Why do startups fail? Advice from eight scaleup founders and CEOs.
22 September 2015
Despite stories of billion-dollar acquisitions and startups becoming world leaders in incredibly short time periods, it stands to reason that not everyone makes it.
Some startups fail during their initial period, burning through funding too quickly, or simply not having enough initial traction to survive the long haul. Others make it into the £2m – £10m revenue stage, but fail to accelerate further.
There are many reasons a startup can fail or stagnate before it truly becomes a “scaleup”. I headed to Quora and rounded up some of the best insight from founders, CEOs and entrepreneurs here to help you avoid the common pitfalls.
What lessons can be learned from startups that have failed in the past?
It’s important to do your homework. There are lots of lessons to be learned from startups that have failed to take off (even if they are ones you founded yourself). In the recent past Zirtual and Homejoy serve as prominent examples, but there are still valuable lessons to be learned from these:
Wil Schroter, CEO: Startups.co
Startups don’t usually go out of business for one single reason – it’s usually a multitude of reasons. It’s convenient in the press to try to say “CEO did XYZ bad and then everything collapsed” but it’s usually not that cut and dry. .
Burn was not managed.
Startups take on burn because they think the negative margin investment will lead to a better outcome in the future. However, it’s predicated on the fact that there will be enough cash to support that burn. Plenty of companies have crazy burn and in many cases it’s a good thing because it’s synchronized to growth. When capital comes in, people consider it a wise decision. When capital falls through…
Growth requires you to be conservative.
These are almost polar opposite ends. The Founder always wants to grow as fast as possible. The idea of saying “no” to growth investments in infrastructure and people can sound ludicrous in the face of so much opportunity. Yet Founders need to constantly have a plan in place to manage the “hedge” or the downside of what happens when the income or capital doesn’t hit the projections. And let’s face it – they usually don’t. So the “hedge plan” is as important as the growth plan. I can’t emphasize this enough.
Garry Tan, Partner, Y Combinator
Be vigilant about managing your runway. Raise money before you need it — at least 3 to 6 months beforehand. If at that time it doesn’t seem like you’ll be able to get there, then have a Plan B — profitability, if you can swing it. This advice is easier to say than it is to follow. Founders are by nature always more optimistic about their future, which is why they’re doing startups in the first place.
There are also a lot of external factors you can’t control when it comes to raising your next round of funding. VCs are notoriously fickle and for some markets there are a finite number of them. Either way, if a company goes out to raise and can’t, it should cut spending and try to get to profitability. Founders always worry about growth but it’s better to switch to Plan B while there is still time to implement it.
When you’re in a car low on gas and not sure if you can make it to your destination, you slow down to conserve gas, not stomp on the accelerator.
Where do most web startups fail?
Both Garry and Will mentioned similar line items: Managing money, and hedging your bets. Are there any other common issues that can knock out a promising startup?
Slava Akhmechet, founder: RethinkDB
Slava listed three key mistakes that can lead a promising business model to wither on the vine.
There are three superficial reasons, but I think they’re important to point out because increasing the level of detail on potential reasons for failure doesn’t help if you don’t understand the larger reasons behind them:
Picking a small market – that is, if the company were to develop a killer product that wins 85% of target customers that encounter it, the total number of such potential customers is too small for the company to succeed.
Failing to develop a killer product. Either the product is not worth building (and therefore using) because it doesn’t provide a significant advantage over the status quo, or the product is poorly designed (has the wrong features, has features that are poorly implemented), or the product never ships.
Poor operations that fail to find/ship a killer product and/or fail to scale it. Perhaps you’ve built something great, or are almost there, but don’t have the operational support to scale it up to a meaningful, profitable, large business.
These three things are the only things that matter. Everything else (getting the people and relationships right, fundraising, paperwork, sales/marketing, etc. etc. etc.) are just means to an end. If you’re doing something that doesn’t help you improve upon these three points, you’re doing something wrong.
Evan Asano, CEO & Founder: Mediakix.com
Evan also listed a number of common issues, but underlined that it was often a mix of these that ultimately led to failure. In addition to Slava’s points, he suggests that entrepreneurs pay special attention to team building and key hires:
The right team is critical for launching a successful startup. So much so that many VC’s invest almost exclusively on the quality of the team. Though even if you have the right team, disputes and non-alignment can derail the startup at a later date.
