What makes startups fail?
The unfortunate reality is that the majority of startups fail. The good news is that in many cases, these common causes of failure are avoidable. As long as founders are aware of the most common startup pitfalls, they can take steps to mitigate situations before they worsen.
Bear in mind that your startup failing doesn't need to spell the end of your entrepreneurial career! Failing can be a great opportunity to learn what customers really want. Moreover, if the failure happens quickly and cheaply, you can pick yourself up and move onto another idea, applying the lessons you've learned from your first attempt.
In this unit, you'll learn about the most common causes of startup failure, and some of the relatively simple actions you can take (or avoid taking) in the early days to maximize the chances of your startup being successful.
At the end of this unit, you can work through a checklist to score your startup against the indicators of startup failure. This list helps you identify any issues that you might need to address.
Building a product that nobody wants
By far the most common reason that startups fail is they build products that nobody wants. In reality, nearly every startup can find someone who will use their product. However, it's essential that you find not only a common problem that people are having, but also that the problem is sufficiently intense or frequent for them. Such people will actively seek out a solution and pay for it.
Without proven demand from customers, it's likely that you'll build either entirely the wrong product or a product that's not exactly what your target customer needs. This prevents you from creating a viable, scalable business.
In another module, we'll discuss methods for validating your idea with customers before you spend significant amounts of time or money building your product. This is a vital step to confirm that customers will want your product and that it will solve a real problem for them.
A derivative idea
Chances are you've encountered startups that are based on a derivative idea. These companies are modeled on successful existing products, but tweaked slightly to create something that's more useful to a narrower set of users or a narrower geography, or that has a slightly different feature set. In some cases, the startup is essentially an alternatively branded version of the original product with no substantive changes.
For example, derivative startups might include, say, a social network just for pet owners, a rideshare company that operates in one specific city, or a voice-chat product that's invite-only instead of open to anyone.
Often founders with derivative ideas believe that the market is big enough to accommodate multiple, similar competitors. It's true that startups based on derivative ideas can be successful, especially if the original idea has overlooked a certain segment of users by trying to cater to a very broad audience.
However, in most cases, startups based on derivative ideas have a tough time achieving real scale. It's usually not difficult to acquire some users and generate some revenue, but it's much more difficult to take significant market share from existing companies that already have product-market fit and a recognized brand.
A good example of derivative brands is the recent surge in "mattress-in-a-box" e-commerce companies. These companies produce mattresses, sell them via online stores, and ship them in space-saving, rolled-up packaging to customers. They don't have a physical retail presence. This is a fundamentally sound business model, because it enables the company to have lower overheads and lower prices than traditional retailers. This business model also provides a more convenient shopping experience for customers.
Casper was one of the first mattress-in-a-box startups. It launched in 2014 and rapidly gained traction in this $28 billion a year market. Over the following few years, more than a dozen mattress-in-a-box companies appeared, with varying degrees of differentiation against the original Casper business model.
The mattress market is large enough to accommodate multiple competitors, and it's true that a number of the mattress startups that followed Casper have been successful due to new product innovations.
However, with derivative ideas, there's a problem with diminishing returns. Being one of the first few entrants in a new business category can be great, but being the tenth or twentieth of these companies is pretty tough.
The previous unit of this module touched on the importance of technology tailwinds. It turns out that mattress-in-a-box startups all leveraged one crucial technology tailwind: the recent development of "roll-pack" machines. These machines enable mattresses to be produced and packed down into a small, easily transportable package. Without this new capability, none of these mattress-in-a-box startups would've been viable.
Competing with free
Let's say you're going to create a product that allows people to do a certain task, and they're currently able to do that task by using something that's free and readily available. Examples of this particular scenario might include a spreadsheet or a Facebook group.
In these instances, you'll need to give potential users a compelling reason to use your product, because:
- You're asking them to stop using something that they're familiar with and that currently works for them, even if it's imperfect.
- You're asking them to try something new and learn how to use it.
- You're asking them to pay money for something that was previously free.
