Due to technological advancements, it is easy nowadays to push your ideas further and try to develop them. All types of resources and investments are more accessible. As a result, startups spring up like mushrooms, but stormy winds just as easily blow them away. It seems that only 10% of startups have found the magic formula. Many people and organizations try to analyze the reasons for such a high failure rate.
The Statistic Brain Research Institute report that in the first year of their life 25% of startups fail, in the second year – 36%, and in the third year – 44%. They also track failure distribution across industries. The results show that the highest failure rate after four years of operation occurs in the field of information (63%), transportation and communication (55%), retail and construction (53%) whereas the most successful startups are in finance and insurance, education and health (see Chart 1).
CB Insights compile a postmortem list of startup failures and summarize the top 20 reasons for these failures on the basis of an analysis of their founders (see Chart 2).
The three major reasons for startup failures appear to be lack of customers (42%), cash problems (29%) and not assembling the right team (23%). Or as the authors of the Startup Genome Report state: “more than 90% of startups fail, due primarily to self-destruction rather than competition”.
The purpose of the Startup Genome Report is to help startups succeed. Some of the key findings therein lead us to believe that the following factors are crucial to startup success:
- Successful founders learn from best practice. Startups which have mentors and adequately measure and track performance achieve higher growth. Furthermore, they learn from customer feedback and are able to act on it. Otherwise, they misinterpret their market.
- The most successful startup teams are the balanced ones having one technical and one business founder as compared to technical or business-heavy teams.
- Scaling should be timely since premature scaling leads to worse results. Scaling may refer to customer acquisition, teams and/or the product itself.
- Money should be invested wisely. Many founders tend to invest more money than necessary in the fist stage of a startup, which is called the “discovery phase”.
- Single founders are less successful than a founding team of two. In addition, founders should devote all their time to their entrepreneurship since part-time founders raise less money and achieve growth at a slower pace.
- Startups that pivot once or twice raise more money and have better user growth. Furthermore, they are less likely to scale prematurely.
The reasonable question here is how to avoid building a product that nobody wants. Even if there is a market niche, the assumptions of the development team about customer need of and attitude towards a new product should be tested because their initial theory may be refuted by the market. It is less time and money-consuming to make a preliminary research even before the product is developed than performing tests on mockups or real products. The research may involve different strategies such as simple questionnaires asking for potential customers’ opinion and collecting contact details, smoke tests in the physical or virtual world, landing pages and so on.
In order to avoid additional expenses and investments, startups may follow Eric Ries’ advice and build a Minimum Viable Product (MVP). This is the smallest version of a product and its purpose is to inform customers of its existence, receive their feedback and identify/create the need of this product. Not long ago, a company decided to offer online booking of appointments with physicians. They designed a simple website and tested their idea by personally talking to physicians. When they discovered that the potential customers were not interested in the project, it was put on hold before further costs were incurred.
We have noticed that people and companies tend to invest more time and money in a MVP than needed. They apply too much makeup to the MVP and add features that are not necessary to validate their hypothesis for product placement. On the one hand, we have a web design company which invested several months in their own website in order to make it perfect and look professional. It took them so much time because they wanted to write the content and all blog posts without first checking if people would be interested at all. On the other hand, we have this promising new product The Grid offering its customers to create websites simply by throwing videos, images and text without any coding, which have already 60-70 thousand founding members, and may oust them from business even before they launch their site.
We have met many founders who are not willing to listen to their customers, let alone make any changes to their products, especially those operating in a highly competitive environment. They know better what their customers need or what would be valuable for them; but often they fail to convince prospects to accept their viewpoint.
One of my recent examples is a resume builder website. When I tried it, I found out that there was not enough space to fill in my summary and achievements. I was advised by the team to describe my experience in three instead of seven sentences. Since I thought that all my accomplishments were important for my good presentation, I gave up. Other customers commented that “many applicant tracking systems can not actually parse pdf files very well (or at all), most recruiters require resumes to be in a doc format and a few would not even read a pdf file”. The team tried to prove their customers wrong by general assumptions and added insult to injury by claiming that ‘’pdf is the most professional format for any documents’’. Arguing with customers and telling them that they are not right is the worst possible selling strategy.
Startups should learn from other companies’ success and failure stories as well as their own experience. If most of the traditional startups fail, then it is high time smartups appeared. In our opinion, the main characteristics of smartups are:
- They learn from business leaders’ success and failure as well as their own experience. They make preliminary researches, carefully analyze every single stage of their development, put to the test everything (assumptions, principles, strategies, products, market, etc.), measure the results and adopt the most successful approach.
- They carefully listen to customer feedback and act accordingly. Thus they increase their chances of acquiring new customers and building a sustainable business.
- They create “magnetic” products. As already discussed in our previous article Smart Lean Ideas for the New Business Model, magnetism refers to a disruptive innovation or unique features. Product magnetism significantly reduces the waste of time, money and effort in marketing and sales.
- Their founders are driven by world-changing ideas and their passion and enthusiasm to help people, rather than by money and profit.
- They recruit team members wisely and form balanced teams. Assembling the right team is crucial to success: tech heavy teams may lose touch with customers and fail to provide a product or features that are sought by prospects whereas business heavy teams may lose touch with technologies and fail to automate their processes. Moreover, smartups have a flat organizational structure and give their teams freedom, thus encouraging and inspiring creativity. In addition, successful teams are committed to the idea and enthusiastic about its implementation.
- They constantly tune their entrepreneurial machine according to customer needs and feedback as well as to their own analysis of success/failure. Tuning may refer to products, teams, marketing, sales and other business processes.
- They decide whether to pivot or persevere on the basis of efficient tracking of performance metrics. Pivot refers to major changes in a business. They also scale products or sales on time.
- They do not pursue fast growth and profit but build a sustainable business.
- They are passionate about setting their projects in motion and greatly enjoy the whole process. At the same time, they carefully balance their work and life in order to avoid burnout.
I am amazed by the fact that everybody reads reports, articles and books on startups, nods in agreement, but only few people apply the learnt knowledge in practice. Many founders criticize or dismiss any creative strategy, idea or product before thinking it over and testing it or tell their prospects that they know better what customers need or what will be valuable for them. After that they blame the sales, marketing, engineer or whatever other team they have for their failure resulting from their own mistakes, inability to learn and/or to act on customer feedback. We would advise entrepreneurs to build a smartup, not a startup, if they do not want to see their next great idea moved to the recycle bin.
Special thanks to Max Marmer, Bjoern Lasse Herrmann, Ron Berman, Ertan Dogrultan, authors of the Startup Genome Report.