10 Reasons Your Startup Will Fail
Great entrepreneurs are not risk-seekers. They are risk-mitigators. If you eliminate every possible risk for your startup, you succeed. Of course, you can’t eliminate all risk, but you can mitigate, control and eliminate a lot of them and let “luck” strike you. That’s the theme of a talk I gave to the TechStars Seattle 2013 class a couple of weeks ago. Tech entrepreneurs get obsessed about things they know and are familiar with, and that’s the product, but when you ask entrepreneurs who failed after a couple of years of hard work why they failed, hardly it was because the product didn’t work, or the database didn’t scale.
The top ten reasons your startup will fail are:
#10 — You’ll hit customer inertia
It’s incredibly hard to get customers (business or consumers) to change
their way and try new things. Even if the new thing is better, faster
and cheaper. Inertia is very powerful. It works in your favor once you
gain momentum, but until then, there is a lot of rowing at a large and
still lake before you reach a slow rapid. The best way to break that
inertia is to be truly disruptive, and that means 10X. It can be ten
times cheaper, or ten times faster, or ten times more engaging, or
whatever 10X is valuable for your customer.
#9 — You’ll sign the wrong contract
You might not even know it, but your startup might be D.O.A. the moment
you sign a new investor or a new partnership. Once you are a starving
entrepreneur and someone dangles hundreds of thousands of dollars in
front of you, the dotted line becomes that much sweeter. Typical
mistakes include raising money from strategic investors with exclusivity
terms, right of first refusal, product or business goals tied to the
deal, etc. Another big mistake for consumer companies is to be on this
hybrid state where you have a direct to consumer product and then you do
a white-label to a Fortune 500 company and now you have to serve two
masters, the consumer, and your big customer, and they rarely go
hand-in-hand.
#8 — You’ll not break through the noise
Have you noticed the ridiculous number of startups out there? Or the
number of apps? Or the number of business trying to figure out social
media analytics, health behavior change, social shopping, big data,
business intelligence, online education, and on and on? Yes, it’s not
enough to have a great product. It might not even be a requirement to
have a great product, but to figure out how to become a top-of-mind
product for customers is a must.
#7 — You’ll have a vitamin…for babies…monkeys
When you have a product, that is a nice-to-have for your customer you
are already in trouble. You should aim for something your customers
can’t live without it. It’s a need-to-have. Then, because of advice from
your “wise” mentor, you decided that going to a broad market is too hard
so you segment it to get traction first, and then you segment even more
because you figure out one way to sell into that tiny segment. You just
created a chasm for yourself. Not only you created a chasm you need to
cross it, you are now a nice small business with all these customers you
still need to support while trying to innovate to attract new customers.
#6 — You’ll have a co-founder / executive blow up
It happens more than we know it. It will happen at your startup. Life
changes. People have new priorities because of health, family, kids,
spouse, goals, etc. When the passion is not there, any small bump
becomes a destructive energy that slowly corrodes the company until the
company or the individual can’t take it anymore. Being slow to identify
and address this issue is never a good thing, and these things usually
happen at the worst possible moment (as if there was a good moment for
blow-ups). Just before you close a round, or just before you’ll make a
major sale, or hire a key employee.
#5 — You’ll pivot too soon
I’m not a fan of the Lean Startup movement. There are many great things
about it, but it permeated this idea of build-test-pivot that is a
fallacy. It’s not that it doesn’t make sense; it does but only on paper.
First, people think they are building a “minimum viable product” while
in truth they are just building a “minimal product”. Second, you don’t
know if your product is viable until it becomes viable. Third, and, most
importantly, it takes time for consumers or customers to build trust on
your brand and commit to it. It takes time for friends to tell friends.
It takes time to sell into small businesses. It takes time to find the
right budget cycle you are selling into. If you think you can prove
there is demand for a product in just a couple of months, you are either
addressing a market that already has lots of competitors (good for you,
just build a 10X better mouse-trap), or you are smoking crack.
#4 — You’ll hire the wrong people
When someone tells you to only hire A-players, first, punch them in the
face. Second, what they are likely saying is to hire only Ivy-league
employees or A+ students, and that’s wrong. You might hire the smartest
person on the planet, but if they don’t have the motivation they won’t
do squat. Worst, if they don’t have the right attitude and cultural fit,
they will not only not do much, they will destroy your company from the
inside out. In addition, if someone says “hire slow, fire fast,” punch
them again. The only valid platitude is ABH — always be hiring.
Particularly for developers, and more so for Mobile Developers, you
should be on an always-open-position mode. Don’t worry about hiring too
fast. If you find too many good candidates to work at your company, your
bar is too low, and you are not using the right recruiting process.
#3 — You’ll spend too slow or too fast
This is very close to the speed you hire, and to the stupid things you
do for marketing. The rule of thumb is your seed round should last
roughly 12-months, and your Series A should last 18–24 months. There are
lots of exceptions depending on the size of the round, the product and
the market you are going after. I’ve seen mistakes on both sides of this
spectrum. Entrepreneurs who don’t hire, don’t spend on marketing, don’t
take risks so they will extend their runway. It doesn’t matter how long
your runway is if your plane can’t take off. The flip-side is
entrepreneurs who are careless with expenses, hiring a CFO, COO and VP
of Marketing to manage the other 5 people on the team, and once you have
well-experienced executives on your team, they do what well-experienced
executives do, they hire marketing research firms, they hire
consultants, the pay for all this stuff that they must have to perform
their job, and suddenly you are out of cash and these exec are on their
way to their next startup.
#2 — You’ll not create enough value for your customers (… in
time)
Value creation is one of the hardest things to explain, but very easy to
understand once you get it. As an entrepreneur, you are on the
value-creation-and-capture business. You are creating value to yourself,
to your investors, to your employees, and more important of them all,
you must be creating value for your customers. If you are not, you are
just a fluke and your startup will be gone in no time. The more value
you create for your customer, the more likely you’ll succeed. A very
easy way to measure value creation is to understand how much of a pain
would it be if you disappeared and your customer didn’t have your
product anymore. If it’s easy to replace, or if they wouldn’t even
bother replacing with something else, you are in deep trouble. This is
also applicable to consumer products.
#1 — You’ll run out of money!
Money is the fuel in the business engine. All investment money is
temporary. You should always be alert to how much money you have in the
bank, how much money is coming in (sometimes it’s zero for a long time),
and how much money is going out. You should never have less than six
months of runway, and you should not be doing accounting tricks.
Unsigned contracts don’t count. Once you hit that 6-month mark, you
should either be fund-raising, and/or you should be cutting expenses,
and/or you should be trying to improve your revenue line.
Finally, there are few reasons your business won’t fail. It’s not they don’t matter, but if you are a tech entrepreneur you might put a disproportional amount of emphasis on those. Of most startups that fail, it’s unlikely they will fail because:
- The product didn’t get built
- A key feature was forgotten
- The projections were wrong
- The logo was ugly, or the name of the company was bad