If you're competing with free, a good rule of thumb is that your product needs to be 10 times better than the free alternative. It's only by providing a massively improved experience that people will change their behavior.
Tip
Ask yourself: How imperfect is the free solution that my target users are currently using? Can I greatly improve the way in which they complete the task? How can I make my product as simple as possible to learn and use? Are users more likely to use my product if I offer a free trial?
Attempting to scale before achieving problem-solution fit
It can be extremely tempting for startup founders to double down on a product as soon as it acquires its first few customers, or generates the first few dollars of revenue.
However, attempting to scale a company based on a relatively weak signal from a small number of users is a risky strategy. These users might be exceptional, and might not represent the larger cohort of future users. Other, closely related products might serve a much larger adjacent market, but you just haven't identified that adjacent opportunity yet.
A helpful way to think about the early days of your startup is to adopt Steve Blank's definition:
A business model is a high-level plan for how the company will create, deliver, and capture value. It includes consideration of the customer, the value proposition, product or service, revenue streams, channels, activities, resources, partners, and costs. For a great primer on business models, reference the Business model canvas.
Although it seems counterintuitive, startup founders should set out to not build a business initially, and should resist the temptation to acquire users and make revenues. Instead, they should set out on a mission to search for a really good problem to solve, that's experienced by a large number of people, for which they could build a compelling solution, and around which they can build a scalable business model.
Achieving problem-solution fit is at the heart of this process. You'll know you've achieved problem-solution fit when customers tell you unequivocally that they care about the job your product can do for them, and that it would either alleviate a major pain point or create a significant gain for them.
Only when you have this evidence should you stop searching for the right business model and start executing on building your business.
When you're building a startup, you're by definition engaging in business-model innovation. You're trying a business model that no one else has tried before. It would be unreasonable to expect that from the very beginning, you know with certainty who your customers are, what product you should build for them, or how you're going to make money.
It's therefore helpful to think about the early stages of your startup as an opportunity to explore and experiment. Instead of locking in a plan, you should develop your ideas iteratively over a period of time. Engage with customers to inform your direction and ensure you're building a product they want, and around which you can build a successful business. We'll spend more time discussing how to validate your idea with customers in another module.
Unnecessary secrecy
Many first-time founders are concerned that someone will steal their idea and use it to build a competing business. This fear leads to either keeping the idea a secret or asking people to sign a non-disclosure agreement before talking to them. Neither of these approaches is helpful for most startups.
The reality is that it's extremely rare for someone to copy another person's startup idea. In fact, in most cases the best thing you can do is tell everyone about your startup idea to get as much feedback as possible, especially from potential customers.
The real value in your startup comes from executing your idea. It relies on your unique combination of skills and insights coming together to create the best possible solution to the problem you're trying to solve.
There are plenty of reasons why it's generally better to tell people what you're working on rather than keep it a secret. Let's briefly discuss a few.
Ideas are cheap and easy to come up with. Millions of people in the world have startup ideas. Most of those ideas won't prove to be worthwhile. If you ask anyone who's even remotely interested in being an entrepreneur, chances are they already have multiple startup ideas that they're passionate about pursuing. Why would they want to devote years of their life working on something they didn't come up with, and that they're most likely not passionate about?
The longer you keep your idea to yourself, the more you're depriving yourself of valuable feedback. You should take every opportunity to tell people about your idea and find out if it meets a need. Don't just tell your friends or family, because they'll most likely give you well-meaning (but unhelpful) positive feedback. The best feedback comes from potential customers, followed by experienced founders, mentors, and investors who can share their advice and insights.
Talking about your startup idea is a great way to attract cofounders and collaborators, particularly if you're part of an existing startup community and can take part in networking opportunities and pitch events. By sharing your vision and passion, you're more likely to find others who can join you and contribute to your startup journey.
If you want to raise money from investors, you have to be able to talk openly about what you're working on. Good investors are highly protective of their reputations, and there's no sense in an investor stealing your idea. They have better things to do with their time, and the feedback you'll get from good investors more than outweighs any risk there might be in talking to them about your idea.
Very few investors will sign a non-disclosure agreement before you tell them about your startup. Asking them to sign one generally doesn't go over well.
