Monday, January 24, 2011

20 Top Reasons that Startups Fail

Here is an insightful article posted on Chubby Brain (love the name!) on why Start Ups fail. As a Sales, Marketing and Productivity organization, it's not surprising that poor marketing was #4 and ignoring customers was #1. Simple stuff that everyone knows but companies run out of bandwidth to execute on.



We’d previously highlighted the top startup failure post-mortems of all-time here (32 in total) written by a group of startup entrepreneurs gracious enough to share their lessons learned from their startup’s failure. Many of you read those post-mortems and asked, what are the most common reasons for failure cited across those posts?

Well, we’ve done the work, and below are your answers. After a thorough analysis of those 32 start-up post-mortems, we have determined the common reasons founders gave to compile this list of the top 20 ways to have your startup fail. First, a handy chart to highlight the top 20 reasons for failure followed by an explanation of each reason and relevant examples from the the post-mortems.

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#20 – Start the company at the wrong time

Many companies that failed started during the recent financial crisis (and continues to suffer through), and some startups highlighted the larger market negativity as a reason for their ultimate demise. The negativity either impacted investment funding (venture capital fell off a cliff in 2009) or the customers they were targeted as was the case for Untitled Partners who were building a platform for fractional art ownership. In their post-mortem, on this topic, they wrote:

Our analysis was supported by articles in the Wall Street Journal and the NYT, as well as the Mei Moses art index, which suggested the art market was countercyclical and had a low correlation to the S&P. What we didn’t account for was the magnitude of the current correction and the effect that it would have on discretionary luxury spending even within a population that financially could still afford our product. We were obviously wrong about Untitled Partners’ ability to grow through the subsequent downturn.

#19 – Not working on it full time

Startups are hard. There even harder when you’re pulled in a couple of different directions aka a day job. This came through in several post-mortems. If you’re working another full-time job with nobody fully invested, you are running the risk of burning out, acting with less urgency and just not having enough hours in the day to get what you need done. Also, with another job, there is the risk that a team acts with less urgency given they have sources of income. The team over at Overto felt the lack of at least one full-time resource was the primary reason for their failure writing:

We thought we’d able to run internet service after hours. To some point that was true. As far as nothing bad was happening with the servers and the application it was all fine. We were working on new features when we had enough free time. Problems started when we faced some issues with our infrastructure. We weren’t able to resolve issues on the fly and had several downtimes. You can guess how it influenced user experience. That also backfired on service development since we had to focus on current problems instead of adding new functionalities. Lack of person working full-time and being able to deal with maintenance and bug fixing was the most important reason of failure.

#18 – Location, Location, Location

Location was an issue in two different ways. The first being that there has to be congruence between your startup’s concept and location. By way of crude example, if your building innovative trading software for Wall Street, be where you customers are and where you can best network. Location also played a role in failure for remote teams. The key being that if your team is working remotely, make sure you find effective communication methods; else lack of teamwork and planning could lead to failure. Location issues were given as a reason for failure 6% of the time. In their startup post-mortem, Nouncer discussed their decision to be in NY as one that hurt their company stating:

In my case, New York didn’t lack money, community, able workers, or smart people with good advice. It lacked the audience my product needed to succeed – the early adopters web hackers looking for the next cool toy to play with. I can count on one hand the number of people I’ve met in New York meetups and events that fit this description. In San Francisco one can find hacking events on a daily basis, as well as many unconference events where people get their hands dirty playing with code. This is a very specific audience dictated by my decision not to build a consumer product.

#17 – Be unable to Attract Investors

While this may be a cousin of reason #20 (starting the company at the wrong time), there was a group of founders who candidly expressed that their inability to attract investors was the reason for their ultimate demise. If there is no money out there for your idea, reassess whether there is a market for it, and reassess your approach.

