106. Why Startups Fail: Top 10 Mistakes to Avoid

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It's Tough Out There for Startups

It's a sad reality that most startups end up crashing and burning within the first few years after they're created. Each one of those stories is a unique journey, but there are ten things that most failed startups have in common. Let’s look at what they are and how you can avoid those traps. At the end I’ll include a bonus item, how even companies that survive can become undead zombies.

There's a nearly infinite number of ways startups can fail, but they largely fall into ten buckets.

1. Not Enough Product Need

Lack of product need can take two forms. The first is that the problem isn't that bad. This is a matter of customer priorities. Your product may solve a problem for these users, but they don't care very much. They have dozens of other priorities that are higher than this on their agenda. Even if you gave them the perfect product at the ideal price, they probably wouldn't want to spend the time to implement and use it because it doesn't make that much difference. It's not going to move the needle for them.

The other case is where the existing solution is good enough. It solves their problem. It might not be perfect or do everything they want, but it generally gets the job done. This is a fundamental problem for your solution, and there's no way around it.

If you're doing your market research and find out that they don't desperately need your solution or the things they've got work perfectly well, don't go into that space. I sincerely hope you're not reading this, having already built an entire product and discovered this issue when you went to market, because there isn't a way out of this other than a fundamental re-architecture of your business. You're going to need to pivot your way out of this particular pit.

2. Running Out of Money

"This may seem like an obvious tautology, but this is what kills so many startups."

Startups are like gliders. You are slowly losing altitude (money) and trying to find the next updraft (funding round) before hitting the ground.

As your cash slowly runs out, you start to feel the pinch of impending disaster. When you're right at the end, raising additional funds is nearly impossible. If you haven't hit any key milestones, investors don't want to work with you. You will need to cut back and shrink your team to survive.

That makes your customer experience worse, which hurts your growth. You don't have enough money to spend on marketing. When you try to adapt at the last moment, it makes everything worse. There's no way to go from one month of runway to eight months without truly radical surgery, like effectively firing everyone and stopping all activities, which puts a total halt to everything you're doing.

The key here is you must take action early. Adjust your plan immediately when you see that you're not hitting your growth projections and won't reach the milestones you need to raise your next round. Can you do more bootstrapping? Maybe you could even raise earlier on some kind of bridgt next round. Go back to your existing investors if they're still excited about what you're doing. You have to take steps now to avoid getting over a barrel. Once you're out of money, you don't have any maneuvering room to allow you to make other plans or pivot.

3. Gaps in the Team

"The team is the most important thing in a startup because it's highly likely that you will pivot."

The details of your initial plan will change, often radically, but the heart of the business is likely to be preserved. You need people who can do those core activities.

If you're a highly technical organization building complex software or doing sophisticated hardware, you need people on the initial team who know that stuff. If you're primarily about branding and marketing, you need people who have those on board. You shouldn't be building that company with just software developers. It's would be a huge mistake. Ther are many different roles that people on the founding team need to fill.

I recommend setting up a matrix to keep track of this and ensure you don't have critical gaps in your capabilities. Across the top of the matrix, list all those capabilities: The kind of engineering you need, programming skills, manufacturing, marketing, branding, and customer relationships. Maybe you need an influencer, someone with access into a specific market, a public speaker, whatever it might be. List all of those out.

Then, down the side, list your initial team. Who do you have, and what boxes do they check off? Hopefully, you're checking off a few boxes each. You want to have as much redundancy as possible. Then, think about who else you could bring onto the team, either by name or the types of people you need to find. They don't all need to be co-founders. They could be people you hire or people committed to coming on full-time as soon as you're funded. There are many ways to slice this, but make sure you understand what you need and how you'll get it by the time you need it. Because if you're missing big pieces, then either the product won't work, you won't successfully go to market, you can't sell, and your customers won't trust you. There are many ways things go wrong if you don't have the right people on the bus.

4. Competition

Competition can kill you in a couple of different ways.

The first is if you're not sufficiently differentiated from the incumbents in the space. Because the incumbents are already in there and have those customers. Now, you must convince people to take on a significant switching cost to use your solution, retool, and change their internal processes.

And, if you're a startup, you're asking them to take a significant risk on a new company that may or may not be around in a couple of years. This is why people say startup solutions must be ten times better, faster, or cheaper than the existing solutions. You can't be 10 percent better. So be honest about how you stack up against those other players and whether people would switch over to use you.

