The No. 1 Reason Startups Fail
If you ask 10 successful entrepreneurs or venture capitalists why startups fail, you'll probably get 10 different answers. That's because there's no shortage of common failure modes:
- They don't solve a big customer pain point way better than other solutions. - They invent technologies, not products. - The target market's too small or just plain wrong. - Their burn rate's too high. - They try to shoestring it and run out of cash. - They can't scale. - The lack of focus. - Their cofounders clash. - There are no competitive barriers.
Yup, there are lots of reasons why startups fail and every one of them is valid. But here's the thing. There's actually one basic cause underlying all those failure modes. It's actually quite simple and yet, its implications are surprisingly broad.
Here's the problem: Founders don't often know what they're doing. No, I'm not trying to be flippant here. It's not a crime, just the truth. They don't know what they don't know.
And even if they have the wherewithal to ask smart people the right questions, they get all sorts of conflicting answers and don't know who to listen to. So they end up taking their best shot at a plan and operating more or less in a vacuum. Sometimes that works out. But not usually.
The truth is that, when it comes to startups, there are simply too many variables, too many tough decisions to make, and too many voices and opinions. Moreover, founders can't help but have relatively narrow and oftentimes limited experience. I don't care who you are; that's a tough equation to solve.
I've been around Silicon Valley for decades. I've seen loads of startups with great technology and a round or two of venture funding that still managed to languish for years because of bad advice, strategy, and decisions that triggered one or more of the aforementioned failure modes.
Speaking of good advice, here's some to help you avoid that fate:
Go out for funding sooner rather than later. Pitching for angel funding or venture capital is the best way I know to engage some really smart, experienced people in dialog about your company. It's the best way to punch holes in your concept, find the weak points, and get you thinking about what you hadn't considered. And if you get funded, then they've got skin in the game. It's in their best interest to help you.
Get an angel to take you under his wing. Find an angel investor who's willing to be actively engaged, take you under his wing, and fund you to demonstrate your concept. It doesn't have to be one of the big super angel firms, but you don't want a wannabe, either. You want someone who's done a lot of deals with good VCs, preferably in your specific domain. You don't want a software guy to help you with biotech.
Get investors to tell you the cold hard truth. VCs tend to be very polite. Don't let them get away with that. Draw them out. Ask pointed questions like, "What would it take for you to fund this right now?" Then listen, I mean really listen, to what they say and, just as importantly, to what they don't say.
Not all investors are created equally. There are VCs and there are VCs. Some firms are great at mentoring entrepreneurs and making connections. Others, not so much. Not all partners are created equally, either. After all, they're human. Then there are venture arms of product companies like Intel and Google, private equity firms, and debt financing companies. You want early investors that will add value and be engaged. Money's only part of the deal.
Find an outside advisor... or two. Since not every startup gets funded by a leading firm like Sequoia, DFJ, or Benchmark, you might still need to poke around and find some people you can trust to give you solid advise. Unfortunately, there's no simple rule for doing that. You've just got to work your network and, with any luck, find a former executive in your field who's willing to actively engage with you in exchange for a piece of the action.
The bottom line is this. Some entrepreneurs come up with an idea that goes viral out of the gate and they're off to the races. You should be so lucky. Startups are usually a marathon, not a sprint. The sooner you settle into that mode and find yourself some solid advisors you can trust, the better chance you'll have of avoiding all those failure modes.
This column originally appeared on Inc.com.