#16 – Get outcompeted

Despite the platitudes that startups shouldn’t pay attention to the competition, the reality is that once an idea gets hot or gets market validation, there may be many entrants in a space. And while obsessing over the competition is not healthy, ignoring them was also a recipe for failure in 10% of the startup failures. Marc Hedlund of Wesabe talked about this in his post-mortem stating:

Between the worse data aggregation method and the much higher amount of work Wesabe made you do, it was far easier to have a good experience on Mint, and that good experience came far more quickly. Everything I’ve mentioned — not being dependent on a single source provider, preserving users’ privacy, helping users actually make positive change in their financial lives — all of those things are great, rational reasons to pursue what we pursued. But none of them matter if the product is harder to use, since most people simply won’t care enough or get enough benefit from long-term features if a shorter-term alternative is available.

#15 – Burn Out

Work life balance is not something that startup founders often get and so the risk of burning out is high. The ability to cut your losses where necessary and re-direct your efforts when you see a dead end was deemed important to succeeding and avoiding burnout as was having a solid, diverse and driven team so that responsibilities can be shared. Burning out was given as a reason for failure in 12+% of the startup failures. The post-mortem of Diffle talks about the impacts of burn out after one’s startup fails which was quite telling in that burn out doesn’t end when the startup is over. It lingers for a while as this post-mortem reveals:

I didn’t realize it at the time, but I was flying when I closed down Diffle – running on pure adrenalin. Part of this was from working with the YC startup, and part was just that entrepreneurship tends to put you into this highly-focused, tunnel-vision state that feels just slighly unreal.

That all crashed down about a month later, which happened to be about a week and a half after I started the job hunt. I ended up getting rejected by FriendFeed, and then told the other companies that I wasn’t quite ready to go back into the employee world and needed a few months to figure out what I really wanted to do next.

For anyone faced with winding down a company, I’d highlyrecommend taking a while off before making any big decisions, and not just the two and a half weeks that I’d initially tried. You’re not thinking straight when your startup dies – your perspective may be a bit different in a few months, as might your preferences for what you want to do next.

#14 – Lose Focus – Distracted by Shiny Objects

Getting sidetracked with all the ‘could-bes’ was cited numerous times as a contributor to failure. It is important to get one thing out on the market and focus on one product else you risk ending up with too many almost finished products that are not valuable to customers or you. In the post-mortem of Kiko, Mahesh Piddshetti writes:

Most entrepreneurs have lots of ideas. Often times, many of them may be really good. I don’t know about you, but my favorite part about startups is talking about new products and new business ideas. If you’re a creative person, it’s very easy to get side-tracked on side ideas when you really should be working on your main one. This is bad. Bad, bad, bad. We did this a lot with Kiko, and it caused many delays in getting the product out the door.

#13 – Disharmony with Investors/Co-founders

Discord with a cofounder was one of the most fatal issues for a company. Bricabox cofounder advises, “When a co-founder walks out of a company — as was the case for me — you’ve already been dealt a heavy blow. Don’t exacerbate the issue by needing to figure out how to deal with large equity deadweight on your hands (investors won’t like that the #2 stakeholder is absent, even estranged, from your company). So, the best way of dealing with this issue is to take a long, long vesting period for all major sweat equity founders.”

But acrimony isn’t limited to the founding team, and when things go bad with an investor, it can get ugly pretty quickly as evidenced in the case of ArsDigital. Investors and founders did not see eye to eye on what was best for the company, and eventually investors began to run the company per this account of failure. The post-mortem of ArsDigita takes the cake for candor and illustrating in graphic detail what goes on when investors and startup management have a falling out from the startup’s perspective. Phillip Greenspun writes:

For roughly one year Peter Bloom (General Atlantic), Chip Hazard (Greylock), and Allen Shaheen (CEO) exercised absolute power over ArsDigita Corporation. During this year they
1.spent $20 million to get back to the same revenue that I had when I was CEO

2.declined Microsoft’s offer (summer 2000) to be the first enterprise software company with a .NET product (a Microsoft employee came back from a follow-up meeting with Allen and said “He reminds me of a lot of CEOs of companies that we’ve worked with… that have gone bankrupt.”)

