Explore the top reasons startups fail and learn effective strategies to avoid the pitfalls entrepreneurs face from strategic control to leadership issues.
We work with a lot of different sized organizations with vastly different needs. Enterprises to startups, the same themes emerge— it’s actually amazing how true this is. It’s really interesting (and fun) to straddle these two worlds. It gives us a perspective of discipline for startups, and a heavy dose of innovation for the mid-market companies we work with. We consult clients that have made some of these mistakes, and we’re also not perfect— we’ve made a few ourselves! I’m writing this article because I want to see you put your passion and skills towards projects that should succeed, and avoid pitfalls that could be costly towards that success.
There is a kindness to pursuing good choices along side our clients, and when they choose to move forward with an idea we get to vicariously launch their venture with them! It’s kind of an entrepreneurial dream of mine— start a company of my own, and help other people launch theirs. Being a hopeless optimist, it’s sometimes tough to remember that being an effective counsellor includes talking about what can go wrong.
This article will address a few common pitfalls. These mistakes cause serious headaches later, or even tip the odds in favor of failure. This is by no means an exhaustive list, but the ones depicted here are from our direct experience at Anthroware.
Note: The relevance of this post isn’t strictly for startups. Many entrepreneurs live inside large organizations. These ‘intrepreneurs’ fight many of the same battles, and decision making can often times be even tougher. Also, I’m not a lawyer and I’m not giving legal advice— talk to a professional about those topics.
Five: Lack of 'strategic control’
How many times have you heard one of the Sharks on Shark Tank say “What’s keeping me from doing this myself.” That’s an example of not thinking about strategic control.
I wont touch on intellectual property (IP) — lots written about that, and you need to talk to a qualified attorney to get good info.
It may or may not be worthwhile to pursue IP for your business (talk to that attorney) but the reasons you do that are all about building a ‘moat’ around your business to protect your interests and have an unfair advantage over your competition. This is a fundamental aspect of creating and leveraging strategic control in your startup. Many people we counsel at early stages have not thought through how they obtain strategic control. Always wonder if there’s a better funded, more motivated version of yourself out there with the same idea— how do you stop that person?
There are a lot of ways to build this ‘moat’. You could file for some IP, or you could be the first to market in that particular vertical, you could push hard to get the largest user base (very good option), you could have the best brand and message, the process itself could be very hard and you have special expertise that allows you to do it… for successful startups, it’s almost always a combination of these things.
Pages could be written on this — find a savvy business mentor and brainstorm how a better funded, smarter version of yourself could steal your product or idea and be objective!
Four: Equity woes and undercapitalized projects
Next on the list is MONEY. Ok, its a little insensitive to write an article about startups and talk about undercapitalized projects… almost everybody starts out undercapitalized! That’s why startups need angels and investors. Some really stingy entrepreneurs (like me and Jason) bootstrap their businesses the whole time and there are pros and cons to that as well— but lets save that for another time. First of all, if you are a single founder, and you really need a coder for your idea you should strongly consider a technical co-founder… Some of the strongest teams I’ve seen are the ones with complementary skills that could take a product to MVP. Otherwise, find someone that believes in what you’re doing and offer some equity. The pitfall happens when an entrepreneur or team (or one charismatic leader) is so driven to see this product work, they give away too much equity too quickly. On the other hand, great co-founder teams often have the skillset to get a rough MVP together themselves— very important for valuation and proving to others the idea is worth taking a risk on!
One of the stickiest issues related to equity partners is when entrepreneurs give equity to a company in exchange for services. An example that we see a lot in the custom digital products world is giving a development shop 5, 10 or even 25 (true story) percent equity to develop the software. There are several issues with this:
- The other company is most invested in the success of their own company, not the success of yours. They care if you succeed, because they want their equity to be worth something, but there is a tangible limit on what they’ll contribute to get you there.
- You aren’t in control of their priorities. Beyond meeting the requirements of your deal, they may not always be the dedicated partner they claim to be. What if they get excited about the next entrepreneur’s idea and become unresponsive to you? What if they took the deal because they weren’t busy doing paid services at the time and then business picks up?
- Uneven distribution of institutional know how. When you build your internal team to handle the tech side, then your original partner becomes silent. With any equity holder, you want to strive for people that contribute value during the entire course of the venture.
In the last few years we’ve seen this issue of giving away equity to a company in exchange for services cause major issues at least 4 times. One company imploded when they brought in another vendor to start fixing things. Their ‘partner’ held a board seat and a good chunk of the company. The product did not work, and nobody would take responsibility. The startup went under, and nobody was happy.
Remember, companies that take equity always have another revenue stream— if you’re a huge success they benefit, but if you go under, they still have other revenue streams. It’s like the chicken and the pig having breakfast; the chicken was invested, the pig was committed!
If you need to give up some equity, give it to an individual who is solely dedicated to the success of your venture and has the missing skill set, or give it to investors that add value to your team. Only take 'smart money' from investors that add serious strategic value to your team.
Fundamentally, you need to show validation that the pain point really exists, and that people will pay for your product. If you’re gonna raise money, then get enough to put a high quality product out there people need and love. One of the esteemed mentors that hangs around Hatch all the time, Chris Buehler, once said “There is a double-double rule; ask yourself if you have enough runway to make this work if it costs twice as much to build and takes twice as long… if you can make it work after the double-double rule, then you’re onto something.”
