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10 reasons startups fail

10 Common Reasons Why Startups Fail

After going through 3 IPO’s and 3 other startups that were sold or merged and seeing the good, the bad, and the ugly points to the sole reminder of how difficult it is in Silicon Valley to prosper with early-stage and startup companies. It’s easy to talk about the successes, because it shows one as ‘successful’ and no one likes to talk about ‘failures.’ But there’s a reason why 90% of startups fail, and if people want to grow in Silicon Valley, then failure is the best way to win the next time. In truthful terms, most people involved in startups have failed at some point, yet they either refuse to learn the reason or blame the things that really weren’t the reasons and wonder why they failed again at the next startup.

Not that I like failure, but I was taught at a young age that you learn from mistakes (yours and others). While it’s so easy to take the path of the ‘blame game,’ if you are part of a startup that has failed, you can’t blame anyone except yourself. But LEARN from it, so you can prepare better for the next startup.

In any case, I have seen it all and have, as well, blamed others. But every time I come back and say to myself, ‘how did I not see this?’, ‘why didn’t I look into this first?’, ‘if only I had asked this question before taking the job,’ and so on. But it’s on me, no one else. If you plan on going to a startup and want to even start a company, you should look at these 10 fundamental reasons startups fail before you can have any hope your company will have a chance at success.

1. Ideas Are Not Salable

Ideas are what start new companies. Normally, the best ones are thought of while just doing day-to-day life things when the idea pops up on how to do something better or how to solve a major problem. Great startups that led to new frontiers like Intel, Apple, Microsoft, Silicon Graphics, Sun, Netscape, etc. were ideas that were turned into great companies because of the massive problems their technology solved. These companies created markets (computers, operating systems, CGI/computer graphics, workstations, internet) and did not follow others. Unlike these great pioneering companies, many startups today are ‘followers’ in an already very crowded market. Avoid these! Startups that claim they have a new, better, faster version of the earlier, pioneering companies that created the respective market (ie flash arrays, cloud, etc.) are red flags. More often than not, these are funded by VC and management connections vs having fantastic products that will ‘sell itself.’ Most likely these products are deviations from the foundational products that started the market and aren’t salable in any quantity that merits success. Before you begin any startup, do your research on the salability of the products. If you come from the respective domain space, you should know the answer.

2. Founders Hold on Too Long

Founders of startups are innovative and smart but are many times very complex as well. Venture firms will fund some of these just for who the founders are and their past track record. However, they usually have never run companies, and the intricacies of solving day-to-day issues across a company are not easy or for everyone. Founders are mostly engineers, and their place is to help the idea that got funded. They are not the best people to run companies, as they are focused on their own ideas, vision, and more often wrapped up in their own place. Startups that have the founder in a CEO or key executive business position are red flags and the ones to be careful of. There are exceptions, like Steve Jobs and Mark Zuckerberg, but for every Jobs and Zuckerberg, there are 50 others startups that have failed with founders holding on too long.

3. One Size Does Not Fit All At the Executive Level

Not sure how many times I’ve heard that this executive person did this, that, and the other, etc. at another company and was fantastic. Well, that ‘other company’ was just that: another company, meaning it had different products, different R&D model, perhaps a different market, different GTM, different sales model, different P&L structures, different operations, etc. Every company is different, and one size does NOT fit all, especially at the executive-level. Executives of startups need to have solid domain expertise across the board (CEO, CMO, COO, VP R&D, etc.). The idea that got funded needs to turn into revenue, increase the company value, and hopefully find a path to an exit (sale or merge; rare to IPO). If you do not know how to do this (ask this before you take the job), the startup will fail. Understanding what it takes to build revenue is the hardest part of a startup, and you can’t put in what may have worked at another company and have it magically work in this new company. Way too many executives are selected based on the buddy system or their track records but are not skilled in the new startup products, domains, and infrastructures. In this case, it’s only a matter of time before these startups fail, and then people ask why. Next time, ask the people hiring you at the startup if the executives have a game plan or not for the company. See what their answer is. That should be enough to make your decision.