3.deprecated the old feature-complete product (ACS 3.4) before finishing the new product (ACS 4.x); note that this is a well-known way to kill a company among people with software products experience; Informix self-destructed because people couldn’t figure out whether to run the old proven version 7 or the new fancy version 9 so they converted to Oracle instead)

4.created a vastly higher cost structure; I had 80 people mostly on base salaries under $100,000 and was bringing in revenue at the rate of $20 million annually. The ArsDigita of Greylock, General Atlantic, and Allen had nearly 200 with lots of new executive positions at $200,000 or over, programmers at base salaries of $125,000, etc. Contributing to the high cost structure was the new culture of working 9-5 Monday through Friday. Allen, Greylock, and General Atlantic wouldn’t be in the building on weekends and neither would the employees bother to come in.

5.surrendered market leadership and thought leadership

#12 – Do not use your connections

We often hear about startup entrepreneurs lamenting their lack of connections so we were surprised to see that one of the top reasons for failure was entrepreneurs who said they did not not properly utilize their own network. Whether it was for advice or introductions, almost 16% of the startup post-mortems stated that the team did not use their connections well enough, which led to failure. So what does this teach us? If you have a network (and everyone does), be judicious in using it, but be sure to use it.

#11 – Pricing Issues

Pricing is one part science, 10 parts art. And a dark art according to a large number of startups which failed and who attributed product pricing that was too high or too low to make money. For example one entrepreneur said, “It took a lot of key chains bought at 50 cents and sold for $1.25 just to pay the phone bill.” The founder of EventVue said that their deadly strategic mistake was that they “went after enterprise sales model with a non-recurring, small price.”

#10 – A “User Un-Friendly” Product

Not sure there is any revelation here, but bad things happen when you ignore a user’s wants and needs whether done consciously or accidentally.

#9 – Do not cut your losses a la Pivot at the right time

One of the most overused startup words of 2010 was Pivot, but pivoting away from a bad product, a bad hire, a bad decision, etc quickly enough was cited as a reason for failure often. Dwelling or being married to a bad idea is not a good way to allocate resources. It’s not just ideas – if you make a bad-hiring decision, take corrective action (euphemism for let them go) sooner than later. As soon as you see that your product is not getting a response in the market, think about what product changes might be necessary. Letting inertia and stubbornness limit your growth and ability to change your business model was cited as cause for failure almost 1/5 of the time.

#8 – Lack Passion and Domain Expertise

There are many good ideas out there in the world, but our startup post-mortem founders found that a lack of passion for a domain and a lack of knowledge of a domain were key reasons for failure no matter how good an idea is. The co-founder of Untitled Partners stated, “I underestimated the importance of a relationship between our corporate and personal identities. “About 18.8% of the time, the post-mortems cited lack of passion as a cause of failure. In their post-mortem, NewsTilt candidly spoke about their lack of interest in the domain they selected writing:

I think it’s fair to say we didn’t really care about journalism. We started by building a commenting product which came from my desire for the perfect commenting system for my blog [17]. This turned into designing the best damn commenting system ever, which led to figuring out an ideal customer: newspapers. While there, we figured they were never going to buy, and we figured out a product that people were dying to use if it existed.

But we didn’t really care about journalism, and weren’t even avid news readers. If the first thing we did every day was go to, we should have been making this product. But even when we had NewsTilt, it wasn’t my go-to place to be entertained, that was still Hacker News and Reddit. And how could we build a product that we were only interested in from a business perspective.

This compounded when we didn’t really know anything about the industry, or what readers wanted.

#7 – Release product at the wrong time

If you release your product too early, users may write it off as not good enough and getting them back may be difficult if their first impression of you was negative. And if you release your product too late, you may have missed your window of opportunity. “This requires balance, if it is a critical user-based website where users need to depend on it like Ebay or, an outage could mean catastrophe. But if it a website like Twitter, an outage is a joke. Know your website, don’t take forever to get it to the market. But, if it’s critical then make sure its sound.” As Reid Hoffman said: “If you’re not somewhat embarrassed by your 1.0 product launch, then you’ve released too late“. This was cited as cause for failure more than 20% of the time.

