The Start-Up Labyrinth

You have probably heard of the rule of thumb that "9 out of 10 start-ups fail". This number is actually not far from the truth in most years but needs some context. According to the Bureau of Labor Statistics:

• 20% of businesses fail during the first 2 years
• 45% fail during the first five years
• 25% last 15 years or longer
• 1% of start-ups become unicorns (source)

What are the reasons that start-ups fail?

Looking at that funnel, the situation does not look that dire. 15 years of being in business is a success from my point of view. Still, it's interesting to look at why start-ups go out of business:

As I have been in the start-up business for quite some time, having founded and left a start-up myself as well as joined a young start-up as a partner, in addition to consulting start-up businesses I want to shed some light on a couple of reasons for failure based on my observations and experiences.

Lack of Willingness to Pivot

Every start-up starts with an idea. And the ideas we love most are our own ideas. Understandably those are also the ideas we have the hardest time throwing overboard. But don't make the mistake of holding on to your original idea for too long if the market environment changes or if customers simply don't like your idea. Listen to your data and if you struggle to objectively assess the current situation talk to someone who has no stakes in your company and see what they think.

False pride is the enemy of progress.

Lack of User Centricity

I can't repeat it enough, but you always have to think from the end user's perspective. Too many times I have seen features being developed that are only a hindrance for the user. Make it as easy for the user as possible to use your product. Many start-ups struggle with that because they think about what they would like. You have to ask yourselves questions such as:

• Do we really need all this data from the user?
• Can we make the sign-up process shorter and easier?
• Do we promote the offer the user is interested in or that we would like our users to be interested in?
• Are we able to keep our brand promise to the user?

User centricity is most of all a question of discipline and unfortunately, people tend to revert to old patterns. So be careful!

Changing Market Environment

That one really sucks because often you can't foresee them even in your wildest fantasies. Often however the thing that really kills a start-up is not the changing market environment but the lack of a contingency plan. Take for example remote working which naturally experienced a huge push during the Corona pandemic. Building a product centered around this change in working behavior totally made sense back then. At the same time, you couldn't just assume remote working is not being challenged. As we know now, big companies in particular in the US have been for some time now trying to force their employees back to their offices. That shouldn't have come as a surprise and such a scenario should be covered by a contingency plan. If this happens what happens to our business model?

Lack of Alignment Between Founders

Disharmony among founders respectively founders and their investors is another very common reason why a start-up doesn't make it. Your partners don't have to be your best friends and you don't have to share the same world views and beliefs, but you should share the same vision when it comes to your company. This goes beyond the business model and larger business goals. This is about corporate culture, communication, transparency, etc. Alignment between founders is easier when each founder has clear competencies that complement each other and those competencies are respected by all involved parties. If there is no trust in each other's abilities it's a major red flag.

Getting Outcompeted

Great ideas can be copied. It should therefore be a top priority for start-up founders to scale as quickly as possible so that it gets too expensive for competitors to copy your idea. You rather get bought than copied ??

At the same time make sure you have a proof of concept that allows scaling. Otherwise, you will just burn money. This brings us to ...

Unsustainable Burn Rate

The burn rate basically tells you how much money you are losing each month. You should really really watch this and operate under the premise of maximum cost efficiency. For example, companies such as Storyblok never had a physical office space and it didn't hinder their growth. Don't spend money you don't have. I am also usually super cautious with hiring people. I know that many founders still think that a big team might convince investors that you are ready to take the next step. But more important than a big team is to be profitable. This also gives you more time to find investors. You don't want to end up in a situation where you might have to shut down if you don't get the next investment. Investors can smell the fear and panic.

Hiring the Wrong People

A start-up is a very different kind of beast compared to corporations or SMEs. In a start-up, processes are often fluid and organizations are in a constant state of flux. This is not the type of environment that people seeking stability and structure enjoy. And that's okay. Start-ups are not for everyone. Employees have to learn fast, be flexible, be audacious, and most importantly self-driven. More important than experience is the spirit and mindset of the people you hire.

Not Enough Focus on Sales

From my experience, especially in early-stage start-ups Sales beats Marketing. Selling your solution to consumers is one thing, selling your idea to investors, banks, and your employees is even more important and you won't go anywhere without doing that. Once you get to the point where you can think about scaling marketing, then you have already overcome the biggest hurdles.

Start-Up Life Is Not for You

Building a start-up can be very fulfilling and a great deal of fun. But let's be real:

Start-Up Life is a rollercoaster

You will have many ups and many downs. You will have to sacrifice things and moments with your loved ones. Often the juice is simply not worth the squeeze. Therefore you should be well aware of what you are signing up for and be honest to yourself: what are the pros and what are the cons. Before you make a decision talk to other founders and ask them to share their experiences. Also, talk to your family and see what they think.

Parting Words

At this point, if you thought about founding a company you probably experience a panic attack. So many ways lead to failure! So let me leave you with some encouraging words. There are not many things more fulfilling than founding a company and seeing it grow. And if your company does not make it, it's not a failure. Few succeed with their first company and only failure prepares you for success. I learned more in one year running a start-up than in 5 years working at a corporation. It made me more resilient, more aware of what's important, and more appreciative of the beautiful things in my life. And if you need some advice or words of encouragement just let me know ??

As always: please share my content if you enjoyed it ??

cheers, Klaus