The other problem is fast followers. They're not competitors right now, but as soon as people see what you're doing and that you're getting good traction, they will know this is a viable approach. Why can't a significant existing player, well-funded with substantial resources, jump in with your model, go after your customers, and eat your lunch right away?

"The only solution is building some kind of moat."

There are many kinds of moats based on various types of strategic power. You could have intellectual property. You could have network effects. You could be building up a powerful brand.

Remember, competitive analysis is not just something that investors ask you to do because they want to see a pretty slide in your deck. Most competition slides are just a long list of features that you picked because you get to check a lot of boxes that your competitors don't. You have a lot of green marks. They've got a lot of red marks. But that means nothing.

"What matters to your customers? What allows you to operate in this space? How do you stack up against these? And which of these are things that other people could easily duplicate, and which are things that you can realistically defend? This understanding should be inform your entire corporate strategy.

Suppose you don't have a defensible space or you're insufficiently differentiated from competitors. In that case, you need to rethink your business model and solution now, before you put in all the work to build it.

5. Pricing Problems

There are three ways that pricing can get you into trouble. The most common is the race to the bottom, where your primary advantage over the competitors is that you're cheaper. And the problem is, this is a game two can play. In general, your competitor can also reduce their prices, and if they're a large incumbent, they can undercut you because their underlying cost structure is better than yours.

If you're doing something disruptive that allows you to have radically lower costs than the incumbents, then you can be doing a lower pricing strategy. But many companies get killed with this race to the bottom that quickly squeezes all of the profit margins out of the business, and now everyone's just suffering, scrambling after pennies on the ground.

Another problem is when you're overpricing. You claim to have a premium solution that can command a higher price. The question is, do your customers believe that? Do they think you're so much better than the other options that they'd be willing to switch and pay more for the privilege? You will want to test that carefully to ensure your assumptions are correct.

The third is a mismatch in how you price, and your customer perceives value.

These must be aligned so that when you ask customers to pay twice as much, they feel they're getting at least twice as much value. And the structure needs to fit with how they want to pay for this.

Not every solution makes sense as a subscription. It could be a one-time purchase. It could be a pay-as-you-go model. It could be a capitated model for the entire enterprise based on the number of people in the company. It could be based on the number of seats. It could be tiered.

"You want to ensure that your pricing works for them and is easy to swallow."

Spend some time talking to those customers. Explore pricing with your customers in a structured way. Don't just ask, "What would you pay for this?" but try to box them in. Several tools, like the Van Westendorp price sensitivity meter, can help you discover the best price for a solution. If you have a SaaS company, this article might help you set prices.

6. Failure to Transition from Prototype to Full Product

So you've got your MVP or beta product out there, and people love it. You're getting great feedback. And now it's time to launch that 1.0 and start your big growth push. And then problems begin to pop up.

Maybe the speed starts to collapse as you get more users, or there are many bugs from the new features you're implementing or stability issues. Moving from the initial version to the final version can be tricky.

And I think the main reason is there is no such thing as a prototype anymore, certainly not in software. We're almost always building that MVP quick and dirty, iterating like crazy, and learning from customers. Then, we try to turn that into the 1.0 version of the product. Suddenly, we inherited this enormous pile of technical debt because when we built that MVP, we probably went super fast.

We used whatever tools came to hand. We cobbled things together with chewing gum and baling wire. We ignored security. We bypassed good coding practices and careful architecture of the systems in favor of being able to get something out there quickly, which you needed to do. But now, you can't maintain the product.

You can't easily add new features. You can't adapt it to new kinds of backend technologies or code bases you want to integrate into the system. It's an unmaintainable mess that's going to cause nightmares for you.

And we all do it. Leadership says, "We will build a new version when we go to the 1.0 version of the product." I've said this, everyone's said this, and then when the rubber hits the road, you promote the prototype.

So there are only two ways out of this: Have the intestinal fortitude to throw away the prototype and build the real thing from scratch correctly with proper practices. Or, build the prototype the right way from the ground up.

It will take longer and require more work, but it will save you later. Many companies fall apart when they can't get the 1.0 version to work well enough to get and keep customers beyond those super excited, very early adopters.

7. Poor Product Timing

There is a magic moment for any solution that is the perfect time to launch; that is the Goldilocks moment when the market exists but hasn't been flooded with other competitors, and it is almost impossible to know precisely when that will be. We all have cloudy crystal balls. And, of course, if you realize the magic time is "right now," it’s too late to start your company. You needed to have started your company a while ago.

If you're too early to the market, the customers won't get what you're doing, and you're going to wallow and burn through your capital while trying to attract people who aren't ready to buy yet.

