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20 Reasons Why Startups Fail

Robert H. Lane,  October 13, 2015

For the past several months we have been examining why start-ups fail. In this process we looked at some 130 situations. Our business activities have spanned some 55 years, during which time the business world has moved from quill pens, slide rules to electronics of all shapes and sizes. Many of the reasons that business failed in the past are still true today. We will share our findings drawn from both the United States and Canada. The numbers do not add up to 100% as we found often two or more reasons of failure

Reason 1: Market Problems (42%)
By far the most significant reason for failure was simply ‘no market need’. There was little or no market for the product or service that they had created.

Some common symptoms:

  • There was not a compelling enough value proposition, or compelling event, to cause the buyer to actually commit to purchasing. Good sales reps will tell you that to get an order in today’s tough conditions, you have to find buyers that have their “hair on fire”, or are “in extreme pain”. You also hear people talking about whether a product is a Vitamin (nice to have), or an Aspirin (must have).

  • The market timing was wrong. You could be ahead of your market by a few years, and they are not ready for your particular solution at this stage.

  • The market size of people that have pain, and have funds was simply not large enough. Reason 2: Running out of Cash (29%)

A second major reason that startups fail is because they ran out of cash. (29%). A key job of the CEO is to understand how much cash is left and whether that will carry the company to a milestone that can lead to a successful financing, or to cash flow positive.

The valuations of a startup don’t change in a linear fashion over time. Simply because it was twelve months since you raised your Series A round, does not mean that you are now worth more money. To reach increases in valuation, a company must achieve certain key milestones.

Milestones for Raising Cash

Progress from Seed round valuation goal is to remove some major element of risk. That could be hiring a key team member, proving that some technical obstacle can be overcome, or building a prototype and getting some customer reaction.

  • Product in Beta test, and have customer validation. Note that if the product is finished, but there is not yet any customer validation, valuation will not likely increase much. The customer validation part is far more important.

  • Product is shipping, and some early customers have paid for it, are using it in production, and reporting positive feedback.

  • Product/Market fit issues that are normal with a first release (some features are missing that prove to be required in most sales situations, etc.) have been mostly eliminated. There are early indications of the business starting to ramp.

  • Business model is proven. It is now known how to acquire customers, and it has been proven that this process can be scaled. The cost of acquiring customers is acceptably low, and it is clear that the business can be profitable, as monetization from each customer exceeds this cost.

  • Business has scaled well, but needs additional funding to further accelerate expansion. This capital might be to expand internationally, or to accelerate expansion in a land grab market situation, or could be to fund working capital needs as the business grows.

What goes wrong?

What frequently goes wrong, and leads to a company running out of cash, and unable to raise more, is that management failed to achieve the next milestone before cash ran out. Many times it is still possible to raise cash, but the valuation will be significantly lower.

When to hit Accelerator Pedal

One of a CEO’s most important jobs is knowing how to regulate the accelerator pedal. In the early stages of a

business, while the product is being developed, and the business model refined, the pedal needs to be set very lightly to conserve cash. There is no point hiring lots of sales and marketing people if the company is still in the process of finishing the product to the point where it really meets the market need. This is a really common mistake, and will just result in a fast burn, and lots of frustration.

However, on the flip side of this coin, there comes a time when it finally becomes apparent that the business model has been proven, and that is the time when the accelerator pedal should be pressed down hard. As hard as the capital resources available to the company permit. By “business model has been proven”, I mean that the data is available that conclusively shows the cost to acquire a customer (CAC), (and that this cost can be maintained as you scale), and that you are able to monetize those customers at a rate which is significantly higher than CAC (as a rough starting point, three times higher). And that CAC can be recovered in under 12 months.

For first time CEOs, knowing how to react when they reach this point can be tough. Up until now they have maniacally guarded every penny of the company’s cash, and held back spending. Suddenly they need to throw a switch, and start investing aggressively ahead of revenue. This may involve hiring multiple sales people per month, or spending considerable sums on SEM. That switch can be very counterintuitive.

Reason 3: Poor Management Team (23%)

We found is some 23% of the cases the business did not have the right team of people. Often the lead person was technically focused and failed to understand the issues around customer support and money management
Weak management teams make mistakes in multiple areas:

  • They are often weak on strategy, building a product that no-one wants to buy as they failed to do enough work to validate the ideas before and during development.

  • They are usually poor at execution, which leads to issues with the product not getting built correctly or ontime, and the go-to market execution will be poorly implemented.

They will build weak teams below them. There is the well proven saying: A players hire ‘A’ players, and B players only get to hire C players (because B players don’t want to work for other B players). So the rest of the company will end up as weak, and poor execution will be rampant.

Reason 4: Beaten by the competition (19%) Some 19% of the failures were simply beaten into failure by their competition. Perhaps this result might be part of not understanding the eco system that they wanted to compete in poor execution and so forth. Some experts recommend avoiding competition and starting a business in an area that nobody has tried.

Reason 5: Pricing (18%)

In 18% of the cases, pricing and cost issues led to collapse. This is the Three Bears question. The price can't be too high, or too low. It needs to be just right. For the start-up getting this right is critical

Reason 6: Product Problems (17%)

We saw this reason that companies fail in 17% of the cases. Might be that they fail to develop a product that meets the market need. This can either be due to simple execution. Or it can be a far more strategic problem, which is a failure to achieve Product/Market fit.

Most of the time the first product that a startup brings to market won’t meet the market need. They invent concepts, not complete products. Ideas and inventions are fascinating, but consumers and businesses generally buy complete products they can actually use. There is a world of difference. In the best cases, it will take a few revisions to get the product/market fit right. In the worst cases, the product will be way off base, and a complete re-think is required. If this happens it is a clear indication of a team that didn’t do the work to get out and validate their ideas with customers before, and during, development.