Without a doubt, you need a strong leader. Someone with a vision, who can communicate this and inspire the team. Someone who can adapt to the market, think strategically and execute relentlessly.
If your startup’s good and the market’s growing, the founders will very quickly find themselves in a position to hire and hire fast. Those hiring decisions can make or break a startup. The team will need to be able to go from being heavily involved in the nitty gritty, to hiring great people to do their jobs and move on to big picture and management.
Friendster is probably one of the best cases of a failed startup due to execution. As Friendster grew, it suffered huge issues with bandwidth and scaling their site. People trying to access the site that was not loading or slow, never had a chance to get locked into it, which made it easy to join Friendster’s fast following competitor MySpace. If you read about Instagram’s growth, you see a different story. The founder there build a simple app and then focused on the critical aspects of building and scaling the database. If the app was glitchy or had issues, then they’d lose users. They focused on this so much so that they didn’t launch on Android for over a year and a half and were app-only (no website) until after Facebook bought them
Skinner Layne, founder: Exosphere
Skinner was quick to point out just how important vision is to a business. While it may be the most difficult aspect to quantify, having a team that understands where the business is going and why is crucial. Without this, people are unable (and unmotivated) to do their best work.
There is a critical difference between startup failure and a startup not succeeding. In order to understand this difference, we need a better definition of what a startup is. If we paraphrase Steve Blank’s definition of a startup as an organized search for a scalable and sustainable business model, then the reason startups of any kind fail is always and singularly that they give up on the search. The only exception to this would be startups who actually go bankrupt–which is not the same thing as running out of money.
Nearly all startups are a series of experiments–few succeed with their first hypothesis. Unfortunately, most startup founders and their teams do not see themselves this way. The Lean Startup movement has also perhaps overcorrected in the other direction. So let’s be more specific.
Most successful startups begin with a clear vision of what the world ought to look like if they were to succeed–we’ll call this a macro-hypothesis. This macro-hypothesis will take the form of normative language like “people ought to be able to rent out their spare bedrooms in an online marketplace to create an alternative to hotels.”
Most of these experiments fail. Some of them succeed and because of WYSIATI (what you see is all there is), founders stop there, saying “Eureka! We’ve found our model,” when in fact that model may not be the best, or even in the 50th percentile of workable models under the macro-hypothesis.
What is the single biggest mistake entrepreneurs make when starting up?
This ties into comments several successful founders made about not being discouraged if your first ideas fail to take off. Becoming a scaleup takes time, commitment and no small amount of luck to go with the talent. In addition to vision, you need to make sure you are building a business for the right reasons, and those may not always be financial.
Dharmesh Shah, Co-founder and CTO: HubSpot
I’ve made countless mistakes in my entrepreneurial career. My biggest was attempting to be a parallel entrepreneur whereby I was foolishly trying to run two companies at the same time.
Startups are an all-consuming thing. It’s hard to split time and passion across multiple ones. Startups are hard enough as it is, but balancing two at the same time is almost always a bad idea.
Dharmesh is the founder of inbound marketing and sales platform Hubspot, where he acts as CTO. You can catch up with him on Twitter here .
Alok Kejriwal, CEO: Games2win.com
The biggest mistake I made was to have started my business with an intent to sell it.
That’s a wrong ‘intention’ to have. The karma of the startup gets muddled up.
Then, all along, you start thinking of exits and shortcuts rather than growth and value creation.
Moisey Uretsky, cofounder: DigitalOcean
Finally, Moisey pointed out that while reaching scaleup stage is a challenge, help is available for entrepreneurs:
Scaling engineering teams, creating management layers, dealing with culture, HR issues, compensation, compliance & legal, org structures, whatever it is has already been done by countless other companies. Thus, the biggest mistake a founder can make is to not have mentors and advisors and constantly rotate them in and out based on the scale and growth of your company.
DigitalOcean is a cloud server deployment service that recently secured $40M in funding. You can find Moisey on Twitter.
1: Keep an eye on where and when you spend your money.
The temptation is to push for more growth, but make sure you have a clear understanding of when and how you will be able to cover expenditure.
2: Have a clear vision
This will permeate everything you do as a business, including hiring and importantly, retaining your teams. Team members who are with you at the start may not be interested in growing a business, so consider the long term implications of each hire.
3: Don’t be discouraged if things don’t go perfectly.
Lots of very successful people took a long time to get where they are today. Help is available from forums, social media groups, meetups, apps and more. If in doubt, ask.