Imagine piloting a ship without an accurate map of the local waters. Unless you're a veteran captain familiar with the area, you'd be sure to run into submerged obstacles or wander blindly into too shallow waters and end up stuck on a sinking vessel.
Something similar goes for first-time founders. Without any guidance as to what dangers lurk, you're likely to run into trouble. Thankfully, question-and-answer site Quora recently marked known startup killers with a metaphorical skull and cross bones, soliciting answers to the question "What are the top five reasons why startups fail?" from investors, bankruptcy pros, entrepreneurs, and consultants. Here's the consensus that emerged from the full discussion.
1. Failure to talk to customers.
Some iteration of failing to produce the right product to solve an actual problem was by far the most commonly cited issue that leads to business failure. "I think the number-one reason people fail is market fail--the market doesn't need the product, the market doesn't understand the product, or the market doesn't know of the product," writes entrepreneur and angel investor Hampus Jakobsson, for instance. "Why does this happen?" he asks. Often because "the team doesn't talk to the market/users/customers."
"Very often startups develop products for themselves instead of for a large market," agrees Axel Schultze, CEO of accelerator of Society3. "They keep their development too close to their chest instead of involving test customers very early on--even before they create their first prototype." As private equity pro Paul Cohn points out, this tallies with research into the top causes of startup failure by CBInsights, which named "no market need" as the number-one killer of businesses.
2. Money troubles.
Everyone knows that new businesses fail when they run out of money, but the responders on Quora dug a bit deeper into the issue of startup money woes, asking why fledgling companies run out of money.
After you know what problem you're solving and have a possible solution ready to test out, Jakobsson notes "you need tenacity." And to have tenacity, you need the cash to keep the doors open, he adds, before offering a back-of-the-napkin calculation of how much that might be: "You need to get some metrics going--inflow of new users/customers, retention, conversion (referrals, review, paying), and in-time revenue. You probably need a team of three to five people for six months, and then to add a person every six months--and you need 12 to 18 months to get to a stage where you can say no to the wrong kind of external money. So you will need cash for 4 people x 6 months, 5 people x 6 months, 6p x 6m = 90 man months. With minimal salaries this means $3,000/m x 90 m = $270k."
Others note that being penny wise but pound foolish can doom a startup. Consultant William Deegan recalls "a client (who shall not be named) who asked all of their engineers to take turns cleaning the kitchen" as an illustration.
3. The wrong team.
There are many ways a founding team can fall short. Schultze lists several: "No sense of urgency. Not fit enough on the technology side, not fit enough on the marketing side, not fit enough on the finance side, not fit enough on the operational side."
Management consultant Peter McCann, meanwhile, puts a slightly different spin on the issue of inadequate leadership, pointing the finger of blame at "delusional management." He notes that "the delusions may be about the product, market, or its own competency. One test, albeit imperfect, is the equity test: If you cannot raise the equity, look in the mirror." Deegan also points out that the right members for a team of 10 may soon be totally wrong for a team of 200. "I've seen this a number of times where the founding team wouldn't admit/accept that they're out of their depth and refuse to step aside and/or get coaching to help them move up to the next level," he writes.
4. No long-term plan.
"Most unsuccessful business owners simply have no business plan at all," asserts Chris Baskerville, an accountant who has handled more than 700 corporate and personal insolvencies. Schultze also feels that having "no long-term vision" often dooms startups. "It's hard to convince a customer that your young startup is the right business if you just focus on your present feature set. It's hard to convince investors, partners, top talents if you can't express where you want to take the company. As a result you won't get enough traction and most likely fail," he elaborates.
5. Marketing? What marketing?
Several respondents suggest that inadequately thought-out marketing (or worse, no marketing at all) often kills startups. "It's been painful to watch some startups persist in the belief that all you need to succeed is awesomeness. There have never in the history of commerce been so many failed or near-failed products floating around in the world. The reason is that startups far too often think their only market is VCs, and that consumers will automatically love them the way their moms do," writes branding consultant Bruce Philp. "Eventually, you have to show the consumer the fundamental respect of selling what you've made."
Did those answering on Quora miss any important reasons startups fail?