Top 3 reasons why startups fail:
- no market need
- ran out of cash
- not the right team
Top 3 reasons why startups fail:
Many aspiring entrepreneurs, without having previously started a business, already have a fixed set of conceptions about embarking on a new venture. The most wide-spread and misconceived of those are:
The misconceptions above (and any of their combinations) usher in a bad start, difficult and eventually unsustainable growth of businesses.
Failure. Success. What association do we have with each? Google search of the word “success” returns nearly 281 million results whereas that of “failure” 119 million. These are telling numbers and they seem to reveal the underlying “logic” of our lives. We are afraid of failures, whether they are in our personal lives and in our careers (whether changing a job/career or starting your own business).
Many are driven and inspired by success stories, recipes and recommendations of others. Success, even if it is not yours, feels good. It feels comfortable. Present and future, in that one instant, seem to become brighter and more rewarding. We live in that instant and want to stay in it.
Many are afraid of failure. We hide our failures. We try to forget them. We mostly attribute our failures to a bad luck, an out-of-control happenstance or an incident. Very few of us openly admit a failure, even less their part in it.
What we don’t necessarily know is that fear of failure destroys any chance for a possible success in future. What we also might not know is that failure breeds success.
Throughout our history, many a successful entrepreneurs, businessmen, politicians, scientists failed first before reaching success. Google returns about 672,000 search results for “failure quotes,” and each of those pages – this is a good example – contains quotations and saying of those who made history.
I selected excerpts from some of modern (and currently very) successful entrepreneurs, businessmen and bloggers who tell of their failure stories and experiences.
Have you failed before? Was it as terrible as you had anticipated? Well, here you are reading this article, so it seems you survived all right. Truth is, failure is almost never as bad as we imagine. Fear of failure is usually much worse than failure itself.
I was what they call a “hyper responder.” I’d buy just about anything that promised freedom and fortune. I bought programs about how to trade the commodities market (and I actually did that and made money); I bought programs on how to bet the horses; I even bought a program about how to become a “waste auditor.”
But as my drive intensified, I began to make larger investments.
I dropped $5,000 on a real estate investment course. I realized too late that I was uncomfortable using the techniques in the program; it was basically worthless to me.
And while that loss hurt, it didn’t hurt nearly as much as the next mistake I was about to make.
Yes, he made mistakes. We all do. But he came out of these mistakes and experiences a stronger person.
Because weird as it sounds, failure is a requirement for success.
And like it or not, without failure you can’t truly succeed, so avoiding it pretty much makes you dead in the water right out the gate.
I’ve met (and worked with) some serious “power players” in business. Not just on the Internet, but offline biz owners, too. I’m talking about people who sometimes make more scratch in a DAY than the average working stiff makes in 6 months toiling away for the corporate beast masters.
And you know what all these people have in common?
They started out as miserable FAILURES.
Last but not least, remember one thing. If you are failing or what you are doing is failing and things just seem plain bleak and without any perspective, then perhaps, it is time to give up what you are doing and start anew. Or perhaps, it is time to start doing something else.
There is a right time to give up. There’s a right time to quit. The trick, and it is a HUGE trick, is knowing which is which.
Remember that surrender is every bit as much a part of strategy as victory. Learning when to surrender or lose a smaller battle has been part of the success plan of every major war ever fought. The trick is in knowing what really matters, and never letting go of that. The problem we have is that we fall into the trenches and think the battle is the war.
Failure. Success. Two sides of the same coin. One cannot exist without the other.
Embrace your failure and you will succeed.
I have previously blogged about top dot-com flops. By chance I came accross this great round-up of failed startup post-mortems on ChubbyBrain. The list includes, among others, the following:
An article (also pointing to the above source) on GigaOm featured information about post-mortem of the infamous StandoutJobs . As for main reasons why statups fail, have a look at Paul Graham’s article and my previous blog post. Finally, here is good set of lessons from Mark Goldenson, founder of PlayCafe (one of failed startups on the above list). I especially like his “Set a dollar value on your time,” which helps prioritize tasks and clarify what is and is not important for your business.
