5 Reasons Startups Fail (and Why Each One Is Preventable)
There are specific reasons startups most often fail. Recognizing them and preparing for them dramatically shifts the odds in your favor.
Any entrepreneur knows that, in your early days, no one will hesitate to tell you that most new businesses fail. It's annoying, but they're right. However, what's usually missing in the message is the why. Instead, there's a sense of inevitability. Starting a business is hard, so of course, most of them fail, right?
But in my experience, there are specific reasons startups most often fail. Recognizing them and preparing for them dramatically shifts the odds in your favor. I've built my business around partnering with healthcare entrepreneurs to avoid these pitfalls — so far with a record of 6-0, with three new ideas coming to life. Here's what to watch out for:
1. You hired the wrong person
Large companies make plenty of bad hires. But they're big enough to absorb a certain amount of incompetence without it affecting the bottom line, especially if their processes are sound. The smaller your business is, the more it hurts when you hire the wrong person. Committing to an employee who lets you down early in the life of a startup can be hard to come back from.
While there is always pressure for startups to move fast, take your time with your first hires. For leadership roles, try to stick to people you've worked closely with before, even though your top picks usually are valued in their current roles. You will have to sell them on your idea, culture and the future.
So much can be done, at least initially, on a limited-contract basis — such as accounting, marketing, HR and even sales. You may be able to build certain functions into partner relationships, such as borrowing an investor's communications team for your limited needs in the short term.
Be wary of "friends and family" offering services and help. They mean well, but having the resources, talent and accountability of a paid professional relationship can be the difference in ensuring successful project completion and timelines are met.
2. You can't sell
Entrepreneurs are a very special kind of people. Salespeople are as well, just in a different way. It's rare that you get both in the same individual (although it does happen).
Often, entrepreneurs have the vision, the insight, the strategy and even the ability to manage a team. Everything is in place. It's a great product or solution. But where are the customers? Startups often fail because the founders don't realize fast enough that they don't have the time, skills or network to sell effectively. They need a true salesperson to kickstart revenue.
Sales is a powerful resource to have on your team, because it can be easily quantified and has a measurable ROI. When hiring a salesperson, weigh their past numbers heavily in your consideration. Hire only those who have powerful networks in your industry and for whom building relationships is like breathing air. Then incentivize them to sell.
3. You spend too much time fundraising
It's hard not to look around at eye-popping capital raises you see announced in business and trade media daily and think about how fast you could grow with that money. This startup raised $30 million. This one raised $50 million. It's $200 million for this one.
What's not mentioned in those press releases is how much work the founders put into those efforts. Many founders spend half or more of their time raising money. When they are in the thick of a raise, it's all they think about 24 hours a day.
Meanwhile, they're losing ground on the problem their company exists to solve. Courting VC millions makes perfect sense for some companies. But before you go down that road, ask if your company can essentially function without you. If it can't, continuing to bootstrap, looking for alternative funding arrangements or growing organically could keep the startup from getting derailed.
Be sure to ask: How can this investor fuel your vision and growth, aside from the injection of capital? Do they have a common mission, a team of experts to help provide strategic guidance, a network of people within your industry that have proven success and relationships or additional resources, such as finance and marketing support?
4. Your investors have different incentives
If you do seek outside investors, make sure you understand their motivations. What do they hope to get out of this investment? What does success look like for them? What are their secondary and tertiary goals?
Also, consider what you might be giving up when agreeing to accept an investor. Do you retain decision-making control?
An investor is looking to see a return. Naturally, you are too. But often companies that prioritize the mission above revenue, at least at first, are more successful in the long run. Does the investor believe in your mission? Is their timeline for a return reasonable?
While raising money can be a huge drain on time, being at odds with your investors can be even worse. Evaluate the fit to make sure you're aligned with your own vision of success.
5. You picked the wrong name
Words are incredibly important. Everything, from the name of a company to the language you use to describe your future vision, matters immensely. It seems like the simplest thing, but a terrible name is a death blow to a startup.
Don't fall in love with a name right from the start. Maybe you've decided on a name that's meaningful or personal to you, but doesn't take into account how it makes your potential customers feel about your business and working with you.
Workshop names. Get feedback. Make sure it hasn't been used already, and that a URL is available. The name should have meaning, but it shouldn't be too on-the-nose. It should be simple, but not the lowest common denominator. It should be different, but not off-putting. It should be something people want to tell others about.
There are, of course, other reasons startups fail — solving a problem no one needs to be solved or is willing to spend money on, or rushing into a market you don't understand, for example. But as long as you have a good idea, know your industry and surround yourself with the right people, avoiding these failure points should put you on a path to success.