7 Reasons Startups Fail–and How to Avoid Them
by Peter Cohan
I estimate that all but one in five million unfunded startups end up being worth at least $1 billion. For every 1,000 startups that meet with a venture capitalist, only two get funding. And for every funded startup, only one in 10,000 ends up being worth $1 billion.
One thing I learned in researching my book Hungry Start-Up Strategy is that great entrepreneurs are good at identifying and taking steps to minimize risk early. Here are seven common examples of such risks and how great entrepreneurs keep them in check.
1. Failure to find unsolved customer pain
Too many founders think that their idea is so brilliant that their best course of action is to build the product, show it to the world, and wait for the money to roll in. However, that common delusion is a major startup killer. In reality, people are reluctant to try a startup’s product, because most of them fail. So they will only try the product if it promises to solve a painful problem that nobody is trying to solve.
To avoid this problem, don’t start your company until many people are willing to pay now to get your product sooner.
2. Reluctance to get feedback on prototypes
Plenty of founders refuse to let anyone see their product until it is perfect. There are plenty of reasons they make this mistake – they are afraid someone else will steal their idea so they want to get a big head start, they want to impress their peers, or they are afraid that unless it’s perfect nobody will want to buy it. Failing to get feedback from potential customers is usually fatal to a startup.
Avoid this problem by building an inexpensive prototype of your product, getting feedback on it, and use that input to build a new one. You should repeat this learning loop until potential customers demand your product.
3. No passion for the market
Don’t start a company if your primary motivation is to make money. The reason is simple – to be successful you will need to spend about 80 hours a week with very little pay to make your startup successful. It is not possible to work that hard and be effective unless you believe that your life’s mission is to make potential customers better off by providing them your company’s product.
So direct your startup at solving a problem that you care about deeply. People start companies most often because the founder had a problem that nobody else had solved. If many other people have that same problem, you are off to a good start.
4. Lack of skills needed to win
If you think the job of the entrepreneur is to think big thoughts and hire other people to do the actual work, think again. One big reason that startups fail is that the founders can’t do the thing that it needs most to get off the ground. I have seen many tech startups flounder and fail because the CEO can’t code when coding better than almost anyone else is the thing that must happen to build the product and get customers.
If you are such a person – your odds of success will increase if you bring world-beating sales skills and knowledge of the market need you are addressing. But you can only achieve success if you have already developed a strong relationship with a world-class coder. More generally, entrepreneurs boost their odds of success if they pick industries that value the skills at which they excel and love to practice.
5. Ignoring cash burn
If you don’t like watching the pennies, don’t start a company. Many entrepreneurs are engineers at heart. They want to build a perfect product and then dazzle the world with their brilliance. They eagerly read about how easy it has been for other startups to raise millions of dollars and think that they will be able to do the same. So they ignore the rate at which they are burning through cash, and assume that when the day comes to replenish their cash coffers, investors will break down the doors to write checks.
The best entrepreneurs spend only on essentials and are always networking to meet investors and they view fund raising as a full-time job starting at least six months before their companies run out of cash..
6. Inability to raise capital
If you have never raised capital for a startup before, chances are you will be surprised by the time and number of rejections required before you succeed. Even if an entrepreneur realizes that cash will run out, too often he starts the process too late, goes after the wrong group of potential investors, and does not present them information about the company that leads them to want to invest.
As I explained in chapter three of my book, entrepreneurs can avoid these problems by matching their capital raising approach to the stage in their company’s development. One CEO I spoke with said that raising capital is generally a full-time six month job that should be started well before the money runs out.
7. Weak team, poor leadership
A final startup-killer is a leader who cannot recruit and motivate the most talented people for the jobs on which the company’s success depends. The simple reality is that if you are not a great leader, it is hard to learn to become one. Moreover, the leadership skills you need to get a company to 10 employees are different than what a 100-person or 1,000-person company requires.
At the startup stage, a great leader has the charisma and track record to conjure up a compelling vision for the company and recruit top talent to come along for the ride of realizing that vision.
Starting up is hard to do and if you can’t navigate your venture around these problems, yours will surely perish.
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