The Real Reasons Startup and Early Stage Companies Fail
It’s a sad reality, but many startup and early stage companies fail. Whether it’s a lack of capital, poor product-market fit or leadership inexperience, roughly 75 percent of all startups fail.
Why do we accept failure as an inherent risk of founding a startup? Failure isn’t an option when you leave your life’s work on the chopping block. We don’t need any more early stage companies to taste defeat.
After 20 years in business development, corporate development and law in the technology industry, I’ve seen my fair share of failures. However, after advising and investing in many startups myself, I’ve come to realize the real reasons startups fail.
Pitfall #1: The 1,000 ping-pong ball strategy
Every startup wants growth, expansion, and scale. They have to determine how and where to sell more products and services at scale.
The problem? Most startups go too far. Instead of juggling a few ping-pong balls, they pick up hundreds more in an effort to be the best. I’ve seen that most startups will do whatever they can for their customer, supplier, or partner to make a sale happen.
This results in what I call market and sector “dabbling.” Because startups flex to make sales (any sales), they have a handful of customers spread across multiple sectors.
Suddenly you have more ping-pong balls firing at you from multiple directions. You have a small sample size of clients and little credibility in the market. You can’t specialize in or understand a specific sector because you’re all over the place.
The solution
Unfortunately, most startups don’t have time on their side. You have to pick the right sector and market as soon as possible if you want to scale.
Ask yourself one important question: “What real, meaningful, and identifiable business impact do we give the customer?”
I’m not talking about soft business drivers, but hard, measurable impact. Demonstrate how you save customers time, money, or frustration in a meaningful way. This will keep you focused as you grow in the right areas.
Pitfall #2: The “It depends” business model
Has a customer or investor ever asked you, “What’s your business model?”
If your answer was, “It depends,” you have a major problem. This steals focus away from your startup, leading into Pitfall #1 and a cycle of failure.
You can’t change your business model to suit a different customer every day.
Every company, no matter its size, needs a scalable and repeatable business model. This business model must align to the key business drivers for customers in your market. A solid business model is critical to growth in any market sector.
The solution
Determine what your business stands for. What kind of business are you building?
Whatever your model, stay true to it. Be willing to walk away from a deal if the opportunity doesn’t align with your model.
The sooner you recognize a bad customer-model fit, the sooner you can move on to the next opportunity.
Pitfall #3: “I can’t say no!”
This point links back to all the other Pitfalls, but it deserves a special mention.
Look back on your business dealings in the past year. Can you remember a situation where you walked away from a deal? Do you remember continually changing your business model or strategy to win an individual deal?
If this happened to you, you don’t know how to say “no.” When you morph to fit every opportunity that comes your way, it’s impossible to have a repeatable, scalable, or profitable business.
The solution
Pick a strategy and business model that works. Use this model as a yardstick for every new opportunity.
If the opportunity doesn’t match your model, simply say “no.” It’s that easy.
Pitfall #4: “All I know is they purchased it”
Do you know why customers buy from you?
No? Unfortunately, you aren’t alone. It’s astonishing how many startup and early stage companies don’t know why customers buy from them.
What’s more alarming is how few companies take time to understand their customers. The result is startups wasting resources on products that don’t address customer pain points, ultimately leading to failure.
The solution
Talk to your customers. Listen to your customers. Invest the time to reach out and understand why they buy from you. Verify that they’re actually using the product and not simply purchasing and abandoning it.
What problem does your product address? What more could it do for your customers?
Quantify the value of your product for customers, whether in time saved, tasks streamlined, or money saved. Use these as metrics to market and improve your product over time.
Pitfall #5. “I don’t know how to lead”
Let’s take a page from sports here.
A head football coach can’t defer blame to an assistant coach. No matter the circumstances or actions of their subordinates, failure falls to the leader.
In the case of a startup, failure always falls to the CEO, regardless of the actions of other executives or employees. It’s this failure to lead that causes so many companies to fail.
Leadership has nothing to do with capability, experience, or your IQ. Most CEOs are incredibly intelligent.
The problem is that most CEOs fail to define their role as CEO. A CEO needs to understand how he or she works in the business. This helps them hire capable folks to handle key business tasks outside the CEO’s skillset.
The solution
There are so many types of CEOs. They have varying backgrounds in finance, product, legal, marketing, sales, strategy, operations, and more.
The key is to understand your area of focus as the CEO. What is your experience? What are your daily duties as a CEO?
Once you’ve defined your responsibilities, outline what else needs to happen to run your business. Hire team members to do these tasks through smart delegation. Hold each leader accountable for growing a team under them.
This sounds simple enough, but delegation requires a lot of awareness, confidence and emotional intelligence.
Some CEOs naturally develop these skills in life, but many others need to work on self-awareness. Leverage counselors, mentors, and consultants to help you improve your leadership style.
The bottom line
These five pitfalls are responsible for the failure of many great startups. Don’t let your early stage technology company fall prey to these mistakes.
Scale intelligently to bring your solution to the world. Skate around these pitfalls with a trusted, experienced advisor like The Hollines Group.
Sign-up above our weekly newsletter and shoot me a quick email at harry@hollinesgroup.com to brainstorm and discuss your business strategy.
