Answer by Auren Hoffman, CEO of LiveRamp, started and sold 5 companies (and many more that failed), on Quora

  • While it is counterintuitive, many start-ups fail because they go after too big of a market.

Many start-ups try to be 0.1% of a fifty-billion dollar market rather than 50% of a $100 million dollar market. Of course, both numbers equal $50 million in revenue but the company that has 50% market share turns out to be much more valuable because it is much more important to its industry.

Being the winner in a very small market is much more important than being a small minnow in a giant sea. Being the big fish in a small pond gives you more ability to innovate and you become really important if a larger player wants to get into that pond. Also, the value of the #1 company is often many times larger than the number 2.

Peter Thiel writes about this phenomena in his book Zero to One (which I highly recommend).

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Answer by Hampus Jakobsson, @hajak, Entrepreneur and Angel investor, brisk.io, on Quora

I have angel invested in 30+ companies and founded two, and 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.

Why does this happen? In order:

  • The team doesn't talk to the market/users/customers.

A lot of entrepreneurs think they know the problem, and the solution. "Well, those are the same, right?"

I wish more pitches spent time on what the actual problem was and how users solved that problem today. REALLY solved that problem today, and not just saying "they don't!". It is hard to invent and create a new problem, so there is a solution today, but probably abysmal. (Example: Skype--call people and pay. Uber--call a cab or drive your own car. Salesforce--lot of spreadsheets and internal calls.)

I promise you--if you know what problem you want to solve (not even knowing how) you will have a much easier time raising capital and finding great people to work with you. And--a "better email", "dating that works", or "analytics for the rest of us" is not a problem. A problem is described by a pain. For example: "Inbound sales today have 20% duplicates and 20% junk, and the rest need to be prioritized--today this is done a lot by humans, which is super boring and a massive time/cost."

  • The team doesn't have the competence (internally) to build and/or iterate the solution to the problem.

Wow--you figured out the problem--no developers needed usually. You talked to a lot of users and stakeholders (no, you didn't need a top-down Gartner report on how big the market is and if-you-take-1-%-of-the-market-you-will-make-$100m-in-revenue). Read this for more inspiration on how: Asking for Success.

Now--you want to start testing your hypothesis on how you can solve it. You need a crappy solution in two weeks in the hands (or at least in front) of your users and see what happens. You need to hear if they get it (communication and UI--not that important) and if it solves the problem. It is perfectly OK if it is hard to use and buggy--if the problem is BIG, they don't care. How many times have you duck-taped a leaking pipe--if it leaks enough you couldn't care if the duck tape was covered in thorns.

Get a handful of interactions per week--50/50 on new and returning. The new to figure out communication and UI and the returning to see how you solve the problem over time. No, you don't need to "growth hack". We are talking about a handful of people per week at this stage.

It is totally fine to do things manually ("that don't scale") and week by week you try to automize the things that hurt the most. What you want is 100 people that use your product as often as the problem arises. (If the product solves the problem without any interaction--for example backup--you need to ask people to do things or you will remove the product--surveys, talk to you, refer it, pay, etc--to measure value.)

  • Money.

Yes, money. When you know what problem you want to solve--and not high level ("better marketing automation" or "cure cancer") but in detail ("retailers with limited editions can't send out newsletters with link to products as they will be sold out and customers disappointed"). And you have a stab at a solution ("newsletters' content rendered at opening, and tailored depending on what is in stock") and some happy users.

NOW--you need tenacity. You are past a "Discovery Phase" and now 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-five people for six months, and then add a person per 6 months--and you need 12-18 month 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 $3000 /m * 90 m = $270k. So an angel round of $300k is what you need.

Now you need to find 2-3 angels who are enthusiastic about what you do and whom you like meeting. If you get people who you dislike, don't add anything, or who wants to steer too much you do not want the money. (It is ok to have some passive capital, but find at least one person who recently or is currently running a startup.)

Valuation? You will need to own at least 80% at the next round so 20% maximum being $300k means a post-money of at least $1.5m. (This round can be done in chunks of less money and with convertible debt, which is often both better and easier.) Higher valuation in my view seldom has anything to do with the market size, but the team. A great team--communicate the product, get it in front of people, develop it, and likable people who work hard--can get 2-3x the valuation without having anything else. If this is not your first (real) startup add 2x, if you have an exit behind you 2-3x. If you are in SF (or another startup capital intensive region), 3x.

That is why startups fail in my view--the product is a mere idea trapped in some dude's head, and that dude wants money to test that idea and be in Techcrunch and gets bitter that there is "too little capital in our region".

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Published on: Apr 23, 2015