Ever since, we have been struggling to break-even, all the more given the unfamiliarity of the market with the concept and with many semi-alternatives such as Starbucks-style coffee shops with moderate Internet connections/quality.
Initially, our agreement was – I was doing it with an Egyptian friend of mine and a partner – that I will take care of the business side and he will be in charge of the logistical and day-to-day management of the company. It took few weeks for me to realize that, however professional and hard-working my friend was, he was not committing the time or brain work required to the company, especially considering the initial stage of our startup and the fact that we did not seek any venture capital, but decided to boostrap. We were both employed full time and Elegua was to be our side project, which we wanted to grow.
Our first stumbling block was to find a comfortable and affordable space in the central Cairo, or close to where many foreigners were living – our target were mostly young, class A/B foreigners, students, young entrepreneurs, techies, geeks. Anyone with a laptop, a need for high-speed Internet connection, comfortable and relaxing working environment and willingness to network with like-minded individuals was qualified. All the more so as there was no real competition, besides the coffee shops with slow and unreliable Internet connections and few Internet cafes (in downtown Cairo there are quite few of them but they all look ramshackle and none allows flexibility of using your own laptop/WiFi).
We did not conduct a proper market research. Instead, we relied on my gut feeling and my partner’s knowledge of Egyptian market and our collective perception that a co-working space would not even need to be sold out. It would be so intuitively appealing that everyone would go for it.
What were the results 7 months later?
Modest revenues (not close to break-even). Many people loved the idea, but not many were ready to brave the Cairo traffic in order to reach the place.We kept on hiring and firing few employees as none were qualified enough- due to lack of time we opted for friends and connections of friends: high turnover. Elegua fan page on Facebook has 200+ fans which failed to convert.
In brief, a failure, but a failure with lots of valuable lessons for me, and surely for my partner.
The main factors in our failure were (my view):
Maybe we were to much in a hurry and could have been a bit more patient and perseverant. But maybe not. The time will show. In any case, I felt this was the right time for such a decision and as much as it was my original idea and closing it, even temporarily is not a joyous occasion, we decided to take this route.
I am moving on with my other project – more about that later – and will perhaps eventually reopen Elegua but with different offerings, another partner – in Egypt any company has to be 51% owned by an Egyptian, and I am not Egyptian – and in a different part of the city!
The Entrepreneur magazine has asked three successful entrepreneurs to describe a scenario of doing things all over again if they had a chance. Below is their response.
Sunny Bonnell, 33, co-founder of Motto Agency, a brand and design firm in Myrtle Beach, S.C. Founded in 2003, the company’s year-end sales are projected to reach about $1 million.
“As a woman business owner, I would have reached out to organizations like Count Me In for Women’s Economic Independence a lot sooner than I did. They have helped me build our networks on a national level (i.e., establish partnerships with FedEx, OPEN from American Express and Dell) and given us access to mentorship, marketing opportunities and business resources.”
Anthony Mongeluzo, 28, founder of The Pro Computer Service LLC, an IT services company in Medford, N.J. He founded the company in 2002 and now has annual revenue in excess of $2 million.
“I would have treated my company like a real business and not looked upon it as a stepchild. I would have given it the same full effort every day and not wasted my energy from 9 to 5 with my employer grasping for a moment or two to sneak in a quick call to one of my clients.”
Kris Putnam-Walkerly, 40, founder of Putnam Community Investment Consulting Inc., a Cleveland-based philanthropy consulting firm for foundations and nonprofits. She founded the company in 1999 and projects 2009 revenue to approach $1 million.
“I should have conducted more regular financial analysis of the business early on to help me understand which types of services and clients were most profitable and to allow me to make more informed decisions as I grew.”
