The real reason for startup failure
Startup failure is a much discussed topic and opinions regarding main contributing factors for failures range from timing to financing and obviously poor market fit. No doubt when a startup fails there are a multiple contributing factors and it’s easy to find outside factors to blame.
"According to some Uber, Airbnb and Wework are startups, but really they’re not."
When discussing startups one must however first remember that there are startups and there are “startups”. According to some Uber, Airbnb and Wework are startups, but really they’re not. Once you’re executing on a known business model you cease to be a startup. Even if Spotify might fail it’s basically due to them building a business model that can’t sustain them or their investors. The business model is there nevertheless. At ridiculously deflated valuations growth companies might have no exit markets and they might be doomed for lack of refinancing, but that’s the growth monster they created consciously. Accelerating growth before you’ve nailed a sustainable business model is pretty typical as startups race to win markets before copycats appear, but there are big risks involved with that tactic something everyone involved knows. This tactic has emerged largely because of venture capital funds craving up to a 100X return on their investment.
"Although a bit controversial, the simplest way to define a startup is really by its age."
When discussing startup failures it is more fruitful to limit the discussion to real startups: companies that haven’t nailed a scalable business model yet. Although a bit controversial, the simplest way to define a startup is really by its age. First five years of a company’s life can be described with only one word: chaos. It’s a constant struggle against time, energy drainage and close to impossible market odds while simultaneously trying to build solid ground under your feet with a product customers love and team capable of building and executing solid business processes for sales, marketing and financing. Anybody that fights their way to see life after year 5 has come a really long way and should have positive cash flow to show for it. If not, continuing the journey might really not be worth it.
"The root cause of most (if not all) startup failures is simple: poor startup management."
The root cause of most (if not all) startup failures is simple: poor startup management. Financing, timing and other outside factors are just symptoms of a more profound issue which is the lack of entrepreneurial wits and stamina it takes to spend five years building a real company. That’s right, it seems most startups are out there to concur the world as fast as possible instead of focusing building real companies. No doubt if you enter a competitive emerging market it might be a case of “go big or go home”, but then entering a known market with a known product you essentially cease to be a startup a lot sooner as those are usually open to experienced entrepreneurs and executives that truly know their market, its customers and business models to build something new and better.
Building companies from zero is much like raising kids. It takes years to build a foundation for happy and balanced kids that grow to become independent one day. There are very few immediate rewards in raising kids as your main challenge is a day-to-day struggle to get from morning to the next evening only to be kept awake during night. If you manage that without divorce (founders/couples) or mental breakdown over a five year period you will one day wake up and realise that you have a company (or kids) on a steady growth curve without requiring your constant nurture to avoid a collapse. Something to look forward to I guarantee. But it only happens if in that chaos you still manage to follow some well-established best practices and principles of which perhaps the most profound is: it’s a marathon and there are no short cuts and acceleration is just relative to your own physical and mental capabilities.
Ola Sundell
Founder & CEO of HUB13
Leading Finnish Business Innovation Accelerator