#6 – I got this product. Now I just need a business model.

Sure Twitter gets away with not having a business model, but they’re not the norm. Perhaps we’re old school, but if there is not a plan to bring in more revenue than expenses, that’s a problem. Failed founders seem to agree that a business model is important. Unfortunately, in 1 of 4 failure post-mortems, the lack of a business model was cited as a reason for failure.

#5 – Ran out of cash

Money and time are finite and need to be allocated judiciously. The question of how should you spend your money was a frequent conundrum and reason for failure cited by failed startups. The decision on whether to spend significantly upfront to get the product off the group or develop gradually over time is a tough act to balance. The team at YouCastr cited money problems as the reason for failure but went on to highlight other reasons for shutting down vs. trying to raise more money writing:

The single biggest reason we are closing down (a common one) is running out of cash. Despite putting the company in an EXTREMELY lean position, generating revenue, and holding out as long as we could, we didn’t have the cash to keep going. The next few reasons shed more light as to why we chose to shut down instead of finding more cash.

#4 – Poor Marketing

Knowing your target audience and knowing how to get their attention and convert them to leads and ultimately customers is one of the most important skills of a successful business. Yet, in almost 30% of failures, ineffective marketing was a primary cause of failure. Oftentimes, the inability to market was a function of founders who liked to code or build product but who didn’t relish the idea of promoting the product. The folks at Devver highlighted the need to find someone who enjoys creating and finding distribution channels and developing business relationship for the company as a key need that startups should ensure they fill.

#3 – Not the right team

A diverse team with different skill sets was often cited as being critical to the success of a starti[ company. Failure post-mortems often lamented that “I wish we had a CTO from the start, or wished that the startup had “a founder that loved the business aspect of things”. In some cases, the founding team wished they had more checks and balances. As Nouncers founder stated, “This brings me back to the underlying problem I didn’t have a partner to balance me out and provide sanity checks for business and technology decisions made.” Wesabe founder also stated that he was the sole and quite stubborn decision maker for much of the enterprises life, and therefore he can blame no one but himself for the failures of Wesabe. Team deficiencies were given as a reason for startup failure almost 1/3 of the time.

#2 – Building a solution looking for a problem, i.e., not targeting a “market need”

Choosing to tackle problems that are interesting to solve rather than those that serve a market need was often cited as a reason for failure. Sure, you can build an app and see if it will stick, but knowing there is a market need upfront is a good thing. “Companies should tackle market problems not technical problems” according to the BricaBox founder. One of the main reasons BricaBox failed was because it was solving a technical problem. The founder states that, “While it’s good to scratch itches, it’s best to scratch those you share with the greater market. If you want to solve a technical problem, get a group together and do it as open source.”

#1 – Being inflexible and not actively seeking or using customer feedback

Ignoring your users is a tried and true way to fail. Yes that sounds obvious but this was the #1 reason given for failure amongst the 32 startup failure post-mortems we analyzed. Tunnel vision and not gathering user feedback are fatal flaws for most startups. For instance, ecrowds, a web content management system company, said that “ We spent way too much time building it for ourselves and not getting feedback from prospects — it’s easy to get tunnel vision. I’d recommend not going more than two or three months from the initial start to getting in the hands of prospects that are truly objective.”

So brave startups, you now know the top 20 reasons startups fail based on the experiences, generosity and candor of 32 of your fallen brethren. We hope this checklist will come in handy on your startup journey and that you’ll share it with other startup cofounders who may benefit from some of its key messages.

Special thanks to Chandni Shah, a Carnegie Mellon graduate, for her fantastic work poring through these post-mortems to compile this analysis and assist with this write-up.

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