There are many reasons why tech startups fail, but from our experience, there are a few that come up far too often. Inability to find market fit, running out of cash, and a lack of focus all rank highly, but they are all symptoms. What are the real causes?
In the last five years, I’ve worked with around 500 founders in the UK in one capacity or another. In the previous ten years, I spent most of it at the coalface. Here are five causes of tech startup failure I’ve experienced, and seen for myself along that journey. They are the fundamental causes of startup failure, from which everything else stems.
A Lack Of Team Unity
Building a disruptive business is hard. Really hard. Actually, let’s go with work-til-your-eyes-bleed hard.
Dealing with human emotions can also be tough.
Combine the two and you have a recipe for challenging times. With limited cash and resources, there’s no place to hide. Especially when you’re spending 70 or 80 hours a week working together.
It takes a certain kind of personality to jump in for the uncertain and emotional ride that is venture-funded business building. Remember, at least 75 per cent of venture-funded companies fail. And that’s at a best case – at worst, 9 out of 10 start-ups collapse in a heap of smouldering ashes.
Egos are in play, as are over-sized ambitions. Both are off the charts for most of the founding team. If I was given £1,000 every time I heard “we’ll be worth a billion dollars in five years”, I’d be five years away from buying my own Pacific Island.
The most effective founders are on a mission to change the world, but this can be blinding. We’ll talk more about that in a minute. But, be under no illusion: there will be disagreements. How do you bring the team back together when discussions get heated?
My first investor-mentor-business partner and I regularly disagreed on a level that I struggle to explain. If an outsider saw how our meetings ended, they would think the relationship was beyond repair.
Quite often, we’d end our weekly meeting telling each other to <ahem> off (yes, that one… four letters). I was called an idiot in front of a partner (deservedly so) after doing something very stupid. Whether it was a tactic to earn the partners’ sympathy is another matter, but it was the way we did business. Honesty and integrity were top of the agenda.
Our private discussions were almost always heated, emotions were strung and we took it out on each other to ensure our point of view was heard. But, no matter what happened, we would always come back together. We had a united stance in front of the team. Not once did the other take a brutally heated discussion to heart.
We listened to each other. We challenged each others’ assumptions. We didn’t always say yes to the others’ demands. Instead, we pushed each other forward.
We were a stronger team for it, and it enabled us to spring out of nowhere to become the market leader with rapid growth. It clarified what we stood for — our why. And that led to a 40x revenue increase in three years before the business was acquired.
Inability To Execute
You’ve got a team that can survive through thick and thin, but are you able to execute effectively?
Building a venture-funded business is a race against the clock. You have a limited amount of resources and a very limited runway, but you need to move mountains.
You’re working to a 12-week year.
You know you have too many plates spinning. Are you able to focus on doing what will have the most meaningful impact for the business today? What about tomorrow? Or the day after? Or next week, or month? Do you let some plates drop and smash? Or do you keep every plate spinning?
If you’re building a software product, being cash flow positive is beyond the horizon. It’s going to take a long time to reach break-even point.
So, you’ll need to raise another round of funding. But what are you going to do to get you to the point of being investor-ready again?
Fundraising does get easier as time goes by. But only if you can execute on the things that really matter. So, what matters?
You need to reach a point where you’ve made significant strides toward market fit. Either with significant commercial traction or with a fully-validated and prioritised product roadmap. Even then the chequebooks aren’t guaranteed. If your message is not clear, you will draw blanks because your audience won’t understand your business. Investors don’t invest in things they don’t understand — and I’ve learnt that the hard way.
I’m convinced that romance is a business killer, and in more cases than most founders would care to admit.
What does romance have to do with business? No, I’m not talking about office romance. I’m talking about being romantic about the business you’re in. The customers you serve. Your customer acquisition channels.
This is what I mean when I say romance kills businesses.
Most pivots happen far too late. Too late to make it through to the next raise. You can’t get the house in order in time, and you run out of cash.
Founders can get caught in the weeds. They’re working so hard that they forget to come up for air, and look around. They get blinded by the passion they have for the product they’re building, the problem they think they’re solving, or the market they hope to serve.
Market adoption is poor. Soft metrics are positive, but the levers aren’t moving no matter how hard you pull them. You’ve built a product that nobody wants. You end up trying to shoehorn a product into a market. Or worse, you try to shoehorn problems into your product and market.
An Unsustainable Business Model
Almost every founder I’ve met in the last five years is almost relentlessly focused on finding product-market fit. Very few consider business model-fit or channel-market fit a high priority.
Many venture-backed businesses fail because they run out of cash. But what’s the cause of that?
Yes, a lack of market need is one symptom. But, fundamentally, you do not have a business if you’re laser-focused on raising your next round of funding. A business should be able to sustain itself.
