Why Most Startups Fail
BRIAN HONIGMAN
FROM BRIANHONIGMAN.COM
Content Marketing Consultant & CEO of Honigman Media
While 400,000 new businesses start every year, 470,000 small business will shut
their doors in the same period.
That’s a net loss of 70,000 businesses a year. Yet, the US has one of the highest
rates of entrepreneurship in the world, and has the highest confidence rankings
by a decent margin.
The statistics for web or tech startups in particular are even worse. According to
multiple sources, the failure rate for new tech startups is around 90%. And this
failure typically occurs within the first 120 days.
As noted entrepreneur and founder of renowned startup incubator Y
Combinator,Paul Graham put it bluntly in a 2007 speech:
If you can just avoid dying, you get rich.
It seems as though Graham’s intuition is backed by some compelling data. The
aforementioned 90% failure rate applies to startups in Round-A seed funding.
By the time a startup gets to the second round this rate dips below 50%. And
once a startup has made it past C-Round funding it’s success rate is at 90%!
Sure, one could argue that the startups that make it past the vetting process of
these VC’s are already primed for success, but the sheer magnitude of change
suggests that there is more to the answer than this and that this answer might
apply to a broader range of businesses than the VC-funded startups.
In that same speech I quoted above, Graham notes that most startups don’t just
die “mid-keystroke.” They typically die either because funding falls through, or
a key founding member bails. Both of these fates befall startups when they get
demoralized.
The reason that so many entrepreneurs get demoralized early on is typically due
to some innocuous seeming mistake that quickly evolves into systemic business
issues.
In this article I will highlight a few of these mistakes and how I believe they can
best be remedied, overcome and/or prevented. In this way, your small business
can survive past the vulnerable early startup period and ultimately go on to
develop successfully.
Companies Don’t Start with a Story
A study from Babson college on entrepreneurship shows that a remarkably low
proportion of American entrepreneurs started their business based on what the
study referred to as “necessity.” Basically, this means that most entrepreneurs
didn’t start their business because they had no other choice.
The lion’s share of startups are instead “opportunity-driven.” This means that
somebody already had a steady paying job and decided to leave and start his/her
own business anyways. If you’re going out and doing this, you better have a
pretty good reason.
The Problem
The crazy thing is that so many “opportunity-driven” businesses seem to be
fueled simply by a desire to make money. Obviously this is a crucial component
of any business, but unless your business is started out of necessity, money
should be a means to an end, not an end in itself.
If you are an opportunity-driven startup, you better have a better reason for
existing than to “make money.” Only necessity based startups can have this for
an answer and be authentic. In every other case you seem desperate and/or
selfish.
No matter your business, chances are you are not coming up with a product or
service so innovative that it creates its own class or so efficient that it outclasses
an entrenched competitor. Nearly all upstarts only stand a chance if they can tell
a new, compelling story that resonates with and attracts an audience.
The only way anyone is going to buy your product is if they buy your story. And
your story will never be compelling if you don’t have a clear, credible reason
for existing. If your reason for existing is that you want to take money from a
bunch of people’s pockets and put it into yours (or grab “market share” in
corporate speak) then nobody will look at you twice. You will be forced to
compete directly with all the other businesses who have this goal (a lot) and you
will have a very tough road ahead.
The Solution
The only way to remedy this problem is to think long and hard about your
motivations for starting your business. This is not a very easy thing to do, but
luckily some really smart people have already thought a lot about this problem
and offer fantastic free advice.
One of the best thinkers regarding these types of problems is Simon Sinek, who
outlines an effective approach to tackling this difficult question in his TED talk
titledStart With Why.
Sinek provides a framework for thinking through this question that he calls the
“golden circle,” which is just three nested circles with “Why” in the center,
followed by “How” then with “What” at the edge.
Most companies just start with what they do, and pretty much end there.
However, this type of messaging doesn’t really resonate very strongly with
people. “You bake bread (make cars, design dresses, etc.)… Ok, so what?”
As Sinek repeats over and over, “People don’t buy what you do, they buy why
you do it.” Understand why your business exists and simply communicate that
to your customers, and suddenly you’ll be speaking in a language that people
understand.
Take the time to create your own “golden circle,” paying particular attention to
the “Why” behind your business. The catch is that this can’t include anything
about money or mention the thing you actually plan on selling.
For example, Apple’s “Why” isn’t “We exist to make great computers.” Instead
it is, “We believe that beautiful design and elegant products can change people’s
lives.”
That kind of appeal actually makes people want to buy into what you’re selling.
People don’t buy what you do, they buy why you do it.
Businesses Don’t Focus on Process
According to the Wasp Bardcode State of Small Business Report one of the top
ten reasons small businesses fail is something as basic poor inventory
management.
While inventory management might not be something that is applicable to all
businesses, it is indicative of a broader problem many small businesses face – a
lack of focus on establishing processes.
The Problem
When a company is young and just starting out, there is a constant fight to
simply stay afloat. Things come at you very quickly and just getting them out of
the way so you can deal with the next thing seems like the only priority.
However, if you don’t develop a methodical way to deal with the inevitable
issues of doing business early on, each time you tackle a challenge you’ll be
reinventing the wheel.
Process isn’t only important because it allows you to efficiently and effectively
tackle business issues, it’s also crucial because the methods you put in place can
help guide the overall direction your business is taking.
The Solution
Let’s return for a moment to the “golden circle” exercise from the last section.
As mentioned, the first step towards filling out your business’s own golden
circle is to address the reason “Why” your business exists.
