Top 10 Reasons for Startup Failure

Top 10 Reasons for Startup Failure

Learning from your own mistakes is a necessary skill in the business world. An arguably even more valuable skill is to learn from the mistakes of others. Consider these common mistakes made by entrepreneurs of all levels of experience so you don’t fall into any of the traps yourself.

1) Some Projects Never Get Started In The First Place

The first point is almost moot, because it’s the simplest yet very common reason for startup failure. The founders just talk, dream, draw blueprints, schemes, and diagrams, blow lots of hot air, but never actually sit down to do hard work. It sounds laughable but is dishearteningly common and actually sad. I have never been in the shoes of such people, but I have seen it time and time again. [login] It is perhaps not fair to make a judgment on whether these letdowns are caused by psychological barriers, insecurities, fear, simple unaccountability, or something else. One thing is certain: whomever does not fall into this category must be extremely vigilant to avoid them, because the furthest such projects ever get is empty chatter. It will cause serious entrepreneurs wasted time, effort, and perhaps most importantly wasted opportunity they could have persued elsewhere; sadly, everyone loses.

2) Founders Are Terrible Leaders

Some people are meant to lead people, some cattle, and some neither. When leading or working within a team of people, few common leadership mistakes can seriously damage a fragile startup. If leadership is disrespectful or disregardful of partners or employees, over time it can lead to resentment and division in what must be a tightly knit group of people. As damaging as lack of respect and a lack of a people factor can be, an equally bad founder trait is indecisiveness, stubbornness, and poor decision-making when decisions are ultimately made. Indecisiveness can unfocus a company and cause it to lag, while stubbornness is typically a way to alienate others and show lack of respect towards their intelligence. If the decisions made by the founders are generally poor, it can cause a startup to die fast because in that fast-paced and unforgiving environment, second chances can be difficult to come by.

3) Cumbersome, Complex Product that Never Comes Out of Development

All markets are competitive and difficult. If they are not competitive, they are rarely worthwhile and are not without their own traps and difficulties. Discussion of different markets is a topic for a book rather than a paragraph, and the reason the topic is brought up, is to show why some people tend to think that to be a new player in a competitive market requires some extra great, cool, new complex technology. Much has been said (or ink spilled if I want to get poetic) about “Lean Startups” and “Minimum Viable Products” so I will not get into that. A more pertinent point is that often the founding team disregards the common knowledge of startup-building and comes up with a grandiose idea for some great omnipotent technology which is sure to be the next Google. This often causes startups to die because it takes too much time to create, costs too much money to build, or takes too long before anything reasonable can be brought to market and shown to customers, at which point the project is light-years behind modern startup schedule.
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4) Poor Sense of Proof of Concept

Some founders see the proof of concept as some holy grail to which they have to get to in order for all their dreams to come true. The proof of concept (POC) is fully part of startup theory, and no one is typically looked down upon for building one. In the greater scheme of things, it is good to embark on building a POC. Problems do arise in cases where the founders don’t have too much of a plan beyond the POC and have just enough money in the bank to work on the startup a few months after the POC release, or are hoping that the POC will bring enough money to pay rent either by bringing investment, or customer revenue from sales of the product. A typical scenario is that the POC does take quite a bit of effort and the founders are typically proud of what they have made. Unfortunately, the POC is by definition a very early stage product and when it is shown to others, enthusiastic reactions are rare and are commonly lukewarm. If that was planned for as it should be, it is ok. If the founders did not have too much of a plan otherwise, it often cripples the project.

5) Founders Look for Funding but Get None

Funding is a sexy topic in the startup world. The realm of angels and venture capitalists is exclusive and coveted because investors are the top of the startup food chain. For a number of reasons, perhaps they should not be, but they are. So until things change, investors will always have a constant supply of seasoned and green entrepreneurs clamoring at their doors. Over a VC career, an investor likely receives over 100,000 proposals, attends few thousand pitches, and invests in approximately 100. And the 100 or so investments are made up of people they either already know, have worked with before, or people who have run successful companies in the past; so even the 100 is a hyped up number with which to do calculations if you want to understand the chances of getting funded. That should say something to people who want to get funding. It is unlikely. Applying for investment takes considerable effort on the entrepreneur’s part which she could have spent working on building up her actual company. So if there isn’t much of a solid plan beyond getting investment, it often spells doom for the company, as very few get funded and most have to focus on a solid company model that can support the founding team and grow. If the proper company model is not in place and all hopes rest on investment, the results are often unfortunate.
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6) Project Takes Too Long, Key Founders Move On

