Why not every startup takes off

Welcome to my LinkedIn Newsletter to get your dose of entrepreneurial inspiration! I will share some intriguing facts, captivating stories, research insights, and ideas on entrepreneurship that I personally find fascinating and inspiring. Who knows, it may also spark your curiosity!

Numbers speak volumes

What can go wrong? You've thought through every aspect of your plan, down to the smallest detail. But the real test comes when your plan meets reality and real customers. Yes, in our world of 8+ billion other people, everyone remains unique, with their own wants, objections, needs and goals. And a new business is expected to be able to read their minds and address their pain points.

Think about these numbers: 90% of startups fail, but not all at once. Within the first year, 10% close; by the end of the second year, that number jumps to 20%; and nearly half, 45%, don't make it to their fifth anniversary.

For first-time founders, the success rate hovers around 18%. Those who have experienced failure have a slightly higher success rate of 20% on their next attempt. At the same time, entrepreneurs who have previously created a successful startup have a 30% chance of success when starting a new venture.

So how do we define success? This is another interesting question that every entrepreneur can answer according to his or her ambition. If you set your sights on the glorious realm of "unicorns" where companies like Canva, Miro or Discord roam, there is only a 1% chance that you will join their ranks.

Burning guestion

But the pressing question remains: Why do so many startups stumble and fail? The intrigue deepens when you learn the top reasons for the demise of startups worldwide in 2022: lack of financing or investors (47%), lack of cash reserves (44%), followed by Covid-19 and bad timing. Upon reflection, it appears that these reasons are caused by some external forces. But if we look at some of the pre-Covid-19 data, it appears that these reasons are mere symptoms rather than root causes. A deficit in investor interest or customer payments often results from a misalignment in product-market fit or, more likely, in problem-solution fit. It indicates that the product or service offered does not adequately address the customer's problem, or does not meet the needs of the target customer segment, resulting in a lack of funding and/or customer interest.

Back in 2021, CB Insights identified "no market need" and "got outcompeted" as the second and third leading causes of startup failure, just behind "ran out of cash/failed to raise new capital."

Another critical factor is time. Renowed entrepreneur and investor Bill Gross emphasized this in a well-cited TED talk as a crucial element for success. Tom Eisenmann points to timing in his HBR article, "Why Startups Fail". Poor timing can be a sign of an underdeveloped MVP, an unprepared market, or even unready founders. Often, it also indicates insufficient research, resulting in entrepreneurs failing to understand what the market needs and how to deliver it. For example, we know that running a restaurant is not an easy business. 60% of restaurants fail in their first year. In addition, 80% of restaurants close before their fifth anniversary. And the number one reason for failure is poor location. Surely, preliminary research can prevent this and find a location that is close to your target audience and a value proposition that meets customer needs.

Kevin O'Leary, a famous investor on Shark Tank, once told CNBC Make It that a common characteristic of his failed investments is founders who refuse to make the necessary adjustments. He observed that such founders often stubbornly cling to their original plans, neglecting crucial updates necessary for their business to survive. These founders find it difficult to "pivot," and their refusal to change direction ultimately leads them to failure:

"They don’t understand [that] the world moves and you have to move with it."

Yes, if there is one constant in our world, it is change. And in the name of evolution, we must all adapt faster to stay relevant and to thrive.

What can we do?

Is there anything startups can do to avoid all these pitfalls? As practice shows, one effective tool available to everyone is an exercise called The Premortem.

When you are starting a new venture, take a piece of paper and write a pre-mortem for your project. All the fears, external and internal obstacles, from a flawed business model to poor management to burnout. Anything that might go wrong and lead to the startup's failure. Discuss this with your team to make sure you don't miss anything. Identify the most critical factors and discuss how to mitigate/avoid the risks associated with them and maybe even turn them into opportunities.

And if you think that success in business is mostly a matter of luck, you'll be surprised to learn that luck is the result of your own efforts. By taking small risks, you expand the space where luck can fly in. Tina Seelig did a great job of describing a number of examples. For example, if you're on a train or plane, try striking up a conversation with the person next to you and learning more about them. When you meet someone new, send them a note thanking them for their time. If you get a rejection on your scholarship or job application, instead of expressing frustration or asking "why," thank them for the opportunity.

Step by step, you will begin to notice that good fortune is coming your way. Just be ready to meet it.

Research on failure

The topic of failure attracts a lot of research. Admittedly, I'm working on a project in this same area right now. But let's take a look at what's been released this year on this fascinating topic.

A study published in the Journal of Small Business and Enterprise Development surveyed 250 entrepreneurs who had failed in business.?The results showed that the ability to learn from entrepreneurial failures has a positive effect on business performance, with this effect being moderated by the type of failure, especially in the case of major failures. In other words, this relationship depends on the kind of failure the entrepreneur faced and its causes.

Another study at the Journal of Management Studies found that there is a relationship between entrepreneurial failure and successful corporate careers. Based on experiments with 80 recruiters and a study with a sample of 326 failed entrepreneurs and comparable graduates who started their corporate careers, it was found that failed entrepreneurs may have an advantage in corporate careers. In other words, “when one door closes another opens”, just keep going!

What matters in this failure story is the conclusions we draw for ourselves when we fail, and the extent to which we understand the causes of failure. Not all failures are equal. Some are good and some are not. In 2011, Amy C. Edmondson published an article with a Spectrum of reasons for failures ranging from “blameworthy” (e.g., a decision to violate a prescribed practice) to “praiseworthy” (e.g., experimentation to expand knowledge and develop innovations). To encourage praiseworthy behavior, we need to build a learning culture with strong psychological safety where people are willing to try new things and take smart risks. This year, Prof. Edmonson published her book called "The Right Kind of Wrong: The Science of Failing Well" where this idea is explored in great detail.

In summary, I believe that failure is a normal part of our life journey and it is our attitude towards it that determines its impact on our present and future.

We can build a healthier relationship with failure (because it's not the end, it's just a new beginning!) and learn from others' and our own experiences so we can do better next time. I like the Failory project where they tell startup failure stories in the "Startup Cemetery" and there is even a "Google Cemetery" and an "Amazon Cemetery" with their failed projects. What I can definitely say by looking at these examples is that only those who do nothing never fail!