The next step is to establish the “How” based on this, and it just so happens that
defining business processes are a perfect way to fill in this blank.
The thing about business processes as a whole is that they tend to be very
specific depending on your industry and unique situation within it. This makes it
difficult to dole out tactical advice, but there are some general guidelines that
apply to nearly all businesses.
When outlining processes for your businesses there are two core considerations
to keep in mind. First of all, make sure that they are laid out explicitly in a way
that anyone can understand.
This seems obvious, but oftentimes entrepreneurs will have a clear idea of how
a process works themselves, but as the business scales they find it difficult to
communicate these procedures to new members of the team.
The second guideline addresses the first in a tangential way and also
incorporates our discussion of the golden circle. To build a robust set of
procedures for your business, allow your core set of beliefs to inform the way
you approach these problems.
A great example of this is the way that Zappos has built their business. Their
why is stated pretty clearly right on their “about” page. “We’ve aligned the
entire organization around one mission: to provide the best customer service
possible. “
This mission statement has obvious implications towards informing Zappos
customer service strategy, and famous examples of Zappos’ legendary customer
service abound.
However, what might not be as obvious is how their adherence to this mission
statement affected a different department. Let’s say (returning to the example
we began this section with) inventory management.
Inventory might seem as distant from customer service as possible, but as this
article based on CEO Tony Hsieh’s book Delivering Happiness illustrates
beautifully, for Zappos they were fundamentally linked.
In the early days of Zappos, they used drop shipping for a majority of their
orders, but “outsourcing that to a third party and trusting that they would care
about our customers as much as we would was one of our biggest mistakes.”
While this decision to drop ship was “easy money,” once Hsieh realized the
impact it was having on customer service he realized he needed to defy best
practices, and then the decision of how to address the issue was easy:
“We run our warehouse 24/7, which actually isn’t the
most efficient way to run a warehouse…but we’re not
trying to maximize for picking efficiency. We’re trying to
maximize the customer experience, which in the e-
commerce business is defined in part by getting orders
out to our customers as quickly as possible.”
Anticipating the problems your business is likely to face and arming yourself
with a prescribed approach for working out the answer does more than just
solve the issue at hand. If you craft these approaches based on what you believe,
each time you carry one of these processes out it contributes towards building
your brand.
Companies Don’t Identify What is Working
Most of the time we judge something as being a success because of people’s
reception to it. While this is a great practical barometer, just because we know
people “like” it doesn’t mean we have any clue why people like what we’re
doing.
People like chocolate ice cream. That conclusion is pretty easy to come by. But
why do they like it? That’s trickier. Obviously a part of it is because people
need to eat, but it also has something to do with our biology, and maybe our
nostalgic association, then there’s the matter of preference.
If something as straightforward as ice cream is difficult to dissect, then how
much more difficult is it to figure out why people like your analytics software?
Truth is, discovering why people like what you do is difficult. However, it’s
also necessary to succeeding consistently.
The Problem
Even companies that experience initial success have a tough time replicating
that success and continuing to deliver whatever it was that attracted their
customers in the first place.
This is due to a lack of awareness about where your organization’s strengths
actually lie, and an additional blind spot surrounding what exactly about your
offerings your customers find so attractive.
Luckily we can return to our handy golden circle to help root out the answers to
this common problem.
The Solution
If you’ve built your business around a core fundamental ideology and then
constructed business processes that reflect these beliefs, everything you end up
doing as a result will have a common DNA. Put simply, if your principles are
focused, then not only will the resulting products/services be good, but all of
them will be good for very similar reasons.
A great example of this is lifted from the fantastic new book How Google
Works by Google executives Eric Schmidt and Jonathan Rosenberg.
After devoting the first few chapters to clearly outlining the core values the
Google stood for and then the way those values translated into processes (just a
note, they never mention the golden circle framework, this is just how they
instinctually viewed their business), they begin talking about the resulting
products.
In relating a story of a meeting they had in which they tried to identify new
potential opportunities, they began looking back at the less successful Google
products. What they discovered was that:
when [they] look[ed] back at other Google products that
didn’t make it (iGoogle, Desktop, Notebook, Sidewiki,
Knol, Health, even the popular Reader), they all either
lacked underlying technical insights from the outset, or
the insights upon which they were based became dated as
the Internet evolved.
In the context of the overarching story of Google’s evolution as a company, this
makes perfect sense. Google’s core reason for being was to offer the most
accurate and useful product to their customer, the processes they set up to make
sure that happened was to hire only “smart creatives” and to create a work
environment that fostered innovation, and the end result were simple, useful
products that exploited practical technical insights.
When spelled out like that, it seems rather obvious why Google’s products
appealed to users, but the reason it is so clear is because Google followed this
framework to a tee.
Pinning down these fundamentals from the beginning might seem like a
secondary concern in relation to the very real and present danger of just keeping
your head above water, but what I hope I’ve convinced you of is that thinking
about this stuff from the very start and incorporating it into the DNA of your
business is crucial toward staying afloat in the long term.
Although missteps are unavoidable, the real reason that entrepreneurs feel
demoralized enough to let their businesses die is typically because (barring
some catastrophe) they feel like their business has gone down the wrong path.
Having clearly set goals and this kind of self-awareness gives you a roadmap for
what success looks like and can give you the vision and conviction to follow the
advice of Percolate co-founder, James Gross.
Startups fail because they can’t find product/market fit
and they give up before finding it. How do you avoid this
downfall?
Never give up.
For more insights on how to be a better marketer, sign up for Brian
Honigman's weekly newsletter.