Top 5 Reasons Why Startups fail and how to avoid it

Top 5 Reasons Why Startups fail and how to avoid it

Today we will look at why startups fail and how you can avoid falling into that trap. There are some things that just kill a lot of Startups, knowing them and knowing how to handle them will make you a lot more likely to succeed.

I’ve always been an entrepreneur, with Vivino we’ve raised $57 million and have over 30 million users all over the world. For years I’ve spoken to several new startups every single week, on that journey I’ve met a lot of amazing founders, some of them succeeded and unfortunately, a lot of them failed. I’ve learned a lot from both groups.

In this article, we will look at what I consider the Top 5 reasons why Startups fail. This list is made out of a combination of data and my 25 years of experience as a founder. For every reason, I will give some clear and applicable advice on how to avoid the pitfalls that kill most startups.

About 8 years ago we did our Seed round at Vivino with a local Danish fund Seed Capital. At that point, they started introducing me to a lot of other early-stage startups and their founders. I met with a lot of them so that we could share experiences and learn from each other. A year in or so I started realizing that a lot of these companies were not there anymore. The chairs around me were getting empty, nobody was sitting there anymore.

For one reason or the other, the companies had died. We all know that most startups fail, but this was the first time I really saw it firsthand. With almost everyone, I thought this was a great company with a great Founder. That really made me think about what went wrong, what can I learn from that so we don't end like that, that is what I want to talk about today.

This is a subjective list, but I base it on a combination of my experience as well as research. I’ve also asked fellow founders and investors to see if they agree with the list and got some really good feedback that helped me build this list.

When I started doing research for this video a lot of people came back to me and said lack of funding, running out of money was one of the primary reasons why startups die.  This is true, a lot of startups die because they run out of money. However, the running out of money part is a consequence of something else and I will not cover running out of money as I want to find out the actual reason they ran out of money. There is always a different reason.

Let me tell you the story about Blippar, Blippar was founded in 2011 in the augmented reality space. They were early on wanting to build a visual image-based search engine. A search engine where you can take a picture of anything and find out what it is. In December of 2018, they went into bankruptcy even though they had raised a staggering $130 million dollars. The news was that they ran out of cash and couldn’t raise another round.

More specifically Blippar claimed that one investor blocked further investment. But really, there is always a reason, Blippar didn’t go down because of lack of funding, there was some other reason why they couldn’t raise that money and that reason is on my list and I have some insights as I met the CEO and founder a few years back will get back to what I think is the real reason why Blippar crashed.

Be aware that very often it is more than one of the reasons on the list that make a startup fail.

We will start at the bottom of the list, with number 5, so here is the fifth biggest reason why startups fail.

#5 Lack of Persistence

Being a founder is not a quick route to a fancy Lamborghini, there are much better and more likely ways of getting a Lamborghini if that is your priority. The people that only do it for the Lambo usually don’t make it.

From the outside, it sometimes looks like things are an overnight success like Startups can be overnight success stories. In reality, it is years of hard work or we like to say it overnight success always takes 5 years of hard work.

When you are a founder you never really know how close you are and I think this cartoon is a great illustration of that. Sometimes the lack of persistence means that we stop just before we hit the big time.

I think one of the reasons why I'm a pretty good founder is that I never quit, even when I should be quitting

Pro Tips

Set expectations

The best thing you can do here is to set expectations. Prepare yourself and the people around you that this is not a short run, this is something that will take years to do. Years of hard work before it becomes a success and there is also a pretty decent chance of failure.

Now let’s take a look at #4.

#4 Premature Scaling

A few years ago the Startup Genome Project did their research on why Startups fail. They concluded that the biggest killer of startups, especially among funded startups, is premature scaling.

Premature scaling means growing the business too fast and without the business being ready for it. This very often happens just after a funding round. There is a lot of money in the bank and there is a certain urge to spend it - quickly! Very often investors are pushing hard to grow, grow, grow. Growth is great, but the company has to be ready.

Vivino had a competitor that was very successful in the US. They raised over $50 million and now the pressure was on to grow, grow, grow. They decided to launch in the UK, France, and Germany rapidly. However, the markets were very different, the model didn’t work there. The launch cost tens of millions of dollars and they ended up shutting down all the 3 markets again. It almost killed the company as the money was spent and they had very little to show for it. This meant that the investors didn’t want to put more money into the company.

