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6 reasons startups fail

Reason 1: Market Problems

A major reason why companies fail, is that they run into the problem of their being little or no market for the product that they have built. Here are some common symptoms:

• There is 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 is wrong. You could be ahead of your market by a few years, and they are not ready for your particular solution at this stage. For example when EqualLogic first launched their product, iSCSI was still very early, and it needed the arrival of VMWare which required a storage area network to do VMotion to really kick their market into gear. Fortunately they had the funding to last through the early years.
• The market size of people that have pain, and have funds is simply not large enough

Reason 2: Failure to find Product/Market Fit

Another reason that companies fail is because 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 start-up brings to market won’t meet the market need. 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. Our experience indicates that it takes about 50 conversations with customers that are not friends to find out if the product concept is really going to sell. Unfortunately because most founders come from a technical or product background, they find it very uncomfortable doing 50 cold outreaches into customers, and so skip this step before starting to build the product. That is extremely unfortunate as they will only get the feedback when trying to sell to those customers after they have built the product, by which time it is too late to incorporate the feedback, and many months will be lost.

Reason 3: Failure to find a Repeatable and Scalable Sales Motion

Once a product has started to show that it has product/market fit, i.e. it delivers business value, and customers want to buy it, there is another tricky journey to figure out: how to sell the product. Sometimes this is called Go-to-market fit. I prefer to call this phase the search for a repeatable and scalable growth model, as the words repeatable and scalable tell such a clear story about what has to be accomplished. This article provides a lot more detail on Steps 4, 5 and 6 in the 9 Step Startup

Reason 4: Failure to find a profitable Growth Model

As outlined in the introduction to Business Models section, after spending time with hundreds of startups, I realized that one of the most common causes of failure in the startup world is that 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).

The observation that you have to be able to acquire your customers for less money than they will generate in value of the lifetime of your relationship with them is stunningly obvious. Yet despite that, I see the vast majority of entrepreneurs failing to pay adequate attention to figuring out a realistic cost of customer acquisition.

Unit Economics: CAC and LTV

CAC = Cost of Acquiring a Customer

LTV = Lifetime Value of a Customer

Reason 5: Poor Management Team

An incredibly common problem that causes startups to fail is a weak management team. A good management team will be smart enough to avoid Reasons 2, 4, and 5.  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. This can carry through to poorly thought through go-to-market strategies.
• They are usually poor at execution, which leads to issues with the product not getting built correctly or on time, 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.
• etc.

Reason 6: Running out of Cash

A fourth major reason that startups fail is because they ran out of cash. 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.

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