Why do startups fail?

 

PebbleWatch-467234225

The Pebble SmartWatch GETTY IMAGES

Decades ago the saying used to be, Hardware companies die hard, software companies die soft. The concept behind this was you could keep releasing new versions of software so long as you still had an engineer left in the company and perhaps that would keep your installed base happy or even turn things around. But hardware is hard to update and takes much more than a single engineer, there’s an entire supply chain involved.

Well this saying is just as true today was it was decades ago. And Wired ‘s story by Erin Griffin about the dangers of betting on crowd funded hardware startups just reinforces it.

Venture funding for hardware startups hit an eight-year high in 2016, with investors pouring $4.4 billion into 624 startups, according to data provider CB Insights.

But what has changed is the emergence of crowd funding which simply did not exist last century. Wired focuses on the Pebble watch, which raised a record $10 million in crowd funding. All those VCs who passed on investing in Pebble then jumped into the firm. It eventually raised a total of $59 million. The VC lemming phenomenon at work!

new study from CB Insights analyzes the failures of 382 hardware startups, finding that the biggest reason they fail is a lack of demand for their products. In fact that’s the same finding the National Science Foundation came to when it studied why all the post-docs it funded failed to commercialize their inventions: they built something no one wanted.

Amid the failures, it’s increasingly clear that crowdfunding success does not automatically equate to widespread consumer demand. A new study from CB Insights analyzes the failures of 382 hardware startups, finding that the biggest reason they fail is a lack of demand for their products. In other words, a popular crowdfunding project can be deceptive. According to the report:

Startups are likely raising money to get to a limited release stage, and then finding that there is not a large enough market for their product to justify a larger raise and production at scale.

Little wonder then that Paul Graham, founder of Y-Combinator, first rule for startups: build something people want! But how do you do that? It seems that testing the market waters with crowd funding would be a great way to validate your business concept. After all aren’t paying customers the true test of a product? The problem comes back to the essential character of a startup and what distinguishes a startup from a small business: growth: growth. Anyone who has read or even heard of Greg Moore’s classic Crossing the Chasm knows that the challenge for startups is NOT getting early adopters to buy the product, it’s crossing the chasm between the early adopters and the early majority.

crossing

So whether your startup is hardware or software or even a service, I can’t recommend Crossing the Chasm highly enough. Yes, you need to win over the early adopters. But that is a battle, not the war. As you can see, the bulge in the curve is the early and late majority. That 68% is where the war is won.

So while crowd funding can be a good way to get financing if angels and VCs pass, be wary of why they passed. It is very hard to get an answer from investors when you ask that question. But try hard, even if you need to go through a backdoor to get it. Because VCs and even angels invest in one thing: growth.  Gaining acceptance amongst the early adopters is necessary, but hardly sufficient.

So make sure your product roadmap, whether or not it’s hardware or software, takes into account the majority users, who will be more demanding, less forgiving, and less adventurous than the early adopters.

And if you are building hardware, give serious thought to modularity and other approaches that will enable you to upgrade your product without starting from square zero again, with its attendant costs in time and money.

 

Author: Mentorphile

Mentor, coach, and advisor to entrepreneurs, small businesses, and non-profit organizations. General manager with significant experience in both for-profit and non-profit organizations. Focus on media and information. On founding team of four venture-backed companies. Currently Chairman of Popsleuth, Inc., maker of the Endorfyn app for keeping fans updated on new stuff from their favorite artists.

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