Some of the biggest lessons on how to succeed with your tech-startup come from other people's failures. Almost like blazing a trail through the woods for others to follow. The explosion of tech startups over the last two decades has left a wealth of lessons for aspiring entrepreneurs. By learning from the mistakes of other entrepreneurs, you can avoid becoming one of the 90%+ of startups that fail to become profitable businesses.
In this article, we will look at current data as well as our unique experience of working with a large number of tech startup founders to provide insight into the topic of why the majority of tech-start-ups fail.
Here are just 3 of the reasons why tech startups fail:
1. Reason for failure - Market Demand
According to CBInsights, the number one reason why startups fail is due to poor product-market-fit. In fact, they say 42% of startups fail due to poorly reading the market demand of their tech solution or product.
At an early stage of your startup at the idea stage and just after, you need to do your due diligence on product-market fit and keep speaking to the market for insights, feedback and confirmation. Your primary objective should be to validate your assumptions quickly and cost-effectively to pivot you tech quickly if needed and before spending too much time and money on the wrong things. This is why building lean and adopting agile software development is critical to support this approach.
Understand what an MVP is, what validation experiments are and validating learning means. When at the idea stage it’s important to learn fast and change priorities as you receive feedback from your ideal customers and users. The Lean Startup by Eric Ries is a must read for any aspiring entrepreneur on this topic.
Here are some findings from the Startup Genome Project:
- Startups require 2-3 times more time to validate their market than most founders anticipate. (The implication here is that cashflow/availability issues can stop the project before it can be properly tested.)
- Founders miscalculate the value of creating real IP (Intellectual Property) ahead of product-market fit by a staggering 255%.
- Startups that pivot 1-2 times based on feedback, haven shown to grow their user base 3.6x faster and raise 2.5x more money. Startups that pivot 0 or more than 2 times perform significantly worse. (This implies that it is sensible to set aside enough time and resources to try up to two pivots.)
2. Reason for failure - Running out of funds
CBInsights named running out of money or personal funds as the second biggest reason for a startup failing. There will be no shortage of founders who can tell you their tales of stresses and struggles trying to desperately keep their ship afloat but failing from running out of cash.
- The time it actually takes to get to revenue is mis-forecast 9 times out of 10. Too many forecasts use over optimistic revenue forecasts either through inexperience or to impress investors.
- Costs are usually much more expensive than budgeted. Whether it's an underestimate of what's in the financial model, or just a whole range of costs not included in the model, this is often a key contributor.
- Most first time founders aren’t financially trained, so it’s a completely new world when the responsibility to manage finances, cashflows and forecasts is thrust upon them.
- The founder should understand how much cash is left and whether it will get the company to a milestone that will lead to a successful financing or cash flow positive.
- Startup valuations do not change in a linear way over time. Simply because you raised your Series A round twelve months ago does not imply you are now more valuable to investors. To improve a company's valuation, certain key milestones must be met and if they aren’t between funding rounds, then running out of cash is the ultimate risk most startups face.
3. Reason for failure - Weak founding team
CBInsights named another top reason for start-up failure as a weak founding team (23%).
Additionally, research published by Harvard Business School supports this and states that bad management is the prime reason why startups fail.They surveyed leading venture capitalists and discovered that bad senior management was the leading cause of failure in high-potential startups for 65% of them. VCs sent a clear message in their responses: "senior management is the critical ingredient that makes or breaks venture-backed businesses."
To add to all of the above evidence, best-selling author and Harvard Business School professor Noam Wasserman claims in his book, The Founder's Dilemma, that conflict among co-founders causes 65% of high-potential startups to fail. To be sure, this is a daunting statistic, but it should come as no surprise to anyone who has ever tried to start a business.
So what makes a good founding team? We find teams with complementary founders who can divide responsibilities, focus, and move more quickly are often the most successful. These teams can execute in parallel, allowing the company to grow faster.
Great founding teams also have good chemistry in addition to complementary skill sets. They all share the vision, finish each other's sentences, and exude more positive energy together than if they were to run the show alone.
Self awareness of their strengths and weaknesses is critical. Confidence is critical, but awareness of where you need to improve as a founder or recruit to fill the skills you can’t gain or perform effectively is a massive way to de-risk the venture.
Finally, brilliance at executing. They don’t sit around and procrastinate, they prioritise and simply get on with doing the important things that need doing.
Start-up Founders - Don’t let the idea of failure deter you!
Startups are undeniably risky, but with considerable risk comes huge opportunities!
Opportunities not only for financial benefits, but also for progress and innovation that could enhance people's lives all over the world. So, don't let the possibility of failure deter you from steering that start-up ship.
If you’re at a stage in your start-up where you feel you’re ready to raise some funds, then the best thing to do is educate yourself on all there is to know about fundraising.
We find a huge % of founders will waste 12+ months of their work life, trying to raise funds, but then realise they are struggling because they lack the key knowledge it takes to raise successfully.
If you want to save yourself the stress & burnout of 12+ months of hard work for no gain and avoid risking your whole business's ambitions going down the drain, then check out our pricing page now to subscribe.
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