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4 Reasons Startups Fail And How To Avoid Them

by Steve Owens, Founder and CTO of Finish Line Product Development Services

The reasons for startup failures are well documented in numerous sources. A recent survey by CBINSIGHTS came up with 20:

No Market Need – 42% of those surveyed
Ran out of Cash – 29%
Not the Right Team – 23%
Get Outcompeted – 19%
Pricing/Cost Issues – 18%
Poor Product – 17%
Need/Lack of Biz Model – 17%
Poor Marketing – 14%
Ignore Customers – 14%
Product Mis-Timed – 13%
Lose Focus – 13%
Disharmony on Team/Investors – 13%
Pivot gone Bad – 10%
Lack Pasion – 9%
Bad Location – 9%
No Financing/Investor Interest – 8%
Legal Challenges – 8%
Don’t use Network/Advisors – 8%
Burn Out – 8%
Failure to Pivot – 7%

There are many other surveys with similar results.

We have always argued that these lists are not very enlightening, as they do not point to root causes; they are merely symptoms of poor execution.

No one decides to run out of cash.  Running out of money is a symptom of poor execution, not a cause in itself.

Our work with hundreds of startups has lead us to a remarkable conclusion – the root cause of most startup failures are the result of violating four golden rules:

Rule #1: Seek out the best, not the cheapest
Rule #2: Revenue is your first priority
Rule #3: Learn how to make effective collaborative decisions
Rule #4: Everything else is dependent

Startups are hard – much harder than running an existing business.  There is no existing market to instruct strategy.  There is very little capital. There is very little time for the team to find its way to being functional.  There is no product, processes or history to guide decisions.

Many startups fail, but some, despite all the impediments, succeed.  Why do some succeed and others fail?  Our research has shown the answer is simple: successful startups are willing to do what the unsuccessful ones are not – namely, follow the four golden rules.

Rule #1: Seek out the best, not the cheapest.

Unsuccessful startups often underestimate the difficulty of execution. Some believe the “idea” is the real value, and anyone can accomplish the “tasks” that need to be performed.  Our work has shown that the reality is much more complicated.  Separating the idea from execution is difficult.  It’s not unusual for the execution to modify the idea in significant ways.  Startups that focus on finding those who execute tasks for the lowest cost, instead of seeking out the best, are much more likely to fall victim to poor execution.

One key attribute of great entrepreneurs is to surround themselves with the best.  They find ways to attract the best despite lack of capital.

Rule #2: Revenue is your first priority.

In this context, revenue can be an investment as well as sales.  One big difference between successful entrepreneurs and unsuccessful ones is that successful entrepreneurs are continually testing their ideas.  They understand the best way to check the idea is to ask people to buy.  They are constantly probing investor/customers for objections and pivoting the idea based on this learning.

The “revenue is your first priority” philosophy is in contrast to the idea of the entrepreneur who spends most of his time focused internally on building the perfect product.

Unsuccessful entrepreneurs are much more likely to believe they have all the answers.  Successful entrepreneurs are more likely to think the market has all the answers and it’s their job to find them by focusing externally.

Rule #3: Learn how to make effective collaborative decisions.

The world has become incredibly complex.  No one person is likely to know everything necessary to make effective decisions about a startup – even a simple one.  Technology, marketing, legal, distribution are all changing and evolving at an incredible pace.  Further, our research has shown that each of these function can and does, affect each other.  The technology you choose for your product will change your Go To Market strategy.  Your distribution method will modify your product, etc., etc.

To execute well, it is imperative to make good decisions.  Making good decision takes a functional team – with emphasis on “functional.”

This functional team philosophy is in contrast with the idea of a single person who, being smarter than all the rest makes all the crucial decisions.  There is a myth in the startup community that a “know it all” entrepreneur is what creates success.  Our research shows just the opposite – a functional team, making collaborative decisions has a much higher correlation with success than the dominant alpha male entrepreneur surrounded by his serfs.

One word of caution here:  teams can non-functional.  Even a team of really bright people can be non-functional.  Creating a functional team takes time and effort.  Start with clear roles and responsibilities, so it is clear who makes what kind of decisions.  Model good collaboration and reward the same behavior in others.  Purge members who cannot check their ego, or ulterior motives at the door.   Set Up an environment where there are space and time for team members to socialize their idea to each other.

Rule #4: Everything else is dependent.

There is a lot of advice out there for startups.  Our experience is that most of it comes from individuals, usually former entrepreneurs, investors or executives from existing business, who have only experienced a handful of startups.  Often this advice is based on a few strategies that worked in these former companies.  Typically they are unaware that this same strategy did not work for a different company.  Most people do not study failure and thus can attribute success to things that also correlate with failure.

In our work with hundreds of startups, both failures and success, we are unable to find any other attribute that always correlates with success.  This finding does not mean that there are no rules that work some of the time or that always work for a specific type of startup or industry – there likely are. What it does mean is that these rules are conditional, not universal.

Steve Owens, Founder and CTO of Finish Line Product Development Services, has over 30 years of successful product development experience in many different industries and is a sought after adviser and speaker on the subject. Steve has founded four successful start-ups and holds over twenty five patents.  Steve has worked for companies such as Halliburton and Baker Hughes.  He has experience in Internet of Things, M2M, Oil and Gas, and Industrial Controls.  Steve’s insight into the product development process has generated millions of dollars in revenue for start-ups and small businesses.

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