Personally, I am also still struggling with my own startup, Elegua, to have it gain sufficient traction, especially considering that I and my partner are on a bootstrapping mode till now. And we both fall into the “lesson learned” of the second entrepreneur, Anthony Mongeluzo, above. My previous initiative, OpenCoffee Club Cairo, is also sort of put on hold, as the inaugural meetup didn’t attract a threshold number of local entrepreneurs, startup enthusiasts, VCs, techies and individuals interested. This reminds me as well to give it another push, as I also got a recent feedback to renew my effort. Hence:
Persevere, persevere, persevere. Perseverance, especially in cultures/societies with corresponding 0-market knowledge of or unadapted mentality to the ideas of the business initiative in question, it is vital to persevere and however steep a climb it might seem, there is always a societal learning curve, which, once the tipping point is achieved, will become self-sustainable.
Given its complete novelty and unawareness in the MENA region and in Egypt, I think I will give it another try.
What are your experiences and lessons learned?
P.S. I know it has been a long time since my last post. My own side projects and my work prevented my “blogging creative juices” from running. I will try to be more systematic henceforth.
John Osher, a serial entrepreneur who launched several successful companies (notoriously, Cap Toys with sales of $125 million per year and sold it to Hasbro Inc. in 1997 ), came up with an informal list of “16 Mistakes Start-Ups Make” – since expanded to 17 – where he put every blunder and error he made during his entrepreneurial career. Ever since, this list has been used in Harvard Business School case studies and in many business publications. He also used the list in 1999 – he wanted to build a company and product deprived of all his previous blunders – when he started SpinBrush, $5 electric toothbrush (hitherto costing circa $80), which he sold to P&G for $475 million in 2001. Below is his “17 mistakes start-ups make” list:
And finally, one of the commenters on this article, Trevas from eBookGuru, suggested an essential mistake which causes many (which have inexperienced founders) of startups fail (and is not explicitly present among the 17 mistakes above).
18. Lack of commitment to see the idea through.
Dot.com bubble witnessed many young, bright and entrepreneurial spirits launch themselves into the tech gold rush only to see themselves chasing the fool’s gold. Too many entrepreneurs wound up in searching for jobs in not-so-inspiring companies and earning not-so-high a salaries. But few found courage to continue their entrepreneurial march and found new beginnings, although not necessarily with happy endings. Eric Ries of IMVU, named as one of the Best Young Entrepreneurs of Tech in 2007 by BusinessWeek, is a case in point.
Eric, like many other talented and bright young men in America, had a rather typical start at Yale: have an idea/dream, find a soulmate, work on the idea.
While pursuing a degree in computer science at Yale, Ries took cues from young techies in Silicon Valley who had no problem getting VC firms to back their software dreams. So he and a roommate started CatalystRecruiting.com, an online database of student résumés, and lined up their own slice of the VC pie. “In retrospect it was not such a good idea for investors to give money to kids who just barely knew what they were doing,” Ries says. “They were just throwing money at these companies. But when the bubble burst we had no chance.”
This first idea failed along with ideas and dreams of many others in the same dot.com lot. His next go? There.com.
Soon another lesson would begin. Ries describes There.com as a “traditional VC-model startup,” characterized by high fixed costs, a focused marketing strategy—and an underdeveloped sense of what consumers want. “They start a marketing buzz and a beautiful PR launch,” he says of the strategy too often pursued by startups, There.com included. Ries rattles off other hallmarks: blow through cash by bulking up on staff, hire a vice-president of marketing “and the burn rate keeps growing.” The trouble is, “they never tested if there would be immediate consumer adoption,” Ries says. Worse, the company couldn’t easily adapt to change, he says. “It was rigid and top-down.” Neither Ries nor Harvey lasted long.
The second time failed as well. None of the two did not seem to be a killer startup and couldn’t not wither turbulent and volatile tech market conditions. He did not digest well the errors he has made during the first two gos. One pattern he could however clearly see in both of his failures was the perceived gap between the tech strategy and business strategy, i.e. the tech-centered approach versus the customer-centered one.
For Ries, try No. 3 would be a charm. After losing their jobs at There.com, Ries and Harvey began working on their own startup, IMVU. This time, Ries says, the lessons stuck. “I knew I couldn’t just be a tech entrepreneur,” he says. “The tech strategy needs to be determined by the business strategy, not the other way around,” he says. So the company’s first meeting was all about determining culture and values. “Startups don’t fail from lack of technology,” he says. “They fail from lack of customers.”