Fundraising is a full-time job. If you are not spending three or four days a week fundraising, you’re not putting the time in. You’re unlikely to discover the best investors for your business at the stage you’re at.
But, guess what? There are other ways to raise money. One of those is to acquire and retain profitable customers. Finding a way to do this in a repeatable manner eventually leads to a profitable business. Wouldn’t you prefer to raise money on your own terms, when you choose to not when you need to?
Do you understand how your target audience wants to pay for your product? Do your customers see significant value in the promise of your product? Can you make the unit economics work for your business? Do the economics scale? Even if your early customers aren’t profitable, is there a chance that you’ll ever be profitable?
If you can’t make this work, it doesn’t matter if you’re close to product-market-fit. Why? You don’t have a business model that works. What can you do about it? Re-evaluate whether you really understand what the market wants — and values.
Misunderstanding What The Market Wants
How well do you know your target audience? How much research have you done to date? How much of that research gives you valuable, actionable insight into what your target customer really wants?
Have you asked the right questions? Were those questions loaded in your favour? Are you listening for the right customer insights?
The problem is that most customers are awful at articulating what they want. They are not product experts (remember: you and your team are the product experts).
Have you ever worked with a designer and wondered why they got frustrated after the tenth iteration of your company logo?
The point is, you don’t actually know what you want your logo to look like until you see it. This is what frustrated your designer. They were playing a game of blind bingo. It’s blind because nobody knows when they’ve won.
Your customers are just like you: they don’t know what they want. They’re buying software not graphic design services, but the point stands. They do not know what they want, until they see it.
Yet they are great at articulating the things, tasks or jobs they’re trying to get done. They know what outcomes they desire. And they also know some (but maybe not all) of the constraints that prevent them from completing the job and achieving their desired outcomes.
A Stratomic customer thought they knew what the market wanted, but couldn’t understand why adoption and sales were not as expected. The CEO was losing sleep over what he thought was a de-risked engineering commitment. But his gut was telling him that it was still very risky. He sought help.
We quickly got to the bottom of what the market wanted. The product roadmap was turned upside down and inside out. We helped to re-shape the product and prioritised important, unmet customer needs.
Market adoption of the new product has been very positive and we are on our way to market fit. Revenue growth is strong, but there’s still a long road ahead. Especially as we build a more complete picture of the job the customer is trying to get done.
It’s hard to imagine where they would be today if they’d blindly committed to their roadmap. Cash was tight, runway even tighter, and they had ambitious goals with very little room for error.
They even considered a major burn rate cutting exercise, which included maybe getting rid of staff. A best case was putting off paying themselves and the other founders ’til they had some certainty.
And they’d done a lot of research up to that point. They’d spoken to well over 1,000 people in their target audience.
The message seemed strong on the surface. But it just wasn’t landing a knock-out punch with the target audience. So, we observed some of their research. They were focusing on understanding the voice of the customer. This had uncovered the surface symptoms rather than real problems.
Since then, the company’s “why” has completely transformed. It’s now much closer to the fundamental problem their target audience faces. And it’s a much stronger message for the investor community. The message is far clearer.
A Lack Of Product & Market Strategy Alignment
To get funded, you’ve already researched and sized your addressable market. But have you segmented that market appropriately and aligned it with your product strategy?
Most entrepreneurs adopt a “build and they will come” approach. They don’t approach marketing with any finesse if they’re even doing any proper marketing in the first place. If you’re not doing marketing, perhaps you’re waiting until you’ve got a product? That’s a terrible idea. They won’t come, I promise.
For those that are marketing while they build, instead of using a sniper rifle, they’re using a marketing muck spreader. It goes everywhere, and it stinks. That’s a different topic altogether, so let’s not get sidetracked.
So how do you know what to build for that first segment of the market? And do you know what the target customers’ pains and desires are in relation to their needs?
Most startups don’t know this. Why? I see it every week at The Accelerator Academy. And, when questioned, founders start to feel a little uncomfortable if they haven’t thought about it. For some, the defence mechanism kicks in. They do what they know best: they fight it.
We’re used to going to bed at night with a bloody mouth and bruised cheeks. It’s a typical day in the world of entrepreneurship. (p.s. If you’ve not had one of those days yet, you’re not pushing your message out to the world hard enough – and when you do, you’re in for a treat!)
What To Do Next
Ultimately the data doesn’t lie. At least 75 per cent of all venture-backed tech startups fail. And, in many respects, I think the data under-represents reality. It’s a best case.
I don’t want to sound alarmist, but it should be a wake-up call for you. At least, that’s how it’s intended.
If you face some of these issues – or see them coming, sign up to our completely free email series. It’s a set of seven actionable tips, with one sent every few days. We do it this way to break up the flow of information and give you time to implement what you learnt.
How many times have you downloaded a PDF and never opened it, never mind taken action? Why did you bother downloading it in the first place? See you on the inside.