Over the years, some startups really came to the pot of gold at the end of the rainbow. Accel Partners invested $ 14.8 million in a website called “thefacebook.com” in 2005, and received a return of $ 5.6 billion, 378 times its original disbursement. Most of the time, however, new companies tend to fail brutally. According to CB Insights, 70% of early stage technology companies fail, usually about 20 months after the first round of financing. The failure rate is even worse for hardware startups, 97% of companies financed by crowdfunding fail or become “zombies”.
The reality is that starting, developing and scaling a successful startup requires hard work, commitment, planning and often a bit of luck. In recent years I have seen many startups fail, some reach a medium level of success and others grow big. There is no single reason why startups fail, the causes are several and change from entrepreneurship to entrepreneurship; lack of market, fatigue of the entrepreneur, the focus is lost, they do not listen to their clients. However, when observing the motives we find that there are patterns that are repeated and causes that cover the majority. In this column we will go through the top 3 reasons why a startup does not reach the promised land:
Put the focus on marketing and not on sales
All too often, I have seen founders who build some initially mediocre product, announce it to the world, find that users never appear, and do not know what to do next. In addition to not getting any user, the startup never receives the feedback it needs to improve the product, it does not find its place in the market and that translates into eventual death if it does not have enough funds to get out of the situation.
The most important thing that a startup in its startup stage should know about marketing is quite contradictory: you should not be doing anything that you define with the term “marketing” at this time. To visualize it better, we can place “sales” and marketing as two extremes of a continuum. At the end of “sales” the scope is limited, but deep. At the marketing end, it is broad and shallow. An early stage startup should be looking for a deep and limited, not only in the way it appeals to users, but in the type of product it builds. Focus on sales should be talking to a small number of users / customers who are seriously interested in what they are doing, not a broad audience that is mostly indifferent. For example, the first Airbnb users were the hosts and guests in New York City. To grow, Airbnb needed more hosts and also help existing ones to become better. So Brian Chesky and Joe Gebbia flew to New York every week to meet with the hosts – teaching them how to improve their ad prices, take better photos, and so on. They also asked the hosts to introduce them to potential hosts, which they later met in person.
Just as focusing on the right end has a double benefit – acquisition of users and definition of the product – focusing on the wrong side is doubly dangerous, it will make it lose focus and burn funds, which for a startup at this stage, are scarce.
The equipment is not the indicated
A diverse team with a different set of skills is critical to the success of a company. The formula of success for technological startups is; team of three founders composed of a technical profile, one business and another design / UX. And the strawberry of the dessert is that it does not only have to have these profiles but there must be synergy between them, it is necessary to note the shared passion, the common goal and the complementarity. Do not misunderstand me, there are teams of “solopreneurs” that have been successful, but the reality is that the path of starting a startup is very complicated and expensive, having a team that will accompany each other when everything goes uphill, when you have to take difficult decisions and long hours building a business is essential.
On the other hand, the startup of a startup consumes many resources, mainly of time and money, the founding team should be able to build a first version of their idea for themselves, without the need to spend large amounts of funds on development. If the founding team can not launch a product on its own, or with a small amount of outside help from independent professionals, you should reconsider who makes up the team and look for add-ons. Having a couple of partners that not only help balance and provide sanity controls for the decisions made, but also contribute their commitment and knowledge to develop the idea, is key and the best example is what happens if we search in all programs of acceleration of startups of the world or speak with managers of investment funds, they will tell you that the team is the most important for the success of the venture.
The market does not exist, the business model does not work
As we saw in the past, bad things happen to entrepreneurs who focus on developing solutions for problems that interest them instead of finding a real and validated need for the market. They ignore the wishes and needs of users / customers, either consciously or accidentally, and develop a product that does not meet the needs of the market, is a path to perdition. Startups fail when they are not solving a market problem, when they are not solving a problem large enough to face a scalable solution.
The startup can have excellent technology, excellent data on purchasing behavior, great reputation as a leader, great experience, excellent advisors, but if you do not have a solution or business model that really solves a problem in a scalable way, it will fail. The first product that a startup launches to the market may not meet the needs of its users, no problem, so it is important to contemplate from the beginning of the venture all the necessary instances to obtain information and adjust the idea.
If we take into account that our first version is going to have many failures but we are prepared to go the way of validating with customers, we are doing well. In the best case, it will take some reviews to find a fit between the product and the market. In the worst case, the product will not comply with what was planned and will require a full reconsideration (an example: the Argentine case of Avenida.com).
Also published on Medium.