His discipline, creativity and determination led him and his partner-in-crime Harvey into founding IMVU. This time, he knew well how to organize his startup; he had learnt it a bitter way, but he did. This time he knew well what there was to know about founding a startup, he had two failures under his belt, and he was determined to succeed.
Early on in his tenure as IMVU’s chief technology officer, Ries audited a class at Berkeley’s Haas School of Business. The instructor, Steve Blank, was so impressed with Ries’ attention to strategy and understanding of business R&D, that he called Shawn Carolan, a managing director at Menlo Ventures, and advised him to invest. Carolan describes Ries as the guy who would go out and read a business strategy book the moment someone mentioned it.
Fruits of his protracted efforts, failures and unfettered passion for what he believed started showing up, the first sign being almost a lucky strike.
Menlo became a backer, as did Allegis Capital (IMVU also had angel investors). “In the consumer market you have to have humility to admit you don’t know exactly what the consumer wants, so that you can be proactive and test features and make changes,” Carolan says. “Eric has an unusual amount of humility and he is unique as a tech person in his ability to be strategic in his business.”
IMVU showed all signs of success early on. Ries started practicing a lean approach for his own startup. Lean startups are resources-, money- and energy-frugal from the very beginning, and as a result are poised better for sustainable growth and long lifetime.
Part of that strategy was taking the product to the customer for testing as early as possible and keeping site development costs low. IMVU.com had a beta version up and running within six months. By contrast, there hadn’t been a test of There.com in its first five years. To prove that the product resonates with customers, there is a small fee associated with participation, and so far, the test phase has met or exceeded the corresponding financial targets.
Additionally, Ries has helped keep expenses in check by adopting a low-cost, low-risk software development process that maximizes ways to improve the site.
IMVU turned out to be an ultimate success and so did Ries, who is not only a full-time in his own startup but serves on boards of other leading tech boxes like pbWiki, Causes and KaChing.
Now the world is facing a recession, the worst one since the Great Depression. But entrepreneurial world is not necessarily crying doom and end to new ideas and initiatives. While some do, others are more moderate by providing an advice/how-to and still others are outright optimistic for launching a startup especially during this recession.
Make your choices.
Current financial crisis starts showing growing signs of migrating to other industries and already causing anticipative layoffs and cuts in many well-established as well as small/startup businesses.
The figure on the left comes from the book by Scott Shane Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By. The data comes from a special tabulation by the Bureau of the Census produced for the Office of Advocacy of the US Small Business Administration. While these data look at the 1992 cohort of new single establishment businesses, the failure rate percentages are almost identical for all the cohorts that researchers have looked at. These are the averages (considerable differences across industry sectors in business failure rates).
If you intend to start a full-time, incorporated business, the odds that the business will survive at least eight years with you as the owner are better than one in four; and the odds of its surviving at least years with a new owner are another one in four. So the eight-year survival rate for incorporated startups is about 50%.
The failure rate is high due to inclusion of sole proprietorships in the statistics. Sole proprietorships push up the failure percentage due to:
Two-thirds of new employer establishments survive at least two years, 44 percent survive at least four years, and 31 percent survive at least seven years, according to a recent study. The same research found that businesses that survive the first four years have a better chance of surviving long-term.
Small Business Growth: Searching for Stylized Facts written by Brian Headd of the Office of Advocacy and Bruce Kirchhoff in October 2007 examines small business dynamics. It notes that growing firms tend to be a constant percentage of all firms and as a general rule, new employer businesses have a 50/50 chance of surviving for five years or more. Among other things, the authors’ analysis determined that:
And considering recent developments in the financial markets and their subsequent repercussions on the corporate world, Jason Calacanis, the founder of Weblogs Inc. and Mahalo asserted “that 50-80% of the venture-backed startups currently operating will shut down or go on life-support (i.e. 3-4 folks working on them) within the next 18 months.“
Which one of the estimates and forecasts (mentioned or not mentioned) above will eventually prove to be accurate remains to be seen. In the meantime, what all entrepreneurs and startups have to do is to focus their energies, finances and best of their efforts on meeting market and customer needs efficiently and effectively and keeping in mind not to repeat some of commonly made mistakes because any or combination of such mistakes, perhaps not critical in past, might become become so in present and not-so-far future.
