Why, really, do startups fail?

Madhu

Why, indeed? This is a question I’ve thought about a lot over the last 2 years (sure, it is a popular thing to mull over), since I took the plunge, so to speak. It’s obviously of deep importance to entrepreneurs – it’s critical to know what failure looks like and try and avert it, whether with a new alpha feature, a marketing campaign, or your startup as a whole. If failure isn’t bad enough, the opportunity cost – what you could have been doing instead – is all too real.

Which is why, when I came across this report from CB Insights on ‘The Top 20 Reasons Startups Fail‘, I was more than mildly interested. The report is based on post-mortems of 101 startups by their founders – a very courageous act. I’ve always found it tough to look back at a failed endeavor, much less deconstruct it as these guys did.

Here’s the key chart from the report:

Startups_Fail

Now, at the trivial level, startups fail when the cash runs out. Or when the founders decide to call it quits, i.e., the commitment runs out. As Brett Martin wrote of his failed startup, Sonar, last year: “Startups don’t die when they run out of money, they die when their founders let go.” Maybe it’s when both commitment and cash run out.

But I have always had a feeling that these are just symptoms, and not the disease itself (and Brett agrees in his post). Put another way, is it the last straw that breaks the camel’s back, or is it that the camel was carrying too much straw anyway?

Back to the Top 20 reasons report – the top 2 reasons are:

  1. Not targeting a market need – 42%
  2. Ran out of cash – 29%

The first one makes complete sense – a solution in search of a problem rarely finds one. I would extend this a little bit though, and say that startups fail when they’re not targeting a market need that’s big enough. For all that the law of large numbers postulates, sometimes there may be only three people that suffer from a problem. Worse, if you’re not from the sector that you’re starting up in, you run a risk that the problem doesn’t exist at all. As Paul Graham said, the key to building a successful startup isn’t necessarily having a brilliant idea, but to make something people actually want.

But I have a problem with the second – I would think running out of cash would, in most cases, be an indicator of some more structural problem at the startup. Indeed, the example used in the report, Flud (a social news reader), ultimately failed when it ran out of cash, but not before trying different approaches to find the elusive product-market fit. And as this blog shows, there’s a lot more going on when you’re running out of cash.

In fact, I would have guessed that reasons 2 and 3 would be poor product and poor marketing, but they come in at no. 6 and 8, as you can see in the chart. I’m sure most people would also agree that the product itself needs to be good, but not enough realize the importance of marketing.

As Peter Thiel says in Zero to One, entrepreneurs learnt from the dot-com crash of the early 2000s to focus on product and not sales, but unfortunately sales and marketing are as important as the product itself. A product itself is worthless unless you get it in front of the customer. And unless you’re building a product for all people at all times (like WeChat and the other South East Asian messaging apps for example), getting your product in front of the customer is a significant challenge. And what’s more, it will remain a significant challenge for a long time, as each strategy you employ to get traction works excellently for a while, and then fails to move the needle as your user growth targets increase, and you have to  jettison it, rinse and repeat (more on that in a separate blog post).

If you’ve invented something new but you haven’t invented an effective way to sell it, you have a bad business—no matter how good the product. – Peter Thiel, Zero to One

And looking at all the other reasons on the chart, you can see how they relate to these three primary factors – (a) product, (b) market and (c) product-market fit. For example, you get outcompeted when your competitor has a better product, or is able to reach the customers more efficiently than you (maybe he can spend more money on marketing than you). The only other element missing in this world-view is time and opportunity cost – without time constraints you could, at least theoretically, continue trying different things cheaply till you get it right. But then, the race against time is what makes this exciting!

What do you guys think? Do you agree with the reasons in the report?

 


PS. Asking founders why their startups failed may not be the best idea – they’re too close to the wheel to go beyond the symptoms. Would asking their investors have yielded a different result?

PPS. Would love your feedback on the post. if you like it, do subscribe over email. I plan to write approximately once a week, on startups, consumer behavior, books, and sometimes nothing in particular (ignore the last part, I didn’t want to put an ‘etc.’).

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