4. Experience & Entrepreneurship Matter

Along with domain expertise, the executive-level positions must have startup experience. I can’t reiterate how important this is. Running a startup vs a division within a big company (ie Apple, IBM, HP, etc.) is night and day different. Only two major things will surface if you know the executives are good: they must extremely execution-oriented and be savvy with cash-flow management. In other words, they need to be able to execute and sell the product as well as be able to raise, save, and manage the funds that will be very tight. In big companies, most executives do not do these jobs or have people doing them. But in a startup, the executives had better be skilled to do these jobs. Small companies will fail for many reasons, but lack of skill in execution and cash-flow are the main ones. Again, domain expertise is a given. Not one startup should be led with executives out of the product’s domain space. However, even with this, if executives do not have the startup experience that teaches them to run things much differently than big or even mid-size companies, avoid them. Big names from big companies net big failures for startups.

5. Do Not Play Only Your Part

In startups, the executive team needs to work together and have the best chemistry. I can’t think of a stronger case for chemistry being needed than this. Startups are on a time leash, and there are not two chances for failure. To ensure startups of having greater success, the entire management team needs to be connected at the hip. Think of management as the pillars that are holding up the small amount employees. These pillars are the foundational strength of the people. Yet how often have we heard that if one collapses then they’ll all collapse? This backwards thinking of many people is not true. It should be when one collapses, the other pillars need to get stronger to pick up the pillars that are falling. Not following the statement, ‘I’ll play my part and you play your part’. If this were the case, you can see why this reasoning just continually hurts startup after startup. Before going to a startup, make sure the management team is all on the same page with a chemistry level that bodes confidence in the growth of the company. Avoid the ones that smell of politics. You’ll know this in the interviewing process.

6. Management Ties In With VC’s

Most VC’s will say the main reason we made the investment was the management team. I’ve heard this way more than I’d like to. If I do hear it, I usually avoid them. This has to be one of scariest reasons to make a multi-million investments. Typically the real reason is that the person made the VC’s some good money in another startup gig, and the VC’s feel that they’ll do it again. In the meantime, when digging deep into the new products, markets, financial model, infrastructures, etc. they are mostly different, and this particular management team that did so well in the previous startup has no idea about the new one. But with the VC ties, they are golden. It’s their way or the highway. Failure will happen, but management will stay intact because of the relationship with the VC’s. If accountability is not implemented from the top and down, the startup will fail. That should begin from the very first day, and will be clear if it’s in place. So check the relationship with the management team and investors before starting. You can ask these questions in the interviewing process. And if you don’t get answers, that’s your answer.

7. Fast and Furious

If you happen to get in a good startup that has made traction and has done well, say for a couple of years, you’ve made the right selection upfront. Congratulations. However, stay on your toes, because it now means your company has ‘awoken a sleeping giant’ in the name of bigger companies you compete with. Management can easily take their foot off the gas pedal when things are going well and lose the vision, thus forgetting to look ahead. Former Intel’s chairman Andy Grove’s saying, ‘only the paranoid survive’ can’t be more truthful at any stage of any company, let alone in a start-up. Success brings competition and unless the culture has that ‘fast and furious’ approach, it may not take long for the bigger companies to squash you and even other startups the same size as you. Never should a company feel safe, which makes every Silicon Valley company stressful. But that’s nature of the business. It’s cut-throat. Keep an eye on the culture as the company evolves. It should have the same drive when success has hit as when the company started.