Let me be very clear, this is a very dangerous situation for a startup. If you scale prematurely spend a lot of money and don’t have anything to show for it you are in big trouble you can easily be in a situation where the investors are not willing to invest anymore more money. This situation is a bit of a paradox as it very often is created by outside forces like the investors and then when the problems start the investors are the ones backing out and not willing to take the company through the difficult situation that they were a big part of creating.

Examples of premature scaling are:

  • Rapidly increasing the cost too early
  • International growth too early
  • Premature paid user acquisition without having proof that it is profitable

Pro Tips:

Don’t be too aggressive right after a funding round

I’m not a great poker player, but there is one rule that I have that works really well. Don’t bet just after you’ve won a big hand. You think you can do anything and you will make bad decisions. For a Startup what that means is that take it easy just after you’ve raised a big round. You have a lot of money, you think you’re smarter and better than anybody else, this leads to really bad decisions. Cooldown just after you’ve closed a big round.

Just say No!

Investors and the people around you invested in you, they believe in you and that gives you a lot of leverage. Use that leverage to just say no when someone is pushing hard on growth, you have a right to do that and they will listen.

We’re moving up the list, now let’s take a look at #3.

#3 Broken Founding Team

I usually say Founders build companies and founders destroy companies, there is a lot of truth in that. If the founding team doesn’t work the startup will fail, if you see that happening you have to fix that and fix it fast. A broken founding team will never build a great startup!

Founders usually have a lot of different skills, as there will be many different tasks that need to be solved. That said there are some core fields that need to be covered, a tech startup really should have a technical co-founder and most startups also need someone with a focus on the business side such as fundraising and sales. I can promise you that I've met very few people that are amazing engineers and at the same time amazing salespeople. Having both skills will require multiple founders and that is where things get complicated, multiple founders and personalities.

Unfortunately, I’ve seen a lot of companies break up because of founder problems, it happens all the time. Usually, it is because the founders can’t work together, they disagree on who should do what or what kind of effort should be put into the Startup. Very often it is also just basic chemistry.

Pro Tips:

Alignment and manage expectations

I think the best advice here is just to have alignment, agree on early, who does what, what the ambition level of the startup is and how much work you will put into it, create as much alignment as you can and manage everyone's expectations early on. You might as well have the conversation early on because I guarantee you that you will have the conversation and it doesn't get easier, it actually gets harder over time.

Founders need to be different

We have a tendency to hire people that are like us, that think like us. That may not be the best solution, we need people that have different skills and sometimes different personalities to build a great startup because there are so many different tasks and skills needed to solve those tasks. If all the founders are similar they will all want to do the same tasks and fight about who is going to do the other tasks. Different personalities can also be problematic, but it is required to build a great Startup, so be diverse on all levels when looking for co-founders.

Solo is not a great solution

The easy way out of this one would be to be a solo founder, but the numbers actually show that solo founders perform a bit worse than companies with multiple founders. I highly recommend having more than one founder. So not really a solution I would recommend.

Ok, we're getting to the top of the list here, let's look at #2.

#2 Bad Timing

First mover advantage sounds great for a Startup, however, it may not be the best place to be. You really need to hit the timing spot on here, not too early, not too late.

The problem with being too early is that neither the technology that you’re building nor the market is ready. You invest crazy amounts of money into an immature technology that you build for a market that isn’t ready.

Neither Facebook nor Google was the first movers, but they were the last ones standing.

As most people know, when you're very late to a market there will be a lot of competition which also makes it hard.

Let’s take a look at Vivino, we hit the timing exceptionally well. We started in 2010 and when we launched our app there were 600 wine apps in the app store. With that in mind, you may think we were kind of late for the market. However, the timing was actually really really good.

The iPhone was launched in 2007 and the App Store in 2008. By 2009 and 2010 it really starts growing in popularity and the competing OS Android is also starting to take off. The smartphone is starting to gain critical mass. We also needed a camera and the phone to be online say in a supermarket, which had also happened for most smartphones by 2010. As time went by developing for these platforms also becomes a lot easier, the technology became more mature.

