Why Startups Fail
“90% of startups fail.”
You’ve probably heard that before. But what does it mean?
Over the past couple years, I’ve :
- been the founder and CEO of multiple startups
- raised money
- been acquired by a public company
- participated in the world’s top startup accelerator programs,
- failed and watched others fail
- succeeded and watched others succeed
- and ate a lot of ramen noodles #truth
Given my experiences, I thought it would be valuable to share my views on why startups fail.
If you understand why startups fail, you will be more likely to succeed.
In school, we’re taught history to avoid repeating the same mistakes. Similarly, as entrepreneurs (practicing or aspiring), we should understand why startups have failed so we can decrease our own chances of failure. After reading this, you will understand the main reasons startups have failed in the past, making you more likely to succeed.
Defining Failure
Startups fail when they can no longer operate -> Startups can't operate when they run out of money.
Understanding this may seem basic, but it’s important. I’ve heard many times that, “the reason a startup fails is because they run out of money.” That’s not a reason. That is the result.
Failure = No Money.
If we can agree that in most cases startups fail because they run out of money, then to truly understand startup failure we need to understand why startups run out of money. Make sense? Great, let’s dig deeper.
Top 3 reasons why startups run out of money
Lucky for us, all we need to know is the top 3, because those 3 reasons account for over 80% of startup failures. I definitely just made up that statistic, but it’s probably in that ballpark.
Reason #1: Building something nobody wants
Over the years, it has been clear that if a startup doesn’t build a product/service that people want, they will not be able to generate revenue.
Revenue = money; no revenue = no money; no money = fail.
In one of Paul Graham’s famous essays, he wrote about this topic and why startups need to “make something people want” (http://paulgraham.com/good.html). It seems so obvious, but in reality it’s not.
Entrepreneurs need to think differently and see the future. While doing this, many assumptions are made because there isn’t enough information to make decisions - if there was enough information, someone else would already be doing it. One of the worst assumptions entrepreneurs make is that people will want their product. The problem is that this should not be an assumption, instead, it should be a hypothesis. Having a hypothesis that people will want your product means that you need to prove it. The biggest mistake entrepreneurs make is: they don’t prove people want their product. What ends up happening is founders skip this step and go directly to building products, hiring people, finding partners, then trying to sell. “Trying” is the key word here, because after they realize they can’t sell, it’s too late and they’ve run out of money.
Learning Point #1: Prove that people want what you’re building.
Before building anything, prove to yourself and your team that people actually want what you’re building. A trick I’ve learned over time is to start with designs. Create your designs on Photoshop or Sketch and use a tool like InVision. This will help you simulate your product without having to write a single line of code. It’s easier, faster, and cheaper to iterate on designs than code.
Reason #2: No Focus
From my experiences founding and mentoring dozens of startups, I’ve seen that focus and prioritization are necessary to achieve success (and avoid failure). Again, doesn’t this sound obvious? It’s not. In a startup, you’re being pulled in all different directions. Founders think they have to do everything at once. They are meeting investors, partners, mentors, customers, building products, figuring out a marketing strategy, going to all the conferences, and blah blah blah...
In reality, there are only 1-3 things at any given time that actually matter. Ideally, you’ve identified and prioritized those things, then distributed the responsibilities across your team. Time is against startups, so it’s important to focus on what matters and optimize your time. Many startups make the mistake of prioritizing raising money from investors. This is because that’s what everyone else is doing and it seems like the cool thing to do. They end up wasting so much time because the company isn’t ready to raise money. Either they don’t have a good product or have low traction, and often they don’t know why they’re raising money in the first place. In the end, they waste months talking to investors, and in that time they could have been proving that people want their product, building it, and selling it.
Learning Point #2: Prioritize, then focus.
Figure out what are the most high value areas you need to focus on. Here’s a prioritization order that applies to most B2B startups:
1) Prove people want what you’re building
2) Build it
3) Get early customers
4) Raise money
5) Hire smart people
6) Sell to more customers
7) Raise more money
8) Hire more smart people
9) Make your product better
10) Sell to more customers
At any point, you should know what stage you’re at, and therefore, what you should be spending most of your time on. This focus will lead to stronger execution and catalyze your growth. Without focus, a lot of money will be wasted and chances of failure will be higher.
Reason #3: No Passion
A lot of people have this notion that starting a company is the dream. It’s no surprise given all the recent exits and IPOs. Startups have become sexy. As a result, I’ve seen many people start a company because they think they’ve stumbled on a great idea. Heck, I even did this back in university.
Whenever I meet a founder, I ask: “why did you start this company?”. This is the single most important question I’ve learned to ask founders. If you asked me that question when I started my first company, I would have said, “because I think it’s a good idea and the market is huge!”. The problem is, I had no passion. That company failed. There was nothing driving me behind the idea. Similarly, many startup founders I meet have no real passion or a deeper reason why they started their company.
If you’re starting a company without passion for the problem, then during the hard times you will be less motivated to power through them, and your chances of failure will be higher.
Learning Point #3: Do something you’re truly passionate about
I heard this saying somewhere: “Attitude is Altitude”. In my personal experiences, I’ve found this to be true. When you’re faced with hardship, either professionally or personally, staying positive will always increase your chances of success. It’s easy to get mad, depressed, and/or stressed, but try to control your emotions and stay positive by remembering why you started in the first place.
Having real passion is essential to get through hard times with your company. To get through the hard times, you need motivation. I’ve found that passion is the strongest motivator. When founders are extremely passionate about the problem they’re tackling, they figure out how to solve the issues at hand. The best motivators I’ve seen are:
- The founder(s) experienced the problem themselves
- The founder(s) believe in a future that may not exist unless they create it
- The founder(s) have close family and friends that have been affected by the problem
Putting it all together
Whether you’re working for a big company, thinking about starting a company, or already founded a startup, it’s worth reflecting on the lessons we have learned from past failures.
1) Build something people want, and prove that they want it.
2) Have focus at all times by prioritizing high-value initiatives.
3) Be real with yourself and do something you’re truly passionate about.
The interesting thing is, these 3 areas also apply to big companies. But, instead of the companies failing, individual products fail. There are multiple examples of products failing in big companies because they didn’t build something people want, or they lost focus. Learn from the past, make new mistakes, and remember, "Attitude is Altitude".
Lastly, Snapchat.
I’ve found that Snapchat is a great way to talk about these topics. Everyday I try posting interesting content on my Snapstory. Don’t wait for my next post on LinkedIn, follow me on Snapchat. Add my username: nav1d
By adding me on Snapchat, you can watch me talk about a variety of startup topics. In the past, I’ve talked about Marketing & Sales Tactics, Raising Money, and Staying Motivated. Add me and share with your friends and coworkers.
#learnfromfailure #startups #innovation #product #studentvoices #leadership #entrepreneurship #businessstrategy #bigideas