Why most startups fail … and here’s how not to

It’s easy to think of the latest startup like a pimple in the middle of your forehead: you wake up one morning and it’s all you can see. And then, one day, for no specific reason, it’s gone.

“Anyone know what happened to Whatchamacallit?” After some enquiry, all you’ve got is a handful of rumours and a bucket of spin. All we know for sure is that it’s over. Truth is, most of the time, it failed because of the same reasons so many other startups fail.

There will always be special individuals who find exceptional ways to kill their business, like setting fire to your parent’s garage, destroying the code as well as the backups. But the majority of startups fail in far more mundane ways.

Having been in the venture capital game for a number of years, I have seen it all. Here are the key reasons I’ve seen startups fail… and ways to avoid making the same mistakes:

1. Not understanding the user

Your plans are based on what you think the user wants, and maybe you even have a few buddies who thought it was cool. Make sure you take the time to find out exactly what the user wants and how they like doing things. Be careful about telling them how they should act, this usually backfires.

2. Too in love with the tech

You love adding features: “Wouldn’t it be awesome if we could also let them Skype with the dead?”. You’re building an elephant, but haven’t tested any of it. Maybe users only need the trunk. Keep it to the core and market-test before you go wild on features. Getting this wrong has massive knock-on effects.

3. Launching too slowly

If you’re building that elephant, you’ll keep holding back on the launch until everything is perfect. It will never be fully ready or tested – and your competition will hit the market with a good basic solution. So keep it lean, get to market fast, and add functions as user demand warrants it.

4. No real sales strategy

Capturing 20 percent of the market is not a strategy. Who will be your first customers? How do you reach them? What does it require to close the deal? How many sales people do you need to do this? What will the sales number look like based on all of this? Brush past these questions and you will have drastically overestimated your revenue.

5. The market is too small

It’s easy to pick a niche that doesn’t seem too challenging. Remember you may face competition, even in that niche, and end up with a potential market that is just too small to support a sustainable business. Make sure your market is big enough – and growing.

6. Basic copycat

Enter the many thousand Groupon clones around the world. Working international concepts have been launched successfully locally, but only if you’re the first to do it locally. Doing this in a busy market because you see current players making tons of money is a sure recipe to burn cash and stay small. I learnt this lesson well, launching a super-cool sunglasses brand … one of hundreds in the market, and just before a recession – damn! We sold some, of course, but the big boys in the market sold millions. Be different, not “the same but better”.

7. Fast burner

You ramp up your costs for a big development team to match the massive revenues you expect. The revenues don’t happen and you’re suddenly burning money faster than a new MP planning gala dinners. Get into the market with the basic product and start generating revenue. When the conversion metrics show you’re getting it right, then you can grow the spend.

There are more reasons why startup businesses fail, but these are the most important and common. Of course, the easiest way not to fail, is to not start. Fortunately, you’re not scared – and now you’re just a little a little more likely to make it. Good luck!