I made this exact mistake when I launched Anonymizer back in 1995. We were doing consumer internet privacy. And the World Wide Web had only been invented in, I think, '91, '92. So, I'd say, "Hey, you need to be thinking about privacy on the internet," and the response was, "Wow, tell me about this internet thing!"

Fortunately, I had set up the company with bootstrapping in mind. I had multiple other non-privacy-related revenue streams, which allowed me to continue building the product and survive and experiment while awareness and the market caught up. So when the internet started getting hot in the late nineties, I was ready; we already had the product and could capitalize on that.

But it's only because I had other sources of capital. People weren't going to invest in the company at that point because there was no market for it. And they were correct to do withhold investment.

The other mistake, of course, is coming in too late. You identify a red hot market. Everyone's talking about it, so you want to create a company to exploit it. However, getting your MVP up and running takes three to six months. By this point, everyone else has seen this market, too, and the space is ridiculously crowded. I see this all the time. A few months after an area gets hot, every third deck I see is an almost identical business plan. If you're one of those, you've missed the window of opportunity.

"It's far, far harder to succeed from that late point when you're a startup coming from a standing start with minimal funding."

So, the key here, as with many things, is research. Ensure you've looked at the market trends, opportunities, and how things are changing. Talk to potential customers, both the very early adopters and the later early adopters, to understand their level of interest in this.

Do they understand the problem? Do they feel the pain point that you're trying to articulate in a way that would make them want to adopt this? Or maybe soon. You're looking for leading indicators that say that in six months, the market will be ready.

You want to make sure that you're not that person who's going to be the last entrant into the race.

8. Loss of Focus

Focus is everything in your startup. You are absurdly resource-constrained.

But if you start seeing opportunities everywhere, and you will see opportunities everywhere, and begin to chase and explore all of them, it sucks all the oxygen out of the room.

It takes your eye off the ball of your core activities. You're start moving slower. You're building features that are of limited interest. You're exploring other parallel areas irrelevant to getting your core customers and delivering a value proposition that matters to them.

But, there's also the reality that most startups pivot.

"So here's this mental paradox that you must engage with: you must be brutally focused on your core activities and pursuing your strategy. You can keep an eye out for other opportunities that might be far superior to the one you're pursuing now, but you can't put much effort into them."

You don't want to run off down some side alley and then discover that the grass was not greener. It's all poison oak, and now you've spent enormous time and money exploring a fruitless direction.

But, you may want to be spending a tiny amount of time and money doing some strategic explorations, having discussions and interviews with customers in that direction, talking to them about those capabilities, and running some little tests that would allow you to determine whether that field is greener.

And then the question is, how much retooling will you do to pivot? Because if it's a significant pivot, you're giving up most of the work you've already put in. Right. You're already some distance down your runway. Is that even a viable activity? So, you need to hold absolute focus and flexibility.

You need to have strong convictions, loosely held.

9. Go-to-Market Failure

So, you've got a product. It's great. It delivers value. Your early adopter customers love it. They're happy to pay for it. They're telling all their friends. What could go wrong?

There are two ways your go-to-market can kill you. And the first is you can't reach those customers at scale. If you could find the people who need your solution and articulate its value to them, they would buy it. But in many cases, there's only a narrow window of opportunity to reach them. There's a transition someone's making. Let's say it's new parents. You need to nail them right before they give birth to that child if you're going to sell them things for neonatal children. And if you hit them six months before or 11 months before, it's completely irrelevant. Six weeks later, they've already bought the thing. You need to reach them in that instant.

Sometimes its impossible to target your customers using the tools available on existing marketing platforms. Either they won’t let you, or the identifying characteristics aren’t visible to the systems.

You can almost certainly get dozens of customers, maybe hundreds, but you need to be able to get thousands or millions of customers, depending on whether you're B2B or B2C. Can you do that? If you can't, then your growth is going to stall out.

The other scenario is that they're out there, and you can target them, but it's a popular keyword, and you can't afford it. Once you start advertising you discover that your customer acquisition costs are too high. Your CAC is higher than your lifetime value.

That's never going to work out. In fact, as a startup, you need your payback on the CAC to be six months or a year.

"And now you can't scale because you can't afford the marketing that would enable scaling." Leveraging individual relationships or the social groups you're already in is the easy way to get that first handful of customers, but it won't get you to scale.

The key here is testing. Go out and spend small amounts to understand your CAC. Can you reach your customers at a reasonable cost? Do they convert? If either of those turns out to be a problem, you must reconsider your whole go-to-market strategy.