Remember, your product is the flame and capital is the gasoline; it burns fast and hot but can accelerate the overall fire. Things like innovation, process refinement, and building the right team are the longer burning fuel you need for sustainable growth.
Three: Poor timing
It’s easy to find a hundred articles on why timing is an important factor for a new product or startup. Fast Company’s Brandon Watts opens one such article with:
"What comes to your mind when you think about companies like Webvan, Dodgeball, Pets.com, Kozmo.com, and WebTV? All were pioneers in their markets in many ways, but all were–in some respects, anyway–failures. In the business world, it’s the unlucky fate of certain companies to serve as proof, or even punchlines, about how ambitious technology companies can implode in sometimes spectacular ways.”
Timing is commonly held as one of the largest success (or failure) aspects of new products. If you’re too early, you’ll freak out the majority, if you’re too late the space is already too crowded. It’s one of the toughest things to judge, and regardless of some advertised methods to avert timing woes, it probably takes a little good luck to get it perfect.
To take this conversation to the next level, I’d like to suggest that timing has an important ongoing aspect. It relates to momentum and making sure you’re responsive to consumer demands. You have a great product right now… how do you expand on that and keep innovating?
Two: Lack of consistent customer focus
One of the hardest parts of a new venture or product is asking someone to buy it. It’s exposing— you’ve given them the chance to reject the product… to reject you! Many businesses wait too long to get rejected.
It seems like ‘validating your market’ must be too easy, because a lot of businesses still make silly things that ‘solve’ pain points that don’t really exist. Rob Fitzgerald wrote a great book called The Mom Test where the premise is that everyone will lie to you a little bit, even your mom. Why? Because they want to be supportive and nice. Now, lets go back to the idea of being rejected for a second. If you instead ask “would you like to pre-order this now? I’ve got a credit card machine.” then they’re on the spot. When you tell someone about your idea, always give them a chance to reject you. They need to give you money, their time, or their reputation for it to count as a positive market test. Anything short of this is a waste of everyone’s precious time.
This is actually good news— nobody wants to waste their time and energy. Once you learn how to ask for feedback the right way, this can save a lot of heartache, and align you to your end-users faster.
"Consistently asking your users if you’re meeting their needs means putting yourself in a constant state of exposure. However, it also gives you invaluable insight into your product which is critical to building something that people will habitually use."
Get a prototype in front of real users ASAP. Ask for feedback, synthesize your learnings and repeat. Consistently asking your users if you’re meeting their needs means putting yourself in a constant state of exposure. However, it also gives you invaluable insight into your product which is critical to building something that people will habitually use. We believe this strongly, which is why we invest so much energy into user experience, design, and feedback loops with users when we work on a project.
If you want to make a great product for people, you have to study them.
One: Leadership issues
9 out of 10 new products will fail for a lot of reasons— but how many times have you heard an investor say that they are investing in the entrepreneur (leader)? Investors know there will be unforeseen obstacles and pivots that great leaders must navigate. Some really struggle, or can’t deal with the rapid changes or emotional roller coaster and they fail to push the idea over the finish line. Not saying that leaders can’t learn to be better at this stuff… I’m the imperfect CEO writing a leadership section in a blog and I’m still learning daily. But lets get real; there are some leaders I’d invest in and some I wouldn’t right now. Your team has to believe you’re the right person to take the idea all the way, and so do your investors. If the team doesn’t believe in their leader, then there is no foundation of trust to get you through the hard times… and yes, there will be hard times.
Common symptoms of an ineffective execution team:
- Can’t seem to galvanize the team. This could point to a ill-defined vision, poor culture, or perhaps that the leader hasn’t been able to prove to their own team that this idea is worth betting it all on!
- Tunnel vision. The business doesn’t work on paper when put into a simple business canvas or plan. These leaders could be hyper focused on their own beliefs about the product that they forget to validate their market segment and ask the customers.
- Shiny object syndrome. Bounce around between many ideas, instead of giving attention to well-prioritized critical items.
- Putting points on the board. At some point you gotta get on the court and make baskets. Great ideas, preparation, doing the right things… none of that matters if the scoreboard doesn’t reflect that you’re crushing it.
Great leaders learn from experiences where they were ineffective. The battle scars of failure and setbacks teach valuable lessons. That’s why it's so important to have some great mentors that will (a) tell you when your $h** stinks, (b) steer you away from tunnel vision and (c) reinforce what you’re capable of, not what you’re doing now. Mentors can really help leaders identify blind spots.
Effective leaders can also be objective about where the challenges are, and calmly work through it. Even something as basic as "Does the business even work on paper?” can be a tough question. There’s no magic trick here, some common tools such as a well fleshed out business canvas can expose some weak spots. Using simple tools creates a discipline and helps keep decisions explainable and objective. "We just quit ‘coeo’" (another venture of Jason and I’s a few years ago) was a tough phrase to tell the startup. But I could no longer walk the business across the page after some new smartphones hit the market. We were able to lead the team through the somber decision making process in a way that made sense to them because we had evidence to support our decision. After hearing the reasons behind the decision, everyone was on board. Have a reason for doing everything you do. There is a huge difference between being told what to do, and being lead to understand how important an objective is or what went into making a tough call. I sometimes still fail at this and am working hard to do a better job at explaining the ‘why’.
Well there you have it. My top five reasons startups or products fail. The list goes on, unchecked technical debt or just plain poor engineering decisions, someone else beats you to the punch, entrepreneur has a bad case of ‘shiny object’ syndrome… etc..
Hope this helps you out.