10 Lessons to Learn From Failing Startups (Including My Own)
Learn how to invest your IRA or 401k into a franchise penalty-free. ($50k min)
While it’s a given that launching a startup means embarking on a long and winding road, pinning down the exact odds for success is not the most crucial task for a company founder. The most important question to ask is why so many fail. While the overall economy can be a formidable influence, startups frequently make certain common mistakes.
So to help all the future entrepreneurs out there, here are some valuable lessons to learn from various failed startups, including my own:
1. Validate the product idea with customers. Entrepreneurs frequently fail to validate the idea of startup's product with customers. That was my big mistake as I launched my first startup, Just A Five. Nobody wanted what my company had to offer. I ended up wasting hundreds of thousands of dollars on building something that nobody wanted.
Another entrepreneur who fell into that trap is Gary Swartz, who founded Intellibank, a company he described in a LinkedIn column as "sort of like Dropbox done wrong." Swartz was convinced by his investors that his product was good enough to move forward, but he never stopped to check for warning signs from his customers.
"The most important people any company should seek validation from are ... customers," Swartz wrote. "That’s right, your customers matter more than your investors -- and any good investor would agree."
2. Understand the importance of co-founders, partners and team members. Every great entrepreneur understands that he or she can’t do everything. Certain tasks lie beyond a founder's capabilities. So it's vital to have the right partners and team members involved.
I learned this lesson the hard way when I started my second company, Pixloo.com, and co-founded it with a brilliant aspiring developer. He worked long and hard hours. Everything was golden for 10 months. We launched the product and acquired more than 80,000 customers in less than a month.
Then came the disagreements. We disagreed over the direction of the company and whether we should raise investment funds. He was not willing to budge from his position. I knew we were not taking the the right direction but since he owned half of the company, there was nothing I could do. We ended up selling the company for pennies.
3. Be aggressive. Most everyone would probably admit a lack of fondness for pushy salespeople. But those who want their business to succeed will have to be extremely aggressive. They'll have to simply pick up the phone and dial customers.
With my first startup, I had two scenarios to choose from: not making money or calling potential clients and refusing to take no for an answer. Without a major push, most new businesses will fail. It's rare for a launch to pan out without aggressive selling of the product.
4. Recognize that fundraising is time-consuming. While many founders of startups have their attention focused on helping customers solve a problem, money is still needed to make this all happen. Startups can’t operate or grow without revenue. Building a startup entails numerous expenses. And sometimes it's not possible to wait that long. Many business owners run out of money.
Expect the fundraising process to eat up a lot of time. It’s not like what's shown in the movies. Expect to pitch a hundred venture capitalists before receiving real investment. I’ve worked with countless startup founders who have approached more than 50 investors and not received one bite. How many VCs is it humanly possible pitch in a week? It all takes time.
5. Keep your eyes on the financials. When I started my second company, Pixloo.com, I thought it would be possible to line up a million customers who would fork out $10 a month. I was wrong. I signed up only about 90 customers who were willing to pay me $10 monthly. The other 80,000 clients were nonpaying ones.
6. Sustain a long-term vision. Most entrepreneurs realize they need a long-term goal for their startup to succeed.
Take Meetro, for example, one of the first location-based social networks. The startup did a great job of building an initial fan base in Chicago and then tackled Silicon Valley, according to a guest post by Meetro founder Paul Bragiel on TechCrunch. Instead of continuing to tend the Windy City community, the founders left that area for San Francisco. "We weren’t there anymore to be the face of the community, organize events," Bragiel wrote. "While the service continued and had a core bunch of people using it, by no means was it as rabid as it was at its peak."
To succeed, the entrepreneurs probably should have kept in mind a long-term goal (like trying nuture several local communities) and strived to establish one community fully and sustain it before or while initiating a presence in another location.
Related: Does Your Startup Have a Strategy?
7. Don't raise much money. It might sound odd but raising too much money might factor into the sinking of a startup. That’s what Ben Yoskovitz described was problematic for his failed startup Standout Jobs: He raised about $1.8 million too early. “We didn’t have the validation needed to justify raising the money we did," he wrote, noting that members of the founding team couldn’t build an minimal viable product on their own. "That was a mistake.”
The danger for entrepreneurs who successfully raise lots of money on a new product not fully tested is that they can fall into the trap of thinking they have something people are interested in. Instead of validating their assumptions, their startups just get bigger and badder -- and not the cool kind of bad.
8. Build a unique product. An interesting dynamic is at play the world of entrepreneurship. Founders can’t focus on too small of a niche audience to avoid competition. It’s just not possible to earn money that way. But be wary of copying another startup.
As Cap Watkin, a designer now at Etsy, explained in a post mortem about Formspring based on his experience there, the staff spent a lot of time and money investing in a share button that was similar to the Facebook share and Twitter's “tweet this” buttons. "We literally spent months on that system. We had to make sure our servers could handle a potentially huge influx of traffic, ... had to design and implement the feature, make sure the implementation was easy for publishers, make deals with publishers."
But the feature was a flop, he said.
“Entrepreneurs: build your product, not someone else’s," Watkin advised. "The most successful products execute on a vision that aligns with their product’s and users’ goal.”
9. Remember to continue to build the business. A startup could be framed around the greatest product in the world, but if the company doesn’t grow, the business isn't going to last very long. In other words, market the startup and spread the word.
That’s was the problem for photography startup Everpix, according to the Verge: "The founders acknowledge they made mistakes along the way. They spent too much time on the product and not enough time on growth and distribution."
10. Find the right investors. It's obvious that an entrepreneur needs to investors to create a successful startup -- unless he or she is independently wealthy. But find the right ones. It's great to work with investors who share the same goals and philosophy and also can provide overall support as well as advice on how the company can become better organized and do marketing.
But what happens if the investors don’t click with the entrepreneur personally, professionally or understand the business? Consider David Levy's experience with his failed startup Tigerbow. "We raised a (comparatively) small amount of money from friends and family. ... Aside from the fact that we got little (non-monetary) value added from these investors, people who are unfamiliar with investing in startups and the risks and challenges of building a company will drive you bananas."
Check out more insights about some of these companies and tons of others in a postmortem roundup compiled by CB Insights.