By: Scott Carey
Last week the UK saw two London-based startups shut up shop: Karhoo and Yubl.
Inevitably, commentators have rushed in to decipher why and how these two startups were forced to close. And there is no shortage of Medium posts detailing why such-and-such startup failed, or the lessons learned by its founders along the way.
Failure can be a subjective term, and so can some of the statistics around startup failures. Many industry estimates have startups failing at a rate of between 75-90 percent depending on who you believe. Either way, that’s not a great figure.
In basic terms we mean a startup has closed down operations, but ‘failure’ could also mean that it didn’t return on investment, or that it pivoted so hard away from its initial aim that it became a new startup altogether. For example, is Stewart Butterfield’s Slack a startup success story, or was Glitch a failure? It isn’t black and white.
What’s more, startups, like any endeavour, don’t fail for a single reason. CB Insights outlines this at the very start of its 20 reasons that startups fail report: “One – there is rarely one reason for a single startup’s failure. And two – across all these failures, the reasons are very diverse.” The whole report is required reading for anyone in the industry.
Here is a quick run down of the most commonly cited reasons for a startup failing, and hopefully how to avoid making the same mistakes.
Lack of market fit
CB Insights data shows that a massive 42 percent of startups that took part in its survey cited “lack of a market need for their product” as the reason for failure, making it the most significant reason cited. The report states: “Tackling problems that are interesting to solve rather than those that serve a market need was cited as the number one reason for failure”.
The technology may be brilliant, but if you have no clear route to market your startup is destined to fail. Basically, if you don’t have a clear business plan the idea isn’t worth protecting.
George Northcott, head of business development at London startup accelerator Founders Factory, says: “Lots of startups we see find themselves building products that no one wants or there was no market need for. Make sure your company solves a problem and that that problem is big enough to be worth paying for it to be solved.”
Bad business model
This is a similar reason for failure, but with some subtle differences. The recent rise of the artificial intelligence or machine learning startup is a good example of smart founders scrambling to find ways to apply the technology to a specific domain, with extremely mixed results. Most AI startups today, with a few notable exceptions, still feel extremely early stage and have very few actual customers.
This is an experience Robert Tregaskes had first hand with his (now defunct) startup Shnergle. “Fundamentally our business model just wasn’t going to work. We couldn’t pivot to something adjacent as there wasn’t really anything adjacent,” he says.
Andrew Griffin from Oakhall Advisors says: “Jumping on a bandwagon business model is not a business plan. Describing yourself as “SaaS” or “The Uber of….” (recent favourites) is not actually describing what you do, who your customers are, or how you make money.”
Running out of cash
A favourite term of Silicon Valley is ‘burn rate’. This is the rate at which a startup spends money on overheads before generating a profit. Burn rate isn’t necessarily a killer (Uber is burning cash at a historic rate) but it can’t be left unattended to.
“Think in your personal life, how much money you could waste eating out or going to parties. Now imagine that, but running a company: paying salaries, paying for services, lawyers and rent. You can start burning some serious cash extremely fast. It doesn’t matter how rich you are, you can burn all of it if you aren’t careful. Even if you’re minted I’d take a very cost-conscious approach. Because if you don’t you’re either reckless or an arsehole,” Tregaskes says.
Griffin from Oakhall Advisors says: “I don’t have a problem with years of forecast losses as long as there’s a plan to make money at some point, and a good handle on cash burn in the mean time. The closure of Zirtual last year I think marked peak financial illiteracy in the startup world, when the CEO said: “Burn is a tricky thing that isn’t discussed much in Silicon Valley…if you earn $100 but pay out $150, your burn is $50″.
Having the wrong team
It is tempting during the good times to bolster your team, with headcount often being equated to successful growth. Hiring talent creates good feeling and can boost morale.
However, as Farah Kanji, head of talent at startup accelerator Founders Factory said: “I see ‘dead wood’ as a reason for startup failure. Firing is just as important as hiring great people. As soon as you realise you’ve hired the wrong person, let them go. No matter how hard it is to find their replacement.”
Alistair Shepherd, founder at recruitment tech startup Saberr said: “Life at a startup often means working in small teams, in close quarters and within highly stressful environments. Interpersonal relationships and team dynamics often fall low down the priority list for startup founders and managers, but this shouldn’t be the case.”
Getting railroaded out
Tinder cofounder Sean Rad and Twitter’s Jack Dorsey may have managed to get back in after being ousted from their startups, but being forced out of your own company is a serious concern for founders.
It has been brilliantly depicted in TV and film (my personal favourites? Eduardo Saverin being forced out of Facebook in The Social Network, Steve Jobs leaving Apple in Steve Jobs and the fictional struggles of Cameron Howe on the criminally underrated Halt and Catch Fire).
There are many reasons why this happens: not being up to the task, being a better engineer than a leader, backing investors into a corner or just plain arrogance.
What you tend to hear from successful startups is that balance is important: every Jobs needs a Woz; and if you have the perfect founding team, try not to antagonise your investors.
You may think you are building a brilliant, unique product, but no startup is created in a vacuum and sometimes you just have to launch in beta to see what you have and avoid being beaten to market. Your idea may end up creating the market, but that doesn’t mean you will be immune to its forces.
Personal finance startup Wesabe was quicker to market than Mint in the early 2000s, but never capitalised on being first, allowing Mint to swoop in and dominate. Mint was eventually acquired for $170 million, while Wesabe had to shut down.
Making false promises
One of the more cautionary tales of the last year in Silicon Valley has been Elizabeth Holmes and the health tech startup Theranos, which is currently being investigated by federal prosecutors.
Theranos burned brightly since being founded by a nineteen-year old Holmes in 2003, being valued at a ‘what on earth were they thinking’ $9 billion dollars at its peak, until it all came tumbling down. Nick Bilton has detailed how the house of cards came down for Vanity Fair here, but in a nutshell Holmes overpromised on what her technology could do in the hope that she could get it to work somewhere along the way. She failed.
A legal challenge can range from being a minor distraction, like having to change your name, to effectively halting your entire business.
UK Martech startup Yieldify was accused of stealing and copying code from Bounce Exchange in the USA and has had to concentrate a huge amount of effort on fighting these court battles instead of its core business over the past year before settling in July. The experience didn’t kill them, but it probably didn’t make them stronger.
CB Insights notes the example of music startups like having to spend their time and money fighting against rights infringements rather than acquiring customers in the tricky music streaming industry.
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