Monday, May 10, 2010

Why do you think startups fail?

A question posted at Quora...

Why do you think startups fail?
I have seen founders blame investors, investors blame CEOs, CEOs blaming the R&D people, R&D people say the product is fine, the market just doesn't get it, and marketing people blaming it all on the recession.

In your opinion, what are the major strategic reasons for startup failures?

My answer:

Strategic Reasons
1. The market simply isn't there. The startup could be way too early, too early, or just never was. I just hope you don't get in the last category because there will be all these drug accusations.

2. Poor allocation of resources and money. I've seen startups hire too many engineers, spend too much on marketing, or waste it on private helicopter rides to meetings (which mobile startup was that?) and other really idiotic expenditures.

3. Inability to change your business model midstream. Related to the first point, many successful startups have changed their business model midstream when they hit a roadblock. Is the CEO or management team able to be flexible in their thinking, or will the love of their product or personal stubbornness lead to their downfall?

4. Raised too much money. Sometimes too much money creates laziness or undisciplined management decisions. I've been here, so I just called it "management blindspots" or "big rounds are like crack for entrepreneurs" take your pick. Money burns quicker than most entrepreneurs think. It's not paper, it's paper soaked in gasoline.

5. Raised too little money. I've been here too. This is what I call funding to fail. You raise too little and you're always chasing the next bridge loan or funding rounds to take your company to the next half-step. Being greedy with your equity is good, but when it becomes a drag on product development or growth it becomes stupid. If and when you can raise a decent round, do it and don't assume investors will be there at your beckon call a few months down the road. Most people are beauty queens (or kings) only once.

Non-strategic Reasons
1. Lack of trust. Trust really is essential for a startup's success. If there is a lack of trust in the founding team from day one, it will be a slow poison that kills the company. A subpoint is the lack of chemistry. This soft issue of trust and chemistry has killed many startups.

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