Why Do Startups Fail

Why do startups fail?

Failure. It’s the circle of life in the world of entrepreneurship. There’s no set formula for how to build a successful startup, or how to avoid ‘failing’ at one. However, failure is not something to be ashamed of, and we wanted to talk about this other side of the startup coin. We sat down with three Velocity Business Advisors, Wes Worsfold, Crista Renner, and Bradley Moggach to get their thoughts on why startups fail.

What do you think causes a startup to fail?

Wes: I would say there are three primary reasons why startups falter, stumble, or don’t progress at a pace they would like to. The first is founder issues, specifically changes in the founder team. The longer people have known each other before they create a startup, the more likely they’ll be able to handle the stresses of it. The less they’ve known each other, that can sometimes be a challenge.

Next, sales. Most of the Velocity teams are awesome technical founders, but may not have had the business development or sales experience, and that’s something they need to learn. Often people will leave that part too long, meaning they think they need to make sure their product is perfect. In some cases that’s really valid, because some products need to go through certifications and legal considerations that have to be there. In other cases, they don’t have to be in that state, so why can’t you sell something based on a demo, a powerpoint, a 3D model, etc.? Companies invest all this time and resource into the product and go to sell, but maybe they didn’t get it right. They didn’t get that product/market fit by looking into the business side of their company. That relates because a subsection of sales is all about product/market fit.

The final thing is execution, which means taking all of the necessary steps to take to actually have a successful company and not just a startup. Most people have great concepts, and they’re working at solving a real problem, but being able to execute is mandatory.

Crista: That’s a broad question… I think some should fail. Product/market fit, failure to understand how to launch into the market, those are some pretty significant reasons why; but I really hesitate saying why do most companies fail. I hesitate to say a general statement because there’s also the background to consider. Sometimes it’s a lack of experience, sometimes it’s conflict; but if you don’t have the expertise or the willingness to stretch outside your comfort zone, or if you’re too focused on the solution and don’t understand the problem enough, again that can lead to poor market fit. Scaling is another reason. Of course there is the potential challenge of lack of investment or ability to get investment, but usually, that’s a symptom of something else I just mentioned.

I got this email from Strategizer which talks about how failure saves money. You wouldn’t necessarily think of it in that context, but it speaks to the idea of ‘Fail Fast, Fail Often, Fail Forward’. The quicker you can get to mistakes or failure, the more money you save because you aren’t wasting time. If you compare it to teams working out of the Velocity Garage, they can find out in three months if they don’t have a market for what they are trying to develop, versus wasting two or three years.

Brad: In my experience, there are essentially two things there when it comes to failure: making something that people don’t want, or rather, don’t want to pay for; or having a great idea and poor timing. People want a lot of things, but when it comes to paying for it, they often don’t – and there’s a whole bunch of reasons for that, like not understanding their market or customers. It sounds super cliche, but make something people want to buy. That’s the crux of it. That’s something that people who’ve started something and fail don’t do. Or alternatively, there’s something to be said about having a great idea and poor timing. For example, if Kickstarter had been founded 15 years ago, the market wouldn’t have been ready for it, but because it emerged when it did, they found success.

Is there a way to come back from making one (or more) of those mistakes?

Wes: Absolutely. The likelihood of getting all of these things right on the first try is not as high as if you have the experience of having done it before, learning from that experience, and doing it again. So, the more experience people have in doing that the better off they’re going to be. They can take those learnings from missteps or misfires, and not replicate them (or at least identify them) in a future startup.

Do you believe someone needs to be inherently entrepreneurial (have that ‘it’ factor) in order to be successful?

Crista: Inherently entrepreneurial depends on what you consider to be entrepreneurial qualities. Curiosity, empathizing with customer needs, the ability to tell a good story; those are some good general qualities. The entrepreneurial side needs to be able to take risks, go outside their comfort zone, be resilient and persistence. Whether or not you call someone with those qualities an entrepreneur, you definitely need entrepreneurial qualities. I think that if you don’t take risks personally, especially in terms of stretching yourself and trying things, then you’re probably not going to take the risk to be an entrepreneur. Do you need to be a risk taker? No, you can be measured; but if you’re not willing to stretch you might run into problems. I think good entrepreneurs are authentic, as long as they do what they say they are going to do.

Wes: Great question. In literature, to be considered an entrepreneur it’s nature or nurture. Can you learn it, or are you born with it? I think a lot of the human traits and personality traits of a true entrepreneur are largely inherent, but can a number of them be learned? Yes. Though I think its more skills that can be learned, not really core personality traits. If you look at personality assessments like Myers-Briggs indicators, there’s been research done that would indicate certain personality types have a higher propensity to be entrepreneurs, and maybe even more successful entrepreneurs; but what’s interesting about this, and this is where the debate is in my mind with respect to nurture, is that the number one correlation between being an entrepreneur and not being an entrepreneur is if you have parents or other family members who were entrepreneurs. If you talk to some of the founders here at the Velocity Garage, you’ll be surprised to see how many have parents, or an uncle, an aunt, a sibling and so on who is entrepreneurial. It’s really astounding. If you’ve been brought up in that environment, it validates it.

