When it comes to lists of reasons for startup failure—or ones like this one about common mistakes that doom startups—you could find Top 10, Top 20, even Top 25 of them. Because the reasons are plentiful and often actually common.
But let's take a look at the top five, that are:
• Most common: These mistakes occur regularly and are agnostic in their choice of the kind of startups they afflict. And,
• Most damaging: A long list of mistakes to avoid is nice to have, but the havoc potential of these five is up there and mostly undisputed.
Additionally, it's useful to look at a list of mistakes rather than a list of reasons for startup failure, simply because ‘mistakes’ imply internal and somewhat controllable factors whereas several common ‘reasons' such as inability to raise funds, a shift in market needs and competition are external to the startup to varying degrees. Let’s dive in.
Not focusing on profits
In the world of startups, there's a tendency to regard profit as a dirty word. Scale—in the form of customer acquisition and revenue growth—is given precedence over all else. Perhaps VCs are partly to blame for this, since they value scale far more than profits, just because the next round’s likely VCs value scale far more than profits, and so on.
It doesn’t help that, often, scale and profitability are inversely correlated (if you sell cheap or spend more on marketing then you sell more!). The main pitfall in pursuing scale aggressively is ever-increasing customer acquisition cost (CAC), the Waterloo for many startups
Besides the single-minded focus on scale at the cost of all else, the other mistake startups make is spending too much. The need to have the best of hardware, software, brainware, offices, or branding in order to show you have arrived burns capital with not as much to show for it.
Even if you can’t sight profits, at least keep your eye on the path to profits. Carefully plan targeted breakeven (cashflow, EBITDA, and net profits) with teams and set deadlines that should not be altered unless absolutely unavoidable.
Build CAC discipline early on; set your thresholds based on your domain’s benchmarks, adjusting for whatever you will need to do as a new entrant. On other costs and overheads, remember there are usually less expensive ways of getting things done that get you more bang for the buck.
Outsource where you can or engage freelancers, if you're assured of the same result, especially early on. Budgets sound painful but get into the habit of making expense budgets, reviewing them, and enforcing them right from the start.
Team dynamics drive a startup when there is little else going for it—when you are burning out, when your capital is burning out, when getting customers is a challenge.
It takes fortitude to keep going and much of that comes from how the team works against odds. The team gets you through the bad days and is there to celebrate on the good ones. It's as much about the dynamics between co-founders and between them and the rest of the team, though poor dynamics between co-founders is as common as it is damaging.
One common and very damaging failing on this count is the ‘know it all/do it all’ founder. This entrepreneur believes in his abilities even more than he believes in his idea. While founders need to wear many hats, they don’t HAVE TO do it all themselves (and humanly cannot!).
Going it alone and trying to do it all yourself is not as bad as having a team and signaling that you know better, though. The angst and bitterness this creates in people who are there for execution, or are better at the task, and yet are subjected to micromanagement by overbearing founders is recipe for disaster.
To start with, have co-founders; choose them wisely, and trust them completely. This relationship has high combustion potential because you will be living through a journey that likely will be very stressful, taxing, and volatile.
An alignment of objectives is important but an alignment of value systems at a personal level is just as important—for good times and bad. You can’t have otherwise well-meaning and perfectly able co-founders working at cross purposes because personal goals and outlooks differ greatly.
Secondly, delegate. Identify team members you can lean on in good times and bad. Technical abilities are obviously important but you also need to seek out people who understand you, your startup, and your objectives. Such people also need to be capable of the balancing act of working independently while being able to seek and accept guidance from you.
Overdoing the stealth bit
Every founder believes in his/her “big idea”, some to the point of obsession. This is necessary—why else would you risk starting your venture? However, this can be taken too far: You couldn’t get them to tell you their name without signing a 5-page NDA first!
Being cagey about sharing information, seeking guidance, taking and inputs just because you are suspicious of everyone’s motives other than yours results in a one-man show for a one-man audience–YOU.