It is not easy for most entrepreneurs and businessmen to talk about their own failures. When they do, they tend to be indulgent or lenient about their past experiences and are inclined to shift some of the “blame” on environment, tendencies, people or just plain luck (lack of it). Only few speak candidly and admit their errors openly with intention of contributing to the accumulated business wisdom and in hope of providing useful information for those aspiring and resourceful entrepreneurs who are at the beginning of their paths. The first step to overcome a failure starts by admitting that we are not perfect.
Jeremy Schoemaker, the founder of ShoeMoney Media Group, is one of the entrepreneurs who had many ideas, which could potentially lead to business successes but instead turned out to be business failures.
Anyway I came up (in about 10 minutes) my top 10 worst ideas to make money that totally were a waste of time and effort (and money in some cases).
Below are some of his top 10 worst money making ideas he came up with.
10 – FireFox Forum (firefoxforum.com) – I purchased this site on digitalpoint ($800) after getting some inside information that FireFox was going to team up with Google on a per download affiliate program. Well all that happened and I think I made about 50$ the first year. FLOP
7 – Omaha-Used-Cars.com – Now here we go! This is easy. Just make a used car site and charge dealers a .25cent per car listing fee right ? ehhh none interested… FLOP
6 – SMS Text Dating textdating.com/texting.com – I was soooooooo sure this one was going to be it! The concept is simple basically you subscribe to this dating website. Make a profile then you could send a message to the person from the website to there mobile phone without having to know there phone number. I had this totally done and nobody every signed up… FLOP
5 – St. Marry’s Bar & Grill – Ok this has nothing to do with the internet. After the Hooters closed down in Lincoln I tried to re-open it then when that did not work out I thought about making a restaurant called St. Marrys where it was like a church and the waitresses dressed like catholic school girls and like the nuns would be the managers and spank the waitresses if they were bad?!? Yes I know bad idea and I never really pursued it…. I like in one of the most conservative catholic communities in the country so no way it would fly… and yes i know im going straight to hell.
3 – Ads Or Not
Simple concept. There is 5 ads on a webpage only one of them is NOT REALLY A AD! Each time you successfully spot the fake ad you get some money built up into your account. – I had issues finding advertisers who were down for this =P FLOP
1 – ShoeMoney Petroleum Company –
(I cant believe im actually telling these in public)
Ok Follow me here –
I want to purchase a Gas Station and Give away Free Gas
The catch is like the gas would come out really slow and also you would be limited as to how much you could get per week. (Like max 50 gallons a week).
How do I make money ? EASY – I would setup paintball guns around the gas station with webcams that would let people from the internet take shots at the people filling up there cars with gas. You could charge per shot or a xxxx amounts of shots per month for a set fee. PROBLEM – I talked to a city council member about this and he told me there was a “no flying ordinance” or something rule within city limits however I could maybe do it in the country…
As you see the breadth and width of ideas is not lacking in originality and ambition. Some of the ideas above would surely seem killer to me and many other entrepreneurs. However, not all, even brilliant and innovative, ideas become equally successful and growing businesses. In face of the ongoing financial crisis and shrinking funds, quite a few investors and VCs go as far as clearly outline what an idea needs to have to obtain a backing. For those who cannot reach VC/investor pockets or are simply willing to build their business without initial VC/investor funding, there is also a way. Whichever way you choose, make sure to check out the startup rules of Loic Le Meur, the founder of Seesmic, and those of Sequoia Capital, a leading VC firm, and do not be afraid to fail. Embrace your failure, learn from it, and remember the words of one of the most profound thinkers of 19th century, Friedrich Nietzsche, who mused, “What does not kill you makes you stronger.”