Why startups fail

by Robin Harris on Wednesday, 21 June, 2017

A great piece at CB Insights. They collected the failure stories of 101 startups and then broke those failures into 20 categories.

Spoiler alert!
Here are the top 10 reasons for failure, as compiled by CB Insights.

Click to enlarge.

What I find interesting is that 8 of the top 10 reasons are marketing related.

  • No market need.
  • Get outcompeted.
  • Pricing, cost issues.
  • Poor product.
  • Need, lack, business model.
  • Poor marketing.
  • Ignore customers.
  • Product mis-timed.

Across the cultural divide
Tech founders tend to be techies, and techies tend to have a problem with folks of the sales/marketing persuasion. One problem is that many marketing people don’t really understand the technology they are marketing, which means they can’t be full partners to the tech team.

Another problem is that marketing people tend to be well-versed in the arts of persuasion. If the marketer takes a position, especially in regards to technology they don’t appreciate, they can easily steer the startup in the wrong direction.

Plus, every techie has a story where they’ve felt misled by a sales or marketing person, and that anger or regret can bleed into professional relationships in a startup.

Finally, techies rarely have a handle on what to look for in their marketing hires. Based on more than 35 years experience, StorageMojo has a suggestion.

The StorageMojo take
My sympathies are with the engineers when it comes to their feelings about marketing. As I said in the link above:

They’d get flayed for every decommit and slip. They’d sweat blood figuring out solutions to hundreds of subtle problems.

Then, after 2 to 3 years of effort, they’d deliver the product to marketing and, all too often, watch their hard work go for naught.

Maybe marketing missed some key features. Didn’t position the product properly. Training failed to equip the field. Mis-pricing. Tougher competition than expected.

That last paragraph captures many of the issues that CB Insights survey did. Which shouldn’t be a surprise.

Startups exist to sell a product. Development is only a means to that end.

Courteous comments welcome, of course. Disclosure: I offer services to help startups with every phase of product development.

{ 8 comments… read them below or add one }

Howard Marks June 21, 2017 at 3:06 pm

Yep, 42% of the time you startups created something no one needed or no one needed at the price you had to charge. Now I want to see how many of that 42% failed at B round or later.

If I was investing I’d insist a TAM study be performed with my A round money so I’d know better than to throw good money after bad.

Robin Harris June 21, 2017 at 3:21 pm

Howard, I agree.

The biggest problem I see in TAM studies is when they fail to adequately account for substitute technologies, which is a particularly pernicious form of tunnel vision. You have to firmly plant yourself in the prospect’s shoes in order to truly understand substitutes, a kind of mental yoga that isn’t easily achieved.

Robin

Petros Koutoupis June 22, 2017 at 7:33 am

I can honestly say, that with my last storage start up, at least three of these categories contributed to our failure. Despite the costs (in time, money & health), lessons have been learned. Onto the next!

KD Mann June 22, 2017 at 4:19 pm

I hate to bring up the dreaded spectre of the “disruptive startup” (because I am firmly convinced that very few startup entrepreneurs or investors really understand disruption) but here goes…

The key distinction between a disruptive innovation and a sustaining innovation is that the latter has a known (or at least, a knowable) TAM and the former does not.

For a startup, knowing the difference between whether you are developing a truly disruptive innovation versus selling a sustaining innovation is the difference between life and death. It all comes down to whether, as a disruptive innovator, you attempt to gain (or blindly accept) investments from sources that have expectations that are built on the assumptions of sustaining innovations.

So, among the 20 reasons why startups fail I was disappointed to see that “taking the wrong money” was not listed. Taking the wrong money is the kiss of death.

All money comes with expectations. Failure to manage expectations is the root of most business failures (and most failures in life, marriages and other human endeavors). In my experience, if the money you accept from investors has unrealistic expectations like a clearly defined TAM or an exit horizon of 5yrs plus-or-minus two years, then…by accepting that money, a disruptive startup signs it’s own death warrant.

I would bet that if this analysis had been done from the perspective of ‘managing the expectations of investors’, then the number one reason for failure of startups would be “failure to set realistic expectations among investors”.

When starting my company (as an architect/engineer) I took some well meaning advice that I should hire a CEO with “MBA” skills — somebody who knew the language of investors. The CEO I hired was skilled in the vernacular. All of the standard questions; what is your TAM, what is your exit strategy, what is my expected ROI over 5-7 years were answered with guesstimates that should never have been given. The answer should have been “we dont’t know, and if we gave you an answer, we’d be lying.”

When a gambler goes to Las Vegas they know the difference between the black-jack table and the roulette wheel. Good gamblers know their odds and the nature of the game, and they bet accordingly.

My company took money it shouldn’t have. It’s a mistake I made, but one I won’t repeat.

KD

Andy Lawrence June 26, 2017 at 9:03 am

You listed the item ‘Poor Product’ as a marketing failure. While marketing and sales should have a big input into product design and direction, it seems to me if the product is poor, that is more of an engineering failure than a marketing one. When I think of poor products, I usually think of buggy software, lousy interfaces, or slow performance. As and engineer, I might like it to be in the marketing category, but that just seems wrong to me. Please explain.

James B. July 9, 2017 at 8:02 pm

Andy: regarding the storage and networking industries, I would say 100% of the off-device software (encompassing drivers, mgmt. software, and integration software) is poorly designed, written and tested.

That comes from an entire industry where eng. caring only about the hw product side, and business/mktg. considering software to a be a cost.

Some examples of pathetic software include Dell/Equallogic’s linux support, and Cisco’s Java NMS – even Cacti is a valid replacement!

But then embedded engineers are still stuck in the 70’s when it comes to software development (version control, tooling, APIs), so none of the above is a surprise to anybody.

G July 11, 2017 at 2:44 pm

The biggest problem is product/market fit. This is not a communication problem or cultural divide. Usually the engineers build what they set out to build, and the marketers market it to the best of their ability, and the sales people sell it to the best of their ability. If not enough people actually want to buy it… then that’s the problem. Product/market fit does not mean marketing failure. It means that the hypothesis on which the company was founded turned out not to be correct.

Robin Harris July 11, 2017 at 2:55 pm

Ideally, and in my experience, commonly, marketing writes a market requirements document (MRD) and a product requirements document (PRD) or something similar. If those documents are wrong, leading to failure, then it’s a marketing problem.

Now, many startups may skip this step, as you hypothesize, so marketing isn’t responsible. But someone was ignoring best practices – investors, the CEO, the board, the marketing VP – so the fault rests with them.

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