Being too much in love with your idea for too long, while believing the world is conspiring to steal it from you deprives you of the opportunity to course-correct before a full launch. There are dependable people out there who are willing and able to help you out–use them!
Talking to too many people may be damaging as well. Misdirection can be expensive in the short and long run; you really do not have the bandwidth to track inputs from many sources, especially when they are conflicting.
The most valuable insights can come from current and former entrepreneurs in or outside of your space. People who are not necessarily competition, who can even be potential partners.
Don’t hesitate, especially at the ideation phase because idea to business is a complex and difficult journey, and idea to business to viable business even more so. The more you can refine your idea and business plan outside of your echo chamber, the better your chances of success.
Poor funding strategy
Bleeding capital (cash burn) is a peculiar characteristic of startup life. Timing funding rounds well and getting the amounts right is a fine art. Underestimating the funds needed is, again, common and very damaging.
Cash burn rate calculation errors usually come from getting your milestones and goals wrong, miscalculating timing and extent of traction or scale, spending too much, trying to grow too fast, or misjudging the competition’s drive or its war chest size.
A question: Why do founders make such egregious errors so commonly in such fundamental matters? Optimism. Startup founders need to have a belief in their idea, its potential, its scalability, and its advantages over anything else on the planet. Why else will they risk starting their venture?
Remember, while raising more than you need will not kill your startup, it can be damaging if it leads you down the slippery slope of being profligate with money.
An important and underrated point on funding strategy—as with co-founders, get your investors right as well. Their money may have no color but they do! Your investors need to be aligned with your vision, goals, objectives, and value systems because the pressure, oversight, and expectations will be real; being pulled in a direction you don’t agree with will be ugly.
Calculate exactly how much money you'll need and at what stage. Hold the optimism in your estimates. Keep this funding plan dynamic and current, and start your fundraising prep a few months before you actually need the money.
Next, raise enough capital to make it through:
- Your burn period
- The next milestone
Don’t raise much more than what you need to get to the next milestone, because raising rounds after the milestone means a higher valuation!
Failing to plan
Failing to plan is planning to fail. Planning may seem tedious, especially when you are like a wound-up spring eager to get things done, but without a well-thought-through business plan, financial plan, and marketing plan, you'll be navigating without a rudder.
Planning is an exercise in caution and we go back to the point on optimism made earlier. You'd naturally take planning—especially risk management and probabilities of failure—lightly because as a founder you're wired for optimism!
Apart from mistakes in planning fundraising detailed earlier, planning errors can involve:
• Customers (wrong segmentation, targeting strategies, CAC estimates, channel choice, scaling too fast/slow…)
• Hiring (role definitions, link between stage and hiring plan, hiring too many, hiring too few…)
• Product development (building products without any customer validation, A/B testing, or beta modes, wrong estimates of development costs…)
• Competition (misreading the market, product offerings, wherewithal of competition, products under development…)
These errors can conflate and compound such that the business model itself is flawed or inappropriate.
- Begin with the end in mind and work backward to align all the pieces needed for each milestone. Too often, we may either make things up as we go along or misjudge the pieces needed to get to our goal and how they align together.
- Be clear about ends v/s means to ends. How often have you worked to achieve or acquire something and once you have, you wonder ‘what next?' In your planning, develop a habit of differentiating clearly between means and ends, and work consciously to look at what you think are goals as means to larger goals. Eg., a fundraising round cannot be an end; it's a means to an end (to get to the next milestone. Note: Don’t obsess over funding). Or, getting rich is not an end, it is a means to an end (financial freedom to do what you please rather than do what you have or need to). This will help you to map out your startup’s future more clearly.
- Have a plan for ALL areas. This should ideally be a concrete and explicit plan for the next one year, broken down by month, in addition to a longer two-three year plan. Create plans for all crucial areas—finance, marketing, product development, hiring, fundraising and remember to involve your co-founders and where relevant, the team leads.