Why Startups are easy, hard and mostly fail

The romance of cycling into a co working space, armed with a skinny latte, tight jeans and hipster looks can draw many to the promise of giving a startup a go.

It could have been precipitated by being chucked out of that corporate job you always hated. Maybe you’ve struggled with an itch you just have to scratch. It might be the allure of untold riches that some startup founders accumulate.

Be forewarned, startups (and I mean a disruptive, scaleable tech startup here, not a Mum and Pop café business or some gardening franchise) are about the riskiest business you can set up.

Setting up your startup is the easy bit.

For some, raising money can be a breeze too. You either have some savings, can go a few months without earning anything or can convince some investors to pop some money in.

Spending that money, well, that’s easy too. We made this mistake when we set up our tech business many years ago. We raised money, quite quickly, and then we spent it. We had an office, some staff, a website… Ta Daaa, we had a startup!

Except we had no business. We had no clients. Well, none that would pay us anything. For a while at least. They were on free trials. And when they did pay, it was small bikkies compared to our monthly costs. Cash crises, sleepless nights and arguments ensued. We almost went under, a few times, but ultimately were saved by our investors, who propped us up (put more money in) while we shaved costs (me and my fellow cofounder took no salary for months) and worked out how to make it work. This was when the business really began.

Disrupting an industry, and the way it has been doing things, is hard. Change happens slowly.

But one thing is central, and never goes away, even when people forget this during the hype and excitement of a new business or disrupter.

You are only going to succeed in business if you find a big problem your customers will pay you to solve.

That’s it.

I have met so many (too many) startup founders who have forgotten this central truth – as I did, when I set out.

Because unless you solve a problem for your customers, they will not pay you, and if they won’t pay you, you haven’t got a business.

Too many founders like to tell me the wonderful features of their app or website, gushing about all the things it can do for its users. Too few tell me what problem they are solving, and how customers will pay them to solve it.

CB Insights have published a report into why startups fail, based on 101 post mortems.

What’s top of the list? No market need. 42% of failures cited this as their number 1 reason for failing.

In other words, the customers were telling them they weren’t going to pay for whatever service was being provided, in sufficient numbers.

The number 2 reason? Running out of cash. Which is the same reason as #1. You need to allocate funds wisely, and be sensible, but overall if you had enough customers willing to pay you to solve their problems, you’d find a way to stay in business.

#3 is “wrong team”. Businesses are run by humans after all, and if they can’t get on, or work together, or have complementary skills, then things can get tougher than otherwise. But you should be able to get rid of the bad people, and hire better ones.

#4 is “being outcompeted”. Someone else beat you to it. Their product is better made or sold or solved the customer problem better (there’s that customer problem again).

#5 was “pricing/costing issues”. Do you offer a free trial, for how long? What packages will then be on offer? How good is your onboarding, and conversion of free to paid? It’s a dark art, and also a science.

Most of these and other reasons are all versions of the same essential issue – not understanding the customer and their problem.

Interestingly, the venture capitalist Bill Gross gave a TED talk in 2015 on this subject. His research showed that the single biggest reason startups succeeded was timing.

Too late, and you’re dead. Too early is better than too late, but it can be hard. Getting the timing right, when the customers and industry are ripe for the disruption you bring, is gold.

Timing, says Gross, is more important than getting the right team together, or the brilliance of your idea, plan or business model, the execution of the strategy or adaptability and resilience.

Rebekah Campbell, Hey You and Posse founder,  writing last week in the Fin Review argued that her startup mistake was raising money in the first place. Don’t raise money at all, she said, but get out there nice and lean, and be close to your customers.

You can argue and debate all this until the cows come home, but in the end, it’s all about the customer. Don’t even think of setting up a startup until you have cracked the big, hairy problem your customers are going to pay you to solve for them.

The rest will then follow naturally.

The full top 20 list is below

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4 thoughts on “Why Startups are easy, hard and mostly fail

  1. Great post Charlie (as usual). I think an important point is that many founders believe they have all of these things (market need, right team, great business model, etc). This is usually as a result of the “general impression” they get. The reality is that most founders are somewhat delusional (me included, at times :-).

    In my opinion, the only solution to this is to gather hard objective data to support the key / riskiest hypotheses, i.e. follow the Lean Startup with Customer Development approach. You don’t need much data (precision is not the goal) but it needs to be objective and used to validate or not a falsifiable hypothesis.

    And the best way to confirm there is a real problem is by “getting out of the building” and listening (not surveying, not leading the conversation, and definitely not selling) to customers, as Steve Blank suggests. There are no facts inside the office or in a founder’s head, only guesses.

  2. Great post Charlie and healthy reminder from my MBA days ie you kept the mantra going with what is the problem a start up is trying to solve??

  3. Pingback: Top 20 Reasons Startups Fail: CB Insights | //Startup News

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