Perhaps direct marketing’s not be the right way to go, but you might be able to use a channel strategy because someone else already has access to those people. If what you're selling doesn't compete with them, you can piggyback on their audience, with a revenue share or some other kind of exchange, to borrow their market and access a space you couldn't reach directly.

But in any case, you need to know that your go-to-market strategy will work and scale before you commit to your solution, or you need to find other ways of thinking about taking that path.

10. Co-founder Conflict

Building a startup by yourself is exponentially harder than building it with a partner or partners. Not only do you have twice as many hands to do the work, but you also have someone else to bounce ideas off. You have other sources of inspiration, people to question your decisions, and different perspectives on your customers and approaches.

All of these are a huge help, but conflicts can happen, just like in a marriage. You're in a high-pressure environment. You're spending a lot of time together. And things often go wrong. It may turn out that after a while, you have fundamental differences about the company's direction or strategy. If you can't agree on that, you might end up breaking up over that issue.

Or maybe one of you can't afford to be a co-founder anymore. You all agreed to give up your salaries for six months. You're now 18 months into the startup, and they can't afford to do it anymore. They have to pay a mortgage and put money aside for their kid's college. That could force them to leave.

It could be that just living with them in this pressure cooker for the last 18 months has gotten you to the point where you can't stand them. You hate each other's guts and don't want to be in the same room. That's not conducive to a successful company.

Once co-founders come into this kind of conflict, it can be hugely disruptive to the company and poisonous to the team. When one of the founders leaves, bad things happen. They typically take a massive chunk of equity, often as much as a third to a half of the company's ownership. That can frighten off future investors because people don't like to see gigantic chunks of dead equity on the cap table. But, the departing co-founder is probably not interested in renegotiating.

However, they were a crucial part of your team, So you need to backfill them. And that can take a long time and kill the company's momentum.

"So, how do you avoid this kind of co-founder conflict? Make sure that you have working experience with them beforehand."

Do some test driving if this is a new person. Work on some projects together before you cement that co-founder relationship. Spend some time doing hard things. See how you work together. Is there mutual respect? Do you have the same ideals and directions and align with the strategies you will be pursuing?

And then put this stuff down in writing. Make sure that everyone's lanes are clear. Here's the strategy we're pursuing. Here's how we're going about it. Here's how we're going to make decisions if we disagree. Here's how the tiebreaker happens. Who is the final word on all of these issues? What will happen if we run into differences, disagree, or someone wants to leave the business? Can we buy that stock back at a reasonable price?

I highly encourage you to vest everyone's stock from the get-go. So if, in six months, things go wrong, they're not walking away with a large slice of the company. That can prevent that colossal drag on your cap table.

And then make sure that you're not single person dependent as much as you can. I know it's tough in a startup, but already be thinking about redundancy, who else you'd hire, warming people up, and bringing in other team members who can back up the people you've got. Even if the co-founders don't leave, and you don't run into any of these co-founder difficulties, there's always the "got hit by a bus" problem.

Zombie Corporations

These companies can bring in customers, achieve a certain level of success, and continue operating, but growth stalls out. Typically, this is because they can't cross a chasm. Either they have the extremely early adopters but can't get the later early adopters, or they've gotten the early adopters but can't move into the mainstream.

The later adopters are unwilling to accept switching costs, and the existing solutions are good enough for them. They're generally conservative buyers. They want to see more proof before committing, but you can't deliver enough proof with just the early adopters.

Once the company starts flatlining, it's harder to restart growth. You don't have people willing to pump more capital into a stagnant company to enable you to create the value, new features, and massive marketing required to reach the next level.

"The solution to this is thinking about those later adopters somewhat earlier in the company." You don't want to wait until you see that growth curve flatten out to worry about those later adopters. About the time you're maybe a third to a half of the way into the early adopters, start talking to those later people. Understand their psychology. Why is this different for them?

What do you need to be doing to appease them, to make them excited about your solution? What levels of proof or maturity do they need to see? Do they need to have third-party integrations in place?

Start making sure that you're getting those lined up. So by the time you're starting to burn out of those early adopters, you have all the ducks in a row to go from, 10 million ARR to hundreds of millions of dollars ARR as you expand into that big, juicy steak in the middle of the market.

For another take on why startups fail, check out this excellent article by the Harvard Business Review.

After all this gloom and doom, you might want something more affirmative! Check out this episode on my top insights from 25 years in the startup world. It's one of my favorites.