.” Post-mortem quote: Customers who churned never complained about the price. We just didn’t deliver up to their expectation.

My take: I said the same thing in my 19 founder mistakes post: “Rolling out a product at a price that encourages demand, produces a profit, and can reach a large and growing customer base should be the goal of every startup.” It’s amazing how many startups drop the ball on this.

When I ran my own business, I wanted my products to be cheaper and better. If I couldn’t compete on price, I made sure I was offering something superior. Sometimes that wasn’t good enough, especially when I was competing against better-known brands. It’s not easy. But startups have to find a way, even if they don’t succeed the first dozen tries.

6. User-unfriendly product. From the report: “Bad things happen when you ignore what a user wants and needs.” Post-mortem quote: Looking back I believe we needed to clear the decks, swallow our pride, and make something that was easier to have fun with.

My take: We still haven’t escaped “why isn’t this obvious” territory. The only acceptable excuse is the one that comes in the crypto space, when the entire industry is so new and the infrastructure so underdeveloped that it’s impossible to fully address ease of use concerns.

7. Product without a business model. From the report: “Failing to find ways to make money at scale left investors hesitant and founders unable to capitalize on any traction gained.” Post-mortem quote: [We] didn’t scale because we were single channel dependent and that channel shifted on us radically and suddenly.

My take: Building a product and building a business require two distinct skill sets. Founders or CEOs who can do one can’t necessarily do the other. An unproven business model is both one of the most exciting and one of the most terrifying things a founder must address.

Filling in the Blanks

This is just a fraction of the dozens of ways a startup can go down the wrong path. As investors, we can’t foresee every wayward path. Even if we ask the right questions, the feedback we get from the startup can be misleading.

That’s because for startups, clarity often only comes in the rearview mirror, never in real time. I’ve never met a founder who doesn’t think they’re meeting a market need, and I doubt I ever will.

But this is also what makes startup investing so interesting. We have to fill in the blank spaces as best we can and fit the pieces of the puzzle together without having a complete set.

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