Reason 7: Business Model Failure (17%)

Great ideas need to become great businesses. This requires finding a good way to make money off of them. A lack of a viable model killed 17 % of these companies. Perhaps aptly described as if we build it they will come to our doors. Many entrepreneurs are too optimistic about how easy it will be to acquire customers. They assume that because they will build an interesting web site, product, or service, that customers will beat a path to their door. That may happen with the first few customers, but after that, it rapidly becomes an expensive task to attract and win customers, and in many cases the cost of acquiring the customer (CAC) is actually higher than the lifetime value of that customer (LTV).

Reason 8: Poor Marketing

Knowing how to code or build good products isn't enough. Behind even the products that supposedly "sell themselves" is somebody who can make them sell more. This is something that was lost on 14 percent of the companies here. Once again, we found instances where the leaders saw little value in marketing

Reason 9 - Ignoring Customers (14%)
This is hard to believe in this day and age, but some 14% blamed their demise on failure to heed customer advice

Reason 10 – Mis-timed Product (13%)

As they say, timing in life is everything. For 13 percent of these companies, it was a bad thing. Often the reasons were that we moved with technology not yet ready for the market. . We were too early. Customers simply did not accept what we had to offer

The next 10 are interesting!

Reason 11: Lost focus (13%)

It isn't easy maintaining passion and focus through the ups and downs that every startup goes through. It takes good leadership, guts and passion to keep going. Often we found the key owners became overwhelmed in trying to keep investors, employees, family and so forth happy. Many said they never realized the responsibilities of running a company. It is not for the faint of heart

Reason 12: Founder-Investor Strife (13%)

There is creative tension, which many big tech successes have had. Then there is the kind that poisons a business way before it gets to that point. This is what happened in 13 percent of the cases. The initial funding came from Friends and family my father-in-law now wants out and I cannot afford to pay him lots of stress at home. All too common comments

Reason 13. Pivot gone bad (10%)

When you come to a fork in the road and go the wrong way you can end up like 10 percent of others who went into the ditch. You have to learn that "Pivoting for pivoting’s sake is worthless. It should be a calculated affair, where changes to the business model are made, hypotheses are tested, and results are measured. Otherwise, you can’t learn anything.”

Reason14: Lack passion (9%)
It's one thing to come up with an idea. It's another to have the passion to see it through because you can't imagine going on another day if you didn't. That's passion. Our belief is that lack of passion is the underlying reason for a lot more business failures

Reason 15: Bad location (9%)
This includes being in the wrong part of the country and also having too many team members working remotely. What about remote workers. A subject little many evangelize about but is it the way of future. In a start-up, how important is it to have all the team in the same room. Little empirical data available to clearly define an outcome. Reason 16: No financing/investor interest (8%)
The corollary to running out of cash is not attracting any investors to begin with. After running out of ‘friends & family’ funding many groups never find money to continue. Once again it could be there product or service was simply not attractive to investors. It might also be there inability to sell their concepts. Often the highly technical founding team hits this issue head on
Reason 17: Legal challenges (8%)
This includes getting into an area that's legally complicated. We found this issues in many failed music startups. Perhaps it’s hard industry to work with

Reason18: Don't use network/advisors (8 %)

It's not enough to have a network. You have to know what to do with it. Some said they failed to get their investors involved. Our word is - Your investors are there to help you. Get them involved from the start, and don’t be afraid to ask for help." We found cases where the wrong advisors were selected (college friend of the owner – a wife’s cousin). We found cases where strong competent legal and accounting were ignored because in the owners mind they were too expensive. With all the hype over entrepreneurship, the quantity of information has gone way up while the quality has gone way down. That means entrepreneurs are getting lots of bad advice from unqualified sources. The worst thing about it is, when they actually get good advice that conflicts with what they’ve been told, they don’t recognize it for what it is. Sad but true.

Reason 19: Burnout (8%)

Bad work-life balance was given as the reason for failure by 8 percent. The problem often with burnout is that you become hopeless and you lose every aspect of your creativity. Easy to tell a founder but often they never listen until it is too late.

Reason 20: Failure to let go (7%)

Hanging on to a bad idea was the reason given in 7 percent of the cases. When should you give up and move onto another idea or direction. Sometimes you simply have to call it quits.

In Summary

It’s easy for entrepreneurs to become so focused, so wrapped up in their own vision, that they lose perspective. Ideas and inventions are fascinating, but consumers and businesses generally buy complete products they can actually use. The market moves on them, or moves over them in unexpected ways. Markets are a complex phenomenon with lots of moving parts that are difficult to predict. Competitors with existing solutions don’t give up so easily. From disk drives and CMOS chip technology to pencils and paper, there are barriers to topple the status quo and, sometimes, old-school solutions that are tried and true and the powerful companies that market them hang in there far longer than anyone would expect.

Moreover, some entrepreneurs simply don’t think ahead. Some founders just can’t get along. Others fall apart when the initial strategy fails, as it often does. Still others are out to make a quick buck and aren’t committed to

working day and night over the long haul. Any VC will tell you, the biggest part of what they invest in is the management team.
We have always been a big fan of learning from failure, so while some of our high-tech brethren like to talk up their successes, we try to help startups avoid catastrophic failure and get to the next stage. We say “try” because, while some make it, most don’t. That’s the nature of the beast.

Perhaps the most important advice we can give you is this: If your startup fails, it’s worth spending time to understand what went wrong. That’s the only way you’re going to improve the odds of making it next time. And, yes, there will be a next time. Hopefully this list will help you avoid a different pitfall. 



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