Have you lost money through an investment in a startup? Don't feel too bad because you're in good company!
Kim Basinger, Nicolas Cage, Burt Reynolds, Hulk Hogan, Eva Longoria, Kiefer Sutherland, Selena Gomez, and Neil Young are just some of the stars that have invested anywhere from several hundred thousand to tens of millions of dollars into great ideas, supposedly great teams, or the next world-beating product, only to meet with failure. And yes, I know what you’re probably thinking. They could afford to make a bad investment, and be able to pick themselves up and keep moving forward. The average person not so much. And you’d be right.
Being rich was never a good indicator of one’s ability to pick a winner when it comes to investing into a person, company, idea or product.
So, what’s going on here? Why do startups fail? And more importantly, how many startups fail?
This is a question I hear a lot from Startups, corporations, investors, economic development folks,
academics, and journalists.
I’m from a Banking and Investments business background and have invested in and started up nine (9) companies in the past 26 years. For the past 5 years, we’ve used a company called CB Insights to conduct market intelligence. It wasn’t always the case, sadly.
Their market intelligence enables us to see which companies and startups have the best innovations and smartest products by following investments made by the biggest corporations. Need to know which tech startup Alibaba has poured money into? Which IT service provider nabbed a fat contract from Amazon? CB Insights reveals all and more so you can also place your bets on future winners.
In their 2019 updated study of why startups failed, they analysed 101 failed companies and came up with their “Top 20” reasons why startups fail. I’ve done my own post mortem of investments I’ve made that have not panned out. So I thought I’d do a head-to-head comparison of my small universe of experience vs a data munching monolith like CB Insights!
Let’s first look at my Top 5 reasons vs CB Insights, and then I’ll take a closer look at the remaining reasons their research uncovered.
CB Insight’s Top 5 Reasons Why Startups Fail.
Pricing is a dark art when it comes to startup success and startup post-mortems highlight the difficulty in pricing a product high enough to eventually cover costs but low enough to bring in customers.
Delight IO saw this struggle in multiple ways, writing,
“Our most expensive monthly plan was US$300. Customers who churned never complained about the price. We just didn’t deliver up to their expectation. We originally priced by the number of recording credits. Since our customers had no control over the length of the recordings, most of them were very cautious about using up the credits. Plans based on the accumulated duration of recordings make much more sense for us and the number of subscription showed.”
The 2019 shutdown of genetic testing and scientific wellness startup Arivale came as a surprise to many partners and customers, but the reason behind the company’s failure was as simple: the price of running the company was too high compared to the revenues it brought in:
“Our decision to terminate the program today comes despite the fact that customer engagement and satisfaction with the program is high and the clinical health markers of many customers have improved
significantly. Our decision to cease operations is attributable to the simple fact that the cost of providing the program exceeds what our customers can pay for it. We believe the costs of collecting the genetic, blood and microbiome assays that form the foundation of the program will eventually decline to a point where the program can be delivered to consumers cost-effectively. Regrettably, we are unable to continue to operate at a loss until that time arrives…”
Despite the platitudes that startups shouldn’t pay attention to the competition, the reality is that once an idea gets hot or gets market validation, there may be many entrants in a space. And while obsessing over the competition is not healthy, ignoring them was also a recipe for failure in 19% of the startup failures. Mark Hedland of Wesabe talked about this in his post-mortem stating:
“Between the worse data aggregation method and the much higher amount of work Wesabe made you do, it was far easier to have a good experience on Mint, and that good experience came far more quickly. Everything I’ve mentioned — not being dependent on a single-source provider, preserving users’ privacy, helping users actually make a positive change in their financial lives — all of those things are great, rational reasons to pursue what we pursued. But none of them matters if the product is harder to use.”
Children’s apparel delivery service Mac & Mia found itself in a tough spot competing with highly successful companies like Stitch Fix and shut down only a year after its 2018 launch:
“Mac & Mia faced a host of competitors in the children’s delivery box space, including the aforementioned Stitch Fix, which launched its kid’s clothing service in 2018. Stitch Fix went public in 2017 and has a market cap around $2.7 billion. At least 20 other upstarts have launched similar delivery services for children’s clothes.”
