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Full Speed Ahead? The 7 'Icebergs' That Sink Most Startups.

Full Speed Ahead? The 7 'Icebergs' That Sink Most Startups.
Image credit: 55Laney69 | Flickr

Chances are pretty good that you would never have heard of the Titanic if it had not struck an iceberg back in 1912.

But when it comes to startups, you don't hear about the ones that slam into icebergs -- you only hear about the tiny few that dodge them.

This shows you that the media always likes to focus attention on the rare interesting cases, rather than the most common -- and more boring -- ones.

But that focus is harmful to entrepreneurs. It deludes them into thinking that startup success is far more common than it really is -- and it blocks insight into the causes of failure so they can steer their startups away from those icebergs.

I estimate that just one in five million unfunded startups end up being worth $1 billion or more. For every 1,000 startups that meet with a venture capitalist, only two get funding. Only one funded startup in 10,000 ends up being worth $1 billion.

This month I learned about a spreadsheet that documents startup failure called Autopsy.io. Based on my review of more than 110 startup failures profiled there as of June 19, here are the seven most common icebergs that startups ram into and how to avoid them.

1. Failure to find unsolved customer pain.

Too many founders think that their idea is so brilliant that their best course of action is to build the product, show it to the world, and wait for the money to roll in. However, that common delusion is a major startup killer.

In reality, people are reluctant to try a startup's product, so most of them fail. Customers will only try the product if it promises to solve a painful problem that nobody else is trying to solve.

To avoid hitting this iceberg, don't start your company until many people are willing to pay now to get your product sooner.

Related: Don't Just Start a Business, Solve A Problem

2. Reluctance to get feedback on prototypes.

Plenty of founders refuse to let anyone see their product until it is perfect. There are many reasons they make this mistake. They are afraid someone will steal their idea, they want to get a big head start, they want to impress their peers, or they are afraid that unless it's perfect nobody will want to buy it.

Failing to get feedback from potential customers is usually fatal to a startup. To avoid hitting this iceberg, build an inexpensive prototype of your product, get feedback on it and use that input to build a new one. Repeat this learning loop until potential customers demand your product.

3. No passion for the market.

Don't start a company if your primary motivation is to make money. The reason is simple. To be successful you will need to spend about 80 hours a week with very little pay to make your startup successful. It is not possible to work that hard and be effective unless you believe that your life's mission is to make potential customers better off by providing them your company's product.

To avoid hitting this iceberg, direct your startup at solving a problem that you care about deeply. My research for Hungry Start-up Strategy revealed that people start companies most often because the founder had a problem that nobody else had solved.

If many other people have that same problem, you are off to a good start.

Related: Simple Yet Powerful Business Lessons From a Broke Entrepreneur Turned Multi-Millionaire

4. Lack of skills needed to win.

If you think the job of the entrepreneur is to think big thoughts and hire other people to do the actual work, think again. One big reason that startups fail is that the founders can't do what most needs to get done to get it off the ground.

I have seen many tech startups flounder and fail because the CEO can't code, when coding better than almost anyone else is the thing that must happen to build the product and get customers. If you are such a person, your odds of success will increase if you bring world-beating sales skills and knowledge of the market need you are addressing, but you still need a strong relationship with a world-class coder.

More generally, entrepreneurs boost their odds of success if they pick industries that value the skills at which they excel and love to practice.

5. Ignoring cash burn.

If you don't like watching the pennies, don't start a company.

Many entrepreneurs are engineers at heart. They want to build a perfect product and then dazzle the world with their brilliance. They eagerly read about how easy it has been for other startups to raise millions of dollars and think that they will be able to do the same. They ignore the rate at which they are burning through cash and assume that when the day comes to replenish their cash coffers, investors will break down the doors to write checks.

This leads us to another huge iceberg.

6. Inability to raise capital.

If you have never raised capital for a startup, chances are you will be surprised by the time required and the number of rejections endured before you succeed.

Even if an entrepreneur realizes that cash will run out, too often he starts the process too late, goes after the wrong group of potential investors, and does not present them information about the company that persuades them to invest. Entrepreneurs can avoid these problems by matching their capital raising approach to the stage in their company's development.

One CEO I spoke with said that raising capital is generally a full-time, six-month job that should be started well before the money runs out.

7. Weak team, poor leadership.

A final iceberg that sinks startups is a leader who cannot recruit the most talented people for the jobs on which the company's success depends.

The simple reality is that if you are not a great leader, learning to become one is hard. Moreover, the leadership skills you need to get a company to 10 employees are different than what a 100-person or 1,000-person company requires.

At the startup stage, a great leader has the charisma and track record to conjure up a compelling vision for the company and recruit top talent to come along for the ride to realize that vision. 

Starting up is hard to do and if you can't navigate your venture around these icebergs, yours will surely perish.

Related: How a Family-Owned Firm Can Beat the Odds and Pivot