The famous line from the film Field of Dreams, "If you build it, they will come," is commonly used by business professionals and entrepreneurs to imply that if you have a business idea and put forth the effort to create it, people will come to it. It's a nice notion. And in a perfect world, it probably happens.
But we don't live in a perfect world, do we? No, capitalistic society. In a capitalistic society, we can't force people to transact with our business simply because we have built it. In our society, people get to determine where to invest, what products to buy, and the prices for buying them. If they don't think that the product or service is worth the price tag attached to it, they simply won't purchase it.we live in a
Startup failure rates.
The idea of, "build it, they will come" really dissipates as a theory when looking at the statistics behind startup success. Although different studies have different statistics to this question, the consensus is that most startups fail. There have been studies that show as high as 90 percent of startups fail. However, let's go more conservative.
After doing some research, I found a study that has the most optimistic startup failure rates. In a study conducted by the Bureau of Labor Statistics, they found that of all the businesses started in 2016:
- 79.6 percent made it one year (2017).
- 68.8 percent made it two years (2018).
- 61.2 percent made it three years (2019).
- 54.3 percent made it four years (2020).
Even in the most optimistic of studies, it shows that only four years into starting a business, roughly half survive.
So the question begs: What leads to startup failures? CB Insights conducted a popular study on this topic, where they broke down the top 12 reasons for startup failure. Some of the results were surprising, but the most surprising reason I saw was, "no market need."
This was the second most common reason for failure, as shown in 35 percent of cases. Now, you may read this and conclude that these failed companies created something with no market demand. But if you think about it, that answer doesn't make sense.
You're telling me that out of 100 businesses, 35 failed because they created something no one wants? Did they all create a peanut butter and pickle sandwich? A car that can't go in reverse? That answer doesn't work for me.
What does "no market need" really mean?
When banking company BBVA analyzed this study, they looked at companies that failed to fit a market need. They cited a company called Intronet, a startup that aimed to compete with LinkedIn, which lasted three years before throwing in the towel.
I looked into Intronet. Intronet was an application that made it easy to make and track introductions and referrals to people in professional and personal networks. So true, very similar to LinkedIn. But did they fail because it didn't serve a market need?
Of course not. The need for a professional and personal connection application led Reid Hoffman, Konstantin Guericke, Jean-Luc Vaillant, Allen Blue, and Eric Ly to create LinkedIn. In fact, there was so much demand for a product like this that 10 years after creating LinkedIn, they were able to sell it to Microsoft for $26.2 billion. Clearly there was a massive market need for a professional and personal connection application.
It seems BBVA came to an imprecise conclusion of why Intronet failed. It's not that Intronet failed to create product-market fit, it's that the supply and demand metrics were not in their favor.
By the time Intronet came around, there was more supply than demand. Everyone who wanted to have a professional and personal connection application had one through LinkedIn, and therefore didn't need Intronet.
Myth busting: Build it and they will come.
Just because you build a business doesn't mean people will become your customer. Therefore, if you want to maximize your odds of ending up on the other side of startup failure rates, then you will need to create a product in a niche with very little supply and high demand.
As soon as I say that, people's eyes start to glaze over. Most people believe that a prosperous business has to be a large business. The idea of starting small turns us off. Our concept of business success is companies that are worth hundreds of billions of dollars. We think of companies like Amazon and Facebook. Well, let's take a look at Amazon and Facebook.
Imagine if Jeff Bezos started Amazon with the intention of it being the face of e-commerce. Do you think it would have turned into the giant it is today? Likewise, imagine if Mark Zuckerberg started Facebook with the goal of building the biggest social media platform in the world. Do you think he would have grown it to the almost-three-billion-users-a-month platform it is now?
We all seem to forget that Amazon started by just selling books. Facebook's initial purpose was to connect Harvard students through an online community. You can't get any more niche than that. From starting in niche markets with little to no competition, both companies have grown into the behemoths they are today.
Startups don't fail because there is no market need for their product. They fail because they are entering a market in which the supply and demand metrics are not in their favor. If you want to succeed as a founder, your sole goal should be to escape the competition.