A diverse team with different skill sets was often cited as being critical to the success of a company. Failure post-mortems often lamented that “I wish we had a CTO from the start,” or wished that the startup had “a founder that loved the business aspect of things.”
The Standout Jobs team wrote in the company’s post-mortem,
“…The founding team couldn’t build an MVP on its own. That was a mistake. If the founding team can’t put out product on its own (or with a small amount of external help from freelancers) they shouldn’t be founding a startup. We could have brought on additional co-founders, who would have been compensated primarily with equity versus cash, but we didn’t.”
In some cases, the founding team wished they had more checks and balances. As Nouncer’s founder wrote, “This brings me back to the underlying problem I didn’t have a partner to balance me out and provide sanity checks for business and technology decisions made.”
At Zirtual, which was forced to lay off 400 employees overnight after a series of financial mistakes and miscalculations, cofounder and CEO Maren Kate Donovan later admitted that one key
mistake was not bringing a CFO onto the board:
“If [a board] had actually been in tune, this would have been caught like six months ago… I blame myself on a lot of this, in not hiring more experienced people, but it wasn’t any maliciousness beyond just naivete…In retrospect, if we had a senior finance person and a senior ops person it would have been a completely different story.”
Money and time are finite and need to be allocated judiciously. The question of how should you spend your money was a frequent conundrum and reason for failure cited by startups (29%). As the team at Flud exemplified, running out of cash was often tied to other reasons for startup failure including failure to find product-market fit and failed pivots,
“In fact what eventually killed Flud was that the company wasn’t able to raise this additional funding. Despite multiple approaches and incarnations in the pursuit of the ever-elusive product-market fit (and monetization), Flud eventually ran out of money — and a runway.”
In September 2019, augmented reality startup Daqri shut down after burning through more than $250M in funding and failing to raise a new round from investors:
“Daqri faced substantial challenges from competing headset makers, including Magic Leap and Microsoft, which were backed by more expansive war chests and institutional partnerships. While the headset company struggled to compete for enterprise customers, Daqri benefited from investor excitement surrounding the broader space. That is until the investment climate for AR startups cooled.”
European budget airline Wow Air met a similar fate; Chairman Skuli Mogensen wrote to employees:
“We have run out of time and have unfortunately not been able to secure funding for the company…I will never be able to forgive myself for not taking action sooner.”
Tackling problems that are interesting to solve rather than those that serve a market need was cited as the No. 1 reason for failure, noted in 42% of cases.
As Patient Communicator wrote,
“I realized, essentially, that we had no customers because no one was really interested in the model we were pitching. Doctors want more patients, not an efficient office.”
Treehouse Logic applied the concept more broadly in their postmortem, writing,
“Startups fail when they are not solving a market problem. We were not solving a large enough problem that we could universally serve with a scalable solution. We had great technology, great data on shopping behaviour, great reputation as a thought leader, great expertise, great advisors, etc, but what we didn’t have was technology or business model that solved a pain point in a scalable way.”
Kolos was direct about its biggest mistake:
“With Kolos, we did a lot of things right, but it was useless because we ignored the single most important aspect every startup should focus on first: the right product.”
So How Did My Own Experience Stack Up Against A More Comprehensive Study?
If you look at the side-by-side comparison, three of the five themes are similar.
Perhaps I was slightly luckier or more experienced than some of those startups that CB Insights investigated. However, in my experience as a Startup Mentor and Advisor, I agree with CB that for first-time Entrepreneurs who have never been responsible for running a business of any kind before, two very common mistakes are, taking your eye off the monthly budget vs actual and hence burn through your capital faster than you are raising it or making sales, and falling in love with your own invention or idea to the point where you are unable to see that consumers can make do with what they have, or that someone else can and will come up with a better, cheaper, faster, nicer etc. solution, rendering yours useless.
I’ll leave the final word on this topic to people who are legends in the world of startup investing.
A month after Paul Graham, Jessica Livingston, Trevor Blackwell, and Robert Morris started the Y Combinator seed accelerator in 2005, they picked “make something people want” as their motto.
This (admittedly) short and somewhat anecdotal study shows that failing to do this is one of the easiest ways to guarantee startup failure.
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As always, I wish all of our readers an abundance of health, wealth and happiness.
Jim