If we had started two years earlier we would have had some big challenges. First of all building, the product would have been a problem. Developing on smartphones was less mature and the image recognition that we needed was not as mature. On top of development being hard and costly we would be building for a small market. There were very few smartphones and they had a bad camera and most of them were not online. We need also those things for Vivino to work properly.

Too late and this obvious and massive market would have been taken by somebody else.

There is a great Ted Talk by Bill Gross on this subject, I highly recommend it. Without giving too much away there is some timing involved.

Pro Tips

Rather late, than early, compensate by executing better

I would rather be late than early, you can’t be too late, but a little bit late is better than too early. The problem with too early is that there is a very chance that you will be dead before the market actually hits, investors gone and no more startup as the money has been invested. The way to compensate for being late is to do better, execute better, build a better product, beat the competition. It is really hard to compensate for being too early.

The window may be longer than you think

The window may not be as small as you think in our case probably a couple of years. Any time between 2010 and 2012 and we would have been fine. So as you look at a market and think maybe it is too late if you can execute better you actually have a good chance.

We're getting to the top of the list so here we go.

#1 No product Market fit

No surprise here, this is the hardest part for any startup and this is where most startups fail. Product-Market fit is the most important thing for any startup, it is hard to find and it is also a requirement for making it, there is no way around it.

Product market fit basically means to find a product, that you can build at scale, that the market wants, and at a price that the market is willing to pay.

Product market fit is finding a product that:

  • You can build at scale
  • That the market wants
  • At the price, the market is willing to pay

Yes, all 3 have to be true or it isn’t a product-market fit.

Product market fit is certainly more relevant in the early stages where most startups look for it, but a lot of companies become very mature, raise multiple rounds of funding while still not having a product-market fit.

For Vivino, we found a great product-market fit very early on. Scanning a bottle of wine and getting all the information about it. However, that was a free “product” and we would need another product-market fit to turn this into a business.

We need a product-market fit that would make some money. After testing for some time we started building a marketplace on top of Vivino in 2016 and charging a marketing fee every time wine was sold. After 2 years of focused work, we found a product-market fit for the marketplace in 2018. So be aware you may need multiple product-market fits before that startup is out of the danger zone.

An example of not having a product-market fit at a very very late stage is is AR company Magic Leap. They’ve raised $2.3 billion dollars and they’ve just recently raised launched their first product. Sure they probably have some amazing tech that positions them incredibly well to find a product-market fit, but they don’t have it and in my opinion, they should focus everything on finding a product-market or else they’re at great risk of getting into real trouble.

Now let’s get back to Blippar that I mentioned earlier. Like I said they managed to raise $130 million dollars in their lifetime. I met with the CEO and Founder of Ambarish Mitra in 2015, they had already raised a lot of money and for me, it looked like there wasn’t any product-market fit. They kept it going all the way till December 2018. The reason that they had to close shop in December 2018 was not because of lack of funding, they never found a product-market fit, and at the end that killed them.

This is THE most critical thing for a Startup, so let’s take a look at what we can do to find a product-market fit.

Pro Tips

All focus on Product Market Fit

There is no way to avoid this, the only thing you can do is put all effort into finding product-market fit, don’t waste your time doing other stuff. When you don’t have product-market fit you ONLY look for product-market fit.

Be aware of false product-market fit

When we work hard and try to improve our product we sometimes fall into the trap of thinking we have a product-market fit when we don’t. Be careful with false positives. A very common mistake here is to do paid marketing. Be very careful with doing paid marketing before you have a product-market fit it may trick you into thinking you actually have a product-market fit. You really don’t have a product-market fit, you’re just paying users to buy or download your product.

Release early, often and learn fast

Finally, this is all about learning fast, always using a minimum viable product strategy, releasing early, often, and learning fast. The faster you learn the sooner you will have a product-market fit.

That is it guys, let’s take a good look at the list. Based on my years with startups, these are my Top 5 reasons why Startups fail.

Looking at this is so important because we can learn so much from the ones that don't make it. Take a close look and learn from the potential pitfalls and your chances of success will increase radically.