I don’t recall where I came across this question, but it’s stuck with me for years:
If my startup fails, what will be the reasons?
I tend to like working backwards – see my posts on pitching and product development – and this is yet another example. Look a few years out into the future and imagine your startup has failed. Then try to work your way backwards to out what contributed to your startup failing.
Traditionally there are three types of risks associated with startups: team, technology, and market.
Let’s take a look at each one for leading indicators that a few years from now these could cause your startup to fail.
As noted elsewhere on Mentorphile, the CEO is the most important person on the startup team. So there are several ways you can get into problems with your CEO:
- The CEO can’t grow with the company. There’s really nothing wrong with this. Many entrepreneurs are much better are starting a company than running a public company, for example. The key is to recognize this issue before it hurts the company. Either there’s got to be another person on the team who can step up or more likely your investors will have to bring in a seasoned CEO who has a track record of running (not necessarily starting) growth companies.
- The team is not aligned in their objectives and goals for the company.
- The team is missing a vital player. For example, channel sales can be critical to an enterprise company, as selling direct is very expensive. Without a channel sales manager with major league experience a company may have a great enterprise product but not be able to sell it. It’s important to note that a channel sales manager is different than a VP of sales – it’s a more specialized position focused on selling through other companies, what were once called VARS – Value Added Reseller.
- There is too much overlap between team members’ expertise and responsibilities. Engineers tend to know other engineers and may not know sales, marketing or financial executives. In the early days of the company it’s easiest to hire your friends. One way to guard against this is to develop an org design: one that is architected to how you will develop, sell, and support your product or service, not tuned to who your friends are.
- The team gets into a fight over equity ownership. Dividing up ownership is one of the most potentially contentious tasks in a startup. What might have seemed fair on day one may be perceived as highly unfair two years later. Equity should be based on contribution to the success of the company, not where you went to school, how many degrees you have or even your title. The best way to handle this is to get good advice from founders who have been through this before. Also leaving a large pool of stock for employees can enable some mid-course adjustments. And don’t let team members leave with stock – they need to sell it back to the company.
There are probably as many potential pitfalls for a team as there are teams. Building a team with a core of people who have worked well together before, or at least known each other well makes a huge difference. Watch the video with Jessica Livingston of Y-Combinator for her take on founder teams.
- Inability to scale. Friendster was the first social network. But it was so popular its servers couldn’t keep up with demand. As Yogi Berra once said of a night club “It’s so popular nobody goes there anymore.” Part of the brilliance of Mark Zuckerberg’s rollout of Facebook from Harvard, to other Ivies, to other top schools, to all colleges, etc. gave the company time to build and rebuild their infrastructure to keep up with demand.
- It’s a solution in search of a problem. I founded my company PopSleuth to help me keep up with the latest releases from my favorite musicians, directors, authors and other creatives. But while this solved a problem for me it didn’t seem to be a problem for too many other people. The technology worked, but it just didn’t solve a widespread problem.
- Buggy or ugly. While early adopters will put up with both, you’ll never cross the chasm unless your tech is fast, reliable, and easy to use – and preferably elegant to boot.
- Choosing the wrong platform or tools. It took a while, but Flash has finally been killed off. A friend built an enormous program in Java, but issues with Java doomed it to fail.
I’m not a technologist, so when you ask the question “If my startup fails what will be the reasons?” make sure you are getting a good cross section of technical and business expertise along with founder experiences.
According to Bill Gross, founder of Idealab, the biggest reason startups fail is poor timing. After watching his Ted talk I can’t find any reason to disagree with him, but there are other reasons besides timing.
- Competition. When I started Throughline to supply operating products and services to startups I totally missed out on a local company called BuyersZone. They ate my lunch. It was founded by a bunch of former purchasing agents and they used their contacts and experience to help all small companies with purchasing products and services, not just startups. As famed baseball pitcher Satchel Paige said, “Don’t look back, they may be gaining on you.” Before you start your company make sure you do a very thorough market scan for competition, afterwards task someone on the team with competitive analysis, and stay ahead via constant learning, constant innovation, and constant hard work!
- Size. There’s a reason VCs not just like, but insist on, large markets. They much prefer a small fish in a large pond to a large fish in a small pond because that small fish can grow. There are at least two important attributes to market size: absolute size and growth rate. If you choose too small a market or a stagnant one, your startup may fail.
- Too much need for customer education. We used to call this “missionary marketing.” If your product is so complex it needs a lot of hand-holding or training you better have plenty of margin, otherwise these costs will eat you up.
- Government regulation stifles innovation. There are two markets that have proven very difficult (but far from impossible) for founders to penetrate: education and healthcare. Both are heavily funded by governments and even more heavily regulated. As Herbert Hoover once said about education, “It’s easier to move a graveyard than to change education.”
Make sure when you ask your mentors for reasons why your startup might have failed that you don’t take generic answers like the above as sufficient! It’s quite possible that some idiosyncrasy of your technology, team, and/or market is what will end up bringing you down. The better they know your company the more likely they are to spot fatal flaws.
Many organizations do postmortems on failed projects or even failed companies. You can avoid this painful process by doing a pre-mortem on your company with your mentors and advisors. Don’t ask them to look out more than 3 to 5 years or allow them to tell you that sentient robots will have taken over your market – no one can predict the future. What you are looking for are structural issues, tiny cracks in the organization, that could spread, open up and split open the organization over time, not new magic technology that will upturn not only your startup, but the entire world.