Even with a proof of concept, funding (or not), and a team that is trying their best to create, improve, and sell a product, the lives of the founding team do not become any easier. While they may feel a slight bit more stability, there are still enormous difficulties like cut-throat competition within their market, cost of acquiring customers and monetizing them for more than it cost to get them, scaling the product, etc. All this takes time even in the best scenario where the company is growing. Al this takes time and to state the obvious, time is a funny thing. It can change people, their ambitions, attitudes, beliefs, goals, family situations and much more. Over the course of a few years a number of the founding members may leave. Some are replaceable and some are often not. While the common saying is that “everyone is replaceable,” it is often not true in startups because often there is one engineer who knows a crucial part of the code or a person with the vision and the true leader; or the one sales person who has accounted for nearly all the revenue. If these people leave, the organizations become like chickens running around without a head. They might kick and scream, run around and make a mess, but ultimately they will die.

7) Business Model Can’t Support Founding Team

This point is consistently echoed in nearly all other points because it is so pertinent. To keep the ship flowing, fuel is absolutely necessary. And money is the fuel that keeps companies going. We have covered how difficult it is to get money from investors. If possible, the best rout is often to position the company to earn money on its own. There is a startup term to the effect of being “noodle soup profitable” meaning that the company should make just enough money to keep its founding team afloat. The dollar amount for break-even can vary with the founding teams. If the founding team consists of one modest person, they can likely break even at $2,000 monthly income which would enable them to survive and worry less about money and more about building the company. On the other hand, if the founding team is full of ex-VP’s who need to support families or mortgages and can not dip below 10k monthly salary, the playing field changes quite a bit. This is pre-beginner cost structure overview, but it has to be understood since it is often difficult to monetize online users who are difficult to bring to your site in the first place.
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8) Founders Get Funding But Can’t Get the Product Right

There are many companies struggling along with an ever-changing product. The product doesn’t change in its core, but rather in its look, usability and minor features. The founders try to get it right, but get lost in overwhelmingly different customer and focus-group feedback. It isn’t as much of a problem as it used to be because the idea of following a vision while listening to customer needs is a great guide to finding the balance between the two. Nevertheless, an ever-changing product can be confusing to existing and new customers, harder and costlier to market and continuously augment, and can be a sign of a weak CEO who is not able to make sharp and crisp decisions.

9) Product Can’t Find Market

Some companies get pretty far. They may get investment or are able to survive on their own, and even get a mature product to market that garners some attention. Things seemingly go well, but the product is never able to reach beyond a certain audience. Typically “early adopters” try out the product because it perks their attention, and the company is able to survive on that wave of revenue and consumer interest for a while, but is not able to reach beyond the early adopter market. Reasons for this are many. Sometimes the product is only marginally better than something people are already used to, or isn’t helpful to a wide enough group, or costs too much, or is just poorly marketed. There are many reasons why some products never grow beyond a certain reach. We are just pointing out that a common cause of startup failure is simply that the company is just not able to attract a wide enough audience, often resulting in failure.

10) Founders Get Funding, Company Doesn’t Take Off, Founders Stall and Create Illusions

I left this interesting scenario for last. Sometimes it is clear that a failure is impending to everyone except the investors. Customers laugh at the company and leave, employees quietly come to work and go home, while collecting a paycheck, and the executive team makes things look amazing from the vantage point of the people who invested in the company and help find further sources of funding. Sometimes the executive team spends most of the money on marketing in order to attract some users, and be able to show user growth to the investors to placate them. Sometimes the team bonds and does show good teamwork, making the investors reluctant to disband a solid team. There are many possibilities, so when evaluating or trying to make sense of a startup, considering who in the company is benefiting from maintaining the status quo and where the gaps look too big to make sense.


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