Important
If you intend to file a patent application to protect your idea, then publicly disclosing it before you file can jeopardize your ability to get a patent. If patent protection is relevant to your startup, then it's a good idea to get advice from a patent attorney before disclosing anything publicly.
Not seeking out the right advice
One of the best things you can do in the early days of your startup is to seek out advice from people with deep startup experience. These people can include experienced founders, angel or venture-capital investors, and people who've run startup incubators and accelerators.
These folks might be able to provide advice that will shorten your learning curve, make useful connections and introductions, and prevent you from wasting time and money going down the wrong path.
Their advice is almost always going to be more valuable than the advice you'll receive from another first-time founder, your accountant (unless they specialize in startups), or your friend who works in a corporate job and has never founded a startup.
One of the reasons first-time founders fail to get advice from the right people is they assume that successful founders and investors are hard to pin down and unlikely to give you their time. Successful founders are certainly busy, but many of them have benefited from the guidance of experienced founders who've come before them. Startup ecosystems have a strong pay-it-forward ethos, and you might be surprised at how easily you can tap into the experience of some very successful founders simply by asking good questions.
Similarly, investors are always on the lookout for promising startups. Good investors will generally take a meeting with a pre-launch startup founder, as long as they can see that you're working on something that fits their investment mandate. They also like to feel that you're seeking their advice, not just pitching them. As the old adage goes, "If you want money, ask for advice; if you want advice, ask for money."
Task: Identify potential connections
Make a wish list of people with whom you'd like to connect. Start with your local startup community, but also look further afield. Reach out through mutual contacts, by using LinkedIn, or by sending an email or direct message. Have a specific question that you believe that individual is well-positioned to address; nobody likes to hear "I just want to pick your brains!"
Tip
Need help finding quality mentors? The Microsoft for Startups mentor network has hundreds of subject-area experts ready to help you overcome obstacles and hit your next milestone. For more information, check out the Microsoft for Startups mentor network.
Cofounder conflict
Disagreement among cofounders is unfortunately a common cause of startup failure.
Disagreements by themselves are a normal part of building a business. However, it's important that cofounders have a sufficiently robust relationship, and the right processes in place to deal effectively with disagreements. They must be able to discuss difficult issues and reach agreement without causing irreparable harm to their working relationships, and to the company.
Cofounder conflict can be particularly acute if any or all of the following conditions are true:
- The founders haven't worked together before.
- They have different levels of commitment to the company (both time and financial).
- They have different financial needs.
- There's a lack of clarity about the respective roles that each will play in the business.
Tip
Ask yourself: Do the cofounders know each other sufficiently well? Have they developed an ability to work through difficult discussions and reach agreement? Is there any misalignment of interests? If you haven't already, review the Founder Alignment Worksheet we discussed in Should you found a startup? and use it as an input to this process.
Worksheet
In this unit, we've discussed seven factors that can be early indicators of eventual startup failure. These are only indicators, and of course they don't mean that your startup is definitely going to fail, nor are they an exhaustive list of all the things that can go wrong in your startup. However, they're a good starting point for identifying some of the most common mistakes made in early-stage startups.
Complete the following checklist to score your startup against these seven indicators. The ideal outcome is to get as low a score as possible. If you get zero, that's fantastic, but don't be concerned if you answer "yes" to some. By completing the remaining modules in the Founders Hub, you'll have an opportunity to explore ways to "un-fail" your startup by addressing any issues that you've identified.
☐ I might be building a product that nobody wants.
☐ My idea seems like a derivative idea.
☐ I'm going to be competing with free.
☐ I've been attempting to scale before achieving problem-solution fit.
☐ I'm too concerned about secrecy.
☐ I haven't been seeking out the right advice.
☐ My cofounder(s) and I haven't addressed how to manage disagreements.
Score: __ / 7
Finally, bear in mind that as well as these indicators of failure, you should be thinking about the attributes of successful startups, as discussed in the previous unit. The absence of those positive attributes is just as much a concern as the presence of these indicators of failure.