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Why startups fail?

5 unexpected reasons why your startup might fail even before you launch it

Most people who haven’t launched startup yet and gain their knowledge from business schools, YouTube videos, or insightful books believe that startups fail for obvious reasons:

  • No product-market-fit

  • Bad cash flow

  • Founders conflict

  • Too much investors dependency

  • Bad/ slow-developing product (it = better competition because if there’s no competition even shitty products will work when customers need some solution to their pain).

There are great insights on all of these points in YC CEO Michael Siebel here.

However, if you ask founders who had failed their startups before, they’d name totally different reasons. As well as the lessons they’ve learned. Well, it’s great to know the official VC view on the problem. But practical advice is much more valuable.

1. Messy hiring process

Actually, investors know that the startup team is the key. They invest in teams, not the ideas. Founders know it too and try to showcase their credentials as much as they can (“2x founder”, “ex-Google”, etc.) But they rarely think this rule is applicable to all hires of the company, not only the founding teams. How on Earth can an intern in the Product Design department influence the destiny of the company?! But the secret is: in times of turbulence everyone matters, and the intern becomes as important as the CEO. What if these times won’t come? But they will. Not if, but when. Turbulence for the early-stage startup is everywhere, it’s in the air. Fast growth is turbulent. Unexpected circumstances (like pandemics) are turbulent. Changes introduced by authorities are extra turbulent. And in times like this, every member of the team has to own the process, take responsibility, make uncomfortable decisions.

We started Saleswhale over 4 years ago. Raised 5.3M, scaled. then covid struck, and we churned >75%. It was a mess. Before that, we had been growing fast. hiring people like crazy. We end up with no team. No connection. No viable strategy. When the pandemic struck everyone started to panic, and all operations were virtually paralysed. As a result, we had to lay off 60% of the team.

— Gabriel Lim

2. Give up too early

Jim Bisenius was building a startup in the games industry. He tried his bests for several years, but could not keep the business afloat anymore. He quit. But his other partners remained and made a pivot. Now the startup Jim had been building operates as a development agency, helping others develop games and create eccentric game content.

From startup — to customer service. From building for yourself to building for others. Not a bad pivot as long as it covers the bills.

3. Build before sell

This reason is the most common one failed founders name. Many teams focus on perfecting their product instead of actively building the customer base for it. What? Build customer base before the product? That’s right! You can read about the first step on this journey here.

The “Build before sell” principle manifests itself in the popular “go stealth” concept when founders try to keep quiet about their product, what they build, and whom are they going to serve (especially, if a new technology is involved). have you seen these bright landing pages that say “We’re working on something amazing”. Well, thanks for the update, Captain obvious!

But sometimes founders do not even think about announcing their product before it’s done — not because they are way too secretive, just can’t imagine how you can start selling something that’s not done yet. Some even skip MVP stage and go directly to the full-featured product. Here’s an amazing story of Rod Danan, founder of Prentus.

In April 2020, I was working on my first startup. It was an influencer marketplace for local businesses. We had just finished building our platform and had a team of 10 people when all our customers got closed. We decided to put things on hold, but the problem was that I’ve already invested about $90K in this business. I had to lay off the team. And that’s exactly when I got another startup idea, the one that transformed into Prentus.

This time I decided to do everything differently. First, I started with positioning. What audience I’m going to address? What do they value? What keywords do they use? Next, I build a landing page in 2 weeks. I had no “background” part, no smart mechanism or AI. It was only me, who decided to do all the matching manually. I announced my services everywhere — HackerNews, BetaList, IndieHackers, startup Slack groups, Twitter. When people signed up, they were emailed a form, and then I filtered best fits from there. I started talking to companies that got interested, talking to Bootcamp grads, and then made every match myself. It wasn’t scalable but it worked for now. After ~100 sign-ups, I got my first customer. They were a small SaaS startup looking for a designer. I charged them $100. It was an amazing deal for them and from there started the first “apprenticeship”. T figure out how to do this again, I arranged weekly sessions with them to check in on the apprenticeship and do research on:

— How they found us

— Why those chose us

— What was working/broken

The book “The Mom Test” helped a lot here.

With each customer, I raised prices. From $100 to $250 to $450 to $600 and eventually $1500 on my last customer. In total, I made $8k in revenue but refunded around $3k to customers that ended up not being a great fit. Net of $5k revenue in just a few months. Not bad either.

But the best part is that now when I have all the processes and insights figured out, I can finally start building the platform — tech that will replace my manual matching. And this one will be scalable — .

4. Weak go-to-market strategy

This one is just another side of the same medal as the “Build before sell problem”. However, sometimes founders try their bests to engage prospective customers on the stage of development. But by the time the product is launched their “promotion” creative ideas suddenly get transformed into competition over the best “Facebook copy” and “good SEO”. Partly, this approach is based on the biased assumptions created by marketing agencies.

I’ve got into this trap myself. With my first startup, I had no idea how to reach out to customers. Well, actually I had some — I made up a list of YouTube bloggers that might be interested in my product, a list of magazines where I can send my press releases, some influencers on Instagram. But somewhere closer to the launch I got scared and hired a professional agency to help me with a “strategic approach”. I claimed that I had some moves in mind, but I needed someone to put it all together into a marketing strategy that will give me the guidelines for months ahead. The agency was great, they just had n ideas outside SEO and social media advertising. I ended up spending $12K on copies and visual assets that I never used.

Oliver Pugh who’s building contactless payment software complaints about the same issues.

— If you’re a startup putting social media in the centre of your marketing strategy is the biggest mistake you can ever make. There’re just two exceptions to this rule: 1) you have very deep pockets or 2) you know people who have very deep pockets. Otherwise, don’t even start with it. Facebook ads, Instagram, YouTube advertising should not eat more than 10–20% of your marketing efforts. Think of other activities that will work — .

5. No or poor customer feedback loop

Zachary Aarons failed his first startup Travelgoat because he didn’t want to listen to the customers. “I ignored the market demand and tried to build what I wanted”, — he recalls.

Lesson learned: Zachary decided that he was not good enough in product development, design, and audience engagement. He is not perusing an entrepreneurial career anymore.

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