The other thing I would say is that if you don’t have that influence, then an organization like Velocity is absolutely critical. Velocity, by existing, validates entrepreneurship as a career choice. If you go to a college, university, or even high school that doesn’t have that as a recognized, valid career choice, you’re likely not to consider it. I remember meeting with my Grade 11 guidance counsellor, and when I was asked what I want to do I said ‘I want to run my own business’. The guidance counsellor did not know what to do with me because at that time there wasn’t a school you could go to for that. She just said ‘I think you’d make a good dentist!’ *laughs*. An influencer such as a guidance counsellor with that exposure, without having external validation, means a person will likely not consider pursuing that path. That’s how organizations like Velocity can pick up those shortfalls to really help people.

Brad: No, I don’t personally believe that. I often equate a startup to a slinky. You need someone to lead the charge up front and really stretch the slinky. It’s ok to have people that are at the back of the slinky and staying put because eventually, you stretch the slinky so far that the back has to catch up. We see that dynamic in teams all the time. Don’t get me wrong, having some entrepreneurial qualities probably make it easier, but I also think the term ‘entrepreneurial qualities’ is a little vague and ambiguous. What does that mean? I’m sure if you asked ten people, you’ll probably get some overlap, but there will also be those outliers. It’s tough to say.

Do you see company failures before the company themselves do? As a Business Advisor, how do you try to steer them away from that?

Crista: We try to coach them in a way that helps them stretch their thinking. If they’re going down a certain path and we see that, it’s not that we want to stop them in their path; we want them to stop, look around, and see what other paths they could take, or at least look at their view from a different perspective. I think ultimately, no matter what you tell people, they will tolerate your conclusions and act on their own. They need to feel it, live it, and breathe it before they acknowledge they can’t continue doing something they are doing. When it comes to stepping away from a path, we don’t want them to necessarily act on our conclusions. We want them to see it from their own perspective because I think there’s better closure.

Wes: I call that ‘saving you from your future self.’ Looking into the crystal ball and trying to predict what may or may not happen is definitely part of what a business advisor does, but one of the most important things I feel is to not be overly-judgemental about that. For my own personal style, I focus on identifying those things but dealing with them in a positive way that solves the problem, and not over-prescribing them. We might think we know what will happen in the next five minutes, but we don’t.

I have been continually surprised over my career by individuals, businesses, and startups that you would say ‘That thing will be great’, but because of the things I talked about before like execution, they go nowhere. Similarly, I’ve seen concepts, ideas, businesses, people, and think ‘That’s not going to work, there are all these fatal flaws in it’, and yet they’ve been wildly successful. So, that’s why trying to distill things for me in terms of what makes a difference is an execution. To back that up a little bit, one of the reasons I believe that is that when I look at what’s most important in a startup is the team and the individuals. I know that their idea will change while at the Velocity Garage, and after the Velocity Garage, the market will change. What’s the technology going to generally look like in ten years? Well, who knows, that exponential growth is going faster than ever before. Artificial Intelligence, medical advances; those are all relatively new things and will have an impact. That is why it comes back to the team, because if you’ve got a great team, then they can execute, regardless of the circumstances and the environment.

Brad: I think something we see more often than not is pattern recognition between things that teams are repeating, and other teams that have done it and didn’t work. We try to steer them away from that. We see enough of the same companies over and over, because students all want to solve student problems. We have ride-sharing companies that pop up every week. We have two of those in the Velocity Garage currently, and there’s obviously Uber and Lyft, plus Zipcar and Maven; we’re at six local companies already who do the same thing. So, do we see failures before they happen? Maybe. We more so try to stop people from repeating the same mistakes.

If you asked any company in the Velocity Garage, they would all say they’re unique and special, and when they join we have to remind them “You’re not unique and special. All your problems are literally the same as everyone else’s.” Everyone around you has already dealt with the same problems, so you are doing yourself a disservice to think you are special or unique. Someone else has had to deal with those problems, so you should really be open to learning from the community. A business advisor might tell you ‘you should’, and that doesn’t necessarily mean you should.  We had this one company who spent the month of October doing stuff we told them not to do, and they did it anyway and that’s not uncommon because many entrepreneurs are stubborn. Lots of companies go against our advice and succeed every day. We have companies that go into YC, and one of those companies was thinking about throwing in the towel a month ago before YC. Now they’ve been given a quarter of a million dollars to do something with.

Do you think that discrepancy means anything when a company considers stepping away from their business, but suddenly gets validation from funding or a program such as YC?

Brad: Money isn’t validation. There’s this huge assumption that if you get VC funding, then your company is legitimate, and that’s not the case. You don’t call your friends to brag when you get OSAP loans *laughs*. It’s different because someone is sharing in your company, but the startup community has a really bizarre way of celebrating selling portions of your company so that you can burn through piles of money as you try to prove yourself successful and get market validation. I say that hopefully, it removes their barriers to market, and they get the traction to prove that the money is wanted; this is easier said than executed in practice.

In your area of expertise of [social and service-based enterprises], is it more difficult to see if something will succeed or not?

Crista: From a service perspective, if there’s not a passive revenue model built in somehow, it is so hard to scale. There will be eventual burnout because if I am selling your expertise as (for example) a marketing consultant, we only have as much product as you have hours in the day. From a consulting perspective, it is really difficult to be out there and selling, because now we’ve got lot of sales coming in for January February, March, but we are now delivering, so we are no longer selling, so the next three months are flat, and you are constantly in that cycle. From a service perspective, sometimes it is easier to step back and say ‘what is going to be the baseline revenue across the board, selling or delivering?’

To learn more about de-stigmatizing startup failures, check out Autopsy and Startup Graveyard.

*Disclaimer: Each of the business advisors is speaking from personal experiences within their lives and careers. Their experiences are in no way meant to be construed as universal truths.