Why Early Stage Startups Fail -- Top Ten Reasons

Robert P. Mollen, Counsel at Fried, Frank, Harris, Shriver & Jacobson (London) LLP.

It’s pretty presumptuous for a lawyer who has never been an entrepreneur to set out views as to why early stage (pre Series C) startups fail. However, I’ve now focused for several years on helping startups, and I see repeating patterns. Unsurprisingly, I saw some of the same patterns in advising incumbent corporations over many years.

So, with apologies in advance for hubris, here is my top 10 list of reasons for failure.

1. Build it and they will come

More often than one would expect, I see companies that have built services or products with what appears to be great tech, but with inadequate focus on who will want it, who will have the ability to buy it, and what challenges need to be met in selling it to them.

Sometimes this is because the startup has failed to understand the problem properly, or has developed a product or service that simply fails to provide an appropriate solution. This is particularly an issue in tech-centric teams that fall in love with the tech, such as artificial intelligence or machine learning, and don’t focus adequately on the application.

2. Failure to recognize sales and marketing challenges

In many cases, though, the startup has, in fact (at least in my view), successfully identified a real problem and provided a real solution.

Even so, the startup may have failed to appreciate how difficult it may be to sell that solution. See http://bit.ly/SellingtoCorporates. The reasons for this can be diverse, including the following:

the function is critical, or relates to critical functions, and the startup (because it is a startup) lacks sufficient credibility;

(b) the solution is ahead of its time;

(d) someone else has come up with a competing solution that, even if less effective, has a competitive advantage (more established reputation of the seller, existing relationships with the customer, bigger marketing budget, etc.);

(e) there are other internal obstacles on the customer side to the adoption of the solution, such as legacy systems or divergent interests (for example, does the solution threaten the interests of a party that has the ability to block or slow its adoption? – one cannot expect the turkeys to vote for Christmas!); or

(f) the potential buyer is focused on other priorities, or is simply not interested in innovation in that space.

The startup could better anticipate some of these obstacles if it had expert, and industry specific, marketing knowledge, either from a member of the team or from a sophisticated investor or an outside adviser.

3. Failure to build a team and a culture

Building a start-up is not a solitary exercise. Those who join typically are making sacrifices, over an extended period of time, to do so, and they are looking for non-monetary benefits that make up for those sacrifices.

Founders who think that it is “all about themselves” are not leaders, and they will not succeed in building successful teams and cultures. The process of team-building must start with the respect and mutual support one shows for ones co-founders, and then needs to expand as the company grows. It isn’t easy to hold together a team, particularly when things are not going well, and culture and relationships are critical to success.

Further challenges arise when team members need to be moved out of roles that they are failing to handle, and sometimes out of the company, while maintaining the overall cohesiveness of the team.

4. Group-think, lack of diversity, and failure to recognize the skills that you don’t have

My points above flag a key problem that I see in many start-ups – an imbalanced team, and a lack of entrepreneur self-awareness.

I recognize that entrepreneurs need to have a lot of self-confidence or otherwise they would not take on the challenges of a start-up. However, this needs to be combined with self-knowledge of one’s own areas of weakness, and an appropriate approach to addressing those gaps. Unfortunately, entrepreneurs often fail in this area, and bring on co-founders who are much like themselves.

Successful start-ups have co-founders with complementary skills and diverse backgrounds. Additionally, co-founders should seek (when they have the resources) to bring on others with skills that they lack. A key element of the success of any senior management team is the ability to recruit people who, at least in some respects, are better and smarter than they are and can help address their own gaps. Needless to say, startup management teams are not the only folks who fail to recognize this.

5. Lack of an appropriate support network

It is really important for a startup to have the right support network, giving it access to a wide variety of skills. This support can come from a variety of sources: (a) angels and other investors; (b) accelerators and mentors; (c) professional or other advisors; (d) partners and commercial counterparties; or (e) otherwise. See, for example, http://bit.ly/AngelsandAdvisors. In any case, though, running a start-up is not a go-it-alone exercise. Large corporate incumbents have a wide network of internal resources on which to draw. In a start-up, you don’t have that luxury, and it is important to build a supporting network of people and organizations that are willing and motivated to help you.

6. Choosing the wrong partner/s

Startups frequently need to advance through partnerships with more established corporations or other organizations. These can provide credibility and access to customers and resources that the startup could not achieve on its own. However, it is really important that the startup understand its partner’s interests, motivations and objectives, and also the level of senior commitment to the partnership. See, for example, http://bit.ly/CorporateVentureandInnovation. I often find that startups enter into partnerships with a starry-eyed view as what they will deliver, and then are disappointed when they don’t yield the expected results.

7. Misjudging sales cycles

I frequently see companies that have developed great solutions to real problems but have misjudged the length of the sales cycle, particularly in selling to corporates (or, worse still, governments). The point is clear – in most cases, it is going to take much longer than you expect. Sales to large corporates usually take a significant number of meetings and require the approval of a number of decision-makers. Consequently, a 12 to 18 month time frame (probably more 18 than 12) is typical. A further period is required to implement the transaction and get paid (frequently 60 days or more after performance). The startup needs to consider how it will stay alive while waiting for those transactions to generate revenue.

8. Some verticals are really hard

Some start-ups suffer from the fact that they have simply chosen a really hard vertical, at least in the markets in which they are operating. For example, at least in the UK and Europe, consumer hardware and healthtech, no matter how good the technology and products, are difficult verticals. The reasons for this range from vertical to vertical, but may include funding challenges, obstacles to market entry, shortness of product cycles, or a variety of other obstacles. I’m not suggesting that companies shouldn’t go into difficult verticals – indeed, while my mentoring is sector-agnostic, I’m heavily involved in trying to support startups in the healthtech and life science space because the challenges are greater in that space. However, entrepreneurs need to recognize those challenges before they launch their start-up, and consider how they might propose to overcome them.

9. Funding, and running out of money

Money matters. You can have a business with great potential, but that won’t help you if it needs to shut down because it runs out of money. As I’ve written separately, http://bit.ly/TenFundingFallacies, when you need to raise externally, raising enough for a sufficient runway (preferably, at least 18 months) to achieve key milestones can be critical to your survival. This is true even in well-funded markets like the Silicon Valley, but it is even more the case in the UK and Europe where the funding markets are not as deep.

10. Luck

The role that luck plays in business is significantly underestimated. However, you can make some of your own luck through running your business well and addressing the points above. Additionally, while luck may play a role in the opportunities that come your way, your ability to recognize those opportunities, and exploit them, is down to you.

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This discussion is not intended to provide legal advice, and no legal or business decision should be based on its contents. If you have any questions or comments, feel free to contact [email protected] or via LinkedIn here.

You will find Bob’s other weekly blogs for emerging and growth companies on US issues, international expansion and early stage financing here: http://bit.ly/StartupGuides