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2 Big Reasons Most Startups Fail

It’s widely accepted that a lot of businesses don’t survive the first year. But hi-tech startups are a different story, because when they fail they fail big time.

Global Influencer

Global Influencer
Global Influencer

It’s widely accepted that a lot of businesses don’t survive the first year. The stats in Canada show that only 15% make it to the first anniversary. Hi-tech start-ups are a different story because when they fail they fail big time.

Don’t get me wrong, founding a successful start-up is easier than hitting a hole in one or making it to the NHL but it is full of risks, and yes, most fail. The odds of a successful start-up are better than finding a gold mine (one in 10,000) but not as good as finding a good oil well (one in three).

Usually the failure results on bad decisions on two fronts – product and management.

Products that come from start-ups range from the boring to the sublime and everything in between. The usual problem with the product side is that a new product provides several challenges to the founders. If it’s a new product it has no history.

Some start-up founders flog their new concept to potential customers who don’t need it or want it, which the founders would have known if they had done proper market research. They either didn’t know how to market a specific product correctly or didn’t know the market demographic.

Is the product too close to something else? Start-up COLOR raised $41M in their first round. They had an impressive management team and triple A investors but their photo sharing app was too close to Facebook, Instagram and Twitter. There was little differentiation to make it work.

Ahh, my favourite cause of start-up failure – management! Sure management gets the rough treatment all the time but essentially besides product issues, management is the clear cause for failure.

Start-ups don’t have good management. They’re usually founders with great ideas but they may not know how to run a large-scale techco. Then again start-ups are notoriously underfunded, understaffed or managed, throughout the structure, by inexperienced managers – just another good reason not to hire your best bud to manage sales and marketing.

The strange thing to me is that there is little stigma in start-up failure. I guess so many are seen as long shots and big risks that people just assign a different attitude to start-up failures. Founders think, ‘well it is Other Peoples Money (OPM) they will soon forget’ –and they do! If investors like the founders they seem to be on board for the next great idea from them.

You may have heard of “Fail Fast, Fail Often”. I can’t remember who coined the phrase but the Globe and Mail wrote a piece on it saying it “may be the stupidest business mantra of all time.” Unfortunately, founders have taken that phrase to heart and say, ‘oh well I guess I failed again but I learned something this time.’

I think the phrase was meant for DevOps so they didn’t get discouraged with writing code.

Of course, the common outcome of a start-up failure is the educational value. Sure, let’s use other peoples hard earned money to learn how to run a company down the road on our next one. Sure running a start-up into the ground is a learning experience as long as the start-up actually got to a certain stage in development. You’ve never learned anything if you didn’t get past the starting gate. I think employees of a failed start-up often learn more about ‘how to’ than the founders. They can see the whole thing unfolding from an observable distance.

Another reason for failure for the ages is not selling the start-up at the right time. I think this is either hubris by the founders, lack of experience or plain poor judgement.

I remember meeting Jerry Yang, one of the founders of Yahoo, and being amused by his title of ‘Chief Yahoo’ on his business card. When you follow the history of the business as it unfolded over the years I would have chosen a different description. In fact, Yang was either too nice or too unwilling to make hard decisions.

Yang was considered one of the geniuses of the Internet age but alienated everyone from customers to investors to the companies it aggressively acquired. It was always dominated by a ‘banker culture’ unlike the cool guys from Google and Facebook.

Yahoo sold a couple of years ago to Verizon VZ for around $4B, the two founders made a lot of money. Sounds incredible but they had been offered an exit of $45billion by Microsoft MSFT in 2008 in an effort for Microsoft to compete with Google GOOGL. Heck, Yahoo at one point was in talks to buy Google for a billion. Arrogance? Well it was a combination of terrible CEO’s (Marissa Mayer) over the years, bad strategies and bad overall management.

BETTER PLACE was a lithium battery swap subscription service for electric car owners. With a high cost of entry (massive inventory), little market research and a service that filled a need no one wanted they lost $850M before disappearing down the rabbit hole.

TRADA, a crowdsourced online advertising service, had their downfall when they didn’t anticipate the market going from outbound marketing to inbound content marketing. More millions of investors’ money down the drain.

Just to point out that not only hi-tech companies fail, PETS.COM lost $100M before closing. Their mainstay products bags and cans of dog food were heavy and shipping was expensive. They discounted everything to move it to the point that they sold everything under cost to create cash flow. No one bought their expected toys for animals’ product lines that had the good margins.

If you look at all those failures it’s obvious that poor decision-making played a big role in their failure. You must also include poor market research, i.e. not knowing your market, bad business models and/or overall strategies as issues as well. One thing to note is that none of those mentioned lacked initial funding. They failed in spite of having millions in the bank.

What’s the bottom line? Watch your capital, know your customer, hire expert management, have long-range strategies/goals and do your research.

Oh, and don’t use your start-up as a learning opportunity for your next start-up.

Gary Bizzo is CEO of Bizzo Management Group Inc. in Vancouver. He has mentored over 1000 business leaders, investors and entrepreneurs. London-based Richtopia placed Bizzo on the Top 100 Global Influencers in the World for 2018.