8. Know What You Know

It’s interesting when I talk to VC’s and management at startups on their paths to building revenue. Many will say they’re going to hire this ‘dynamite’ sales person who is top-notch. When that person is in place, sales will take off. From first-hand experience, this is a path to failure. You don’t need this type of sales infrastructure at this stage, until you know what it is you know. Not that this person is not a ‘dynamite’ sales person, but having them means much more of the startup funds will be spent in advance of decent revenue growth when it’s not necessary. Startup’s initial revenues should be decent, if not semi-substantial, before hiring a huge sales and marketing team. So who should sell then? As I mentioned earlier, if the CEO is not from the domain space, you’ve got a problem already. A domain-savvy CEO should be the number 1 person, along with the founder(s) and key technical folks as needed. These are people who know how to present the product, value prop, solve the customer’s problems, etc. first-hand and can close the deals while preserving the funding. At least, they had better be able to. That’s the main job of CEO’s in startups. In early-stage start-ups, you need to start building a revenue base with this team before you pull in more money for growth. Actually, Series B or higher will never come unless you have decent sales growth. I call it building the foundation. I cover this and the other 2-phases of building a successful company, ‘establish credibility’ and ‘grow the business’ on my website. If you happen to being looking at a startup that has a pretty big sales and marketing team without much revenue, avoid them. There are red flags all over that one.

9. Time Is of the Essence

If a startup is on the third or fourth CEO or other executive management positions (ie R&D, Sales, Marketing, etc.), avoid it. The product is not producing the results it was funded for. On top of this, most likely, the product direction will be changing and will be in starting-over mode again. In any event, the product line needs to be bullet-proof, and running on all cylinders before growth and expansion can happen. In startups, usually the growth will take place after a year or two, if done right. If a startup is in its seventh year, what makes you think it’s going to be a success in its eighth year? I’m sure very capable people were in these positions early, but it shows lack of execution on all fronts. With startups, time is of the essence to make an impact. By the fourth or fifth year, they usually go into ‘has-been’ modes and turn into just a job. Look at the evolution of the startup, year-to-year performance, market credibility, and executive turnover. Clear indications here will be the tell-tale sign of whether to join or not.

10. Investor’s Patience

In defense of some management, some startups are driven by the investors (venture or private equity firms). It goes without saying, avoid these. If the CEO does not get to execute their game plan to run the company, be careful. You’ll know this by looking at your hiring manager’s confidence and body language. Some investors and boards don’t know when not to intervene and make management changes too often. Their patience is very small. It actually does keep some good CEOs and executives from joining these types of companies when they know these types of investors are involved. It’s extremely hard for any CEO, let alone a very good one, to get a startup clicking (as seen on my website) and if they don’t give the CEO the time needed, it’ll be in a constant downward spiral. Research the investors and board, and know their past track-records by looking at their past portfolios. That will give you what you need to know before deciding to join or not.

I hope this helps with your analysis of joining a potential startup. Or if you’re at one, some helpful advice that may help you make some future decisions. I always like to see startups become successful and strive hard to learn from the past and apply the learnings to the future. I’ve seen enough in my days and have been at fantastic startups but have also seen how they can be destroyed due to the reasons I listed above. I certainly learned a lot in my 30 years, and I hope this helps you as well.

Steve Dalton is the founder, President & CEO of Linear Growth Consulting, LLC (LGC). LGC is composed of extremely high qualified, experienced, industry-proven, high-tech executives and personnel with hundreds of man-years of successful results with real-world understandings of how today’s companies need to be fast and nimble with premier execution models that encourages creative entrepreneurial management necessary to compete in today’s markets. To solve these very common executive management breakdowns, there is no better way to understand them than by dealing with them in real time. The partners and consultants at LGC are industry, hands-on executives with proven track records of driving and delivering disruptive solutions in Engineering, IT, Marketing, Sales, Operations, and Customer Service infrastructures. We all exhibit strong leadership, sustained innovation, focused execution, and a sound understanding of market requirements/shifts in defining technical strategy, building & releasing products ground up, and working with the field to drive major customer wins. LGC strives for strong communication skills to be adopted as this has shown to be one of the biggest reasons for a lack of management deficiencies. Moreover, building the revenue is one of the toughest aspects of successful companies, and LGC has all the experience, know-how, and methods to accomplish the toughest challenges that some companies may be facing in this area. Since his ‘learn-by-doing’ undergraduate education at Cal Poly, Steve Dalton has been taking this approach throughout his 30-plus years in the competitive, high-tech market of Silicon Valley. That is a skill within itself and can be done only by having ‘done it yourself.’

Learn more by talking with key executives at Linear Growth Consulting, LLC