Why Some Startups Succeed (and Why Most Fail)
Over the last two decades of building and running businesses, and the last couple of years working full time with dozens of startup founders and CEOs on their strategies and funding plans in my consultancy business, I have observed that there are a common set of reasons that startups struggle and fail, and a consistent set of factors that make startup companies successful.
I wondered if my observations were supported by hard data, and my curiosity around startup success and failure eventually got the best of me. I decided to do some in-depth investigation around this topic. I wondered if there were any research studies that showed why startups succeed and fail? I found several articles that were filled with unsubstantiated opinionsand a few sources that had really great hard research around the topic.
Why do companies fail?
According to an article in FastCompany, "Why Most Venture Backed Companies Fail," 75 percent of venture-backed startups fail. This statistic is based on a Harvard Business School study by Shikhar Ghosh. In a study by Statistic Brain, Startup Business Failure Rate by Industry, the failure rate of all U.S. companies after five years was over 50 percent, and over 70 percent after 10 years.
This study also asked company leadership the reason for business failure, giving a list of four main reasons for failure with sub-categories below those. They also gave a list of 12 leading management mistakes. It is worth checking out the details. This research-based analysis confirmed some of my observations. I bracket the Statistic Brain finding into seven key reasons for that entrepreneurs experienced business failure:
- Lack of focus
- Lack of motivation, commitment and passion
- Too much pride, resulting in an unwillingness to see or listen
- Taking advice from the wrong people
- Lacking good mentorship
- Lack of general and domain-specific business knowledge: finance, operations, and marketing
- Raising too much money too soon
All of these focus on the decision-making of the entrepreneur and general business knowledge.
In another study, CB Insights looked at the post-mortems of 101 startups to compile a list of the Top 20 Reasons Startups Fail. The focus was on company level reasons for failure. I think this list is instructive, but each of these reasons for failure is due to a failure in leadership at some level. The top nine most significant from this study are:
- No market need
- Ran out of cash
- Not the right team
- Got outcompeted
- Pricing/cost issue
- Poor product
- Need/lack business model
- Poor marketing
- Ignore customers
Notice that all of these are business- and team-related issues, even the ones that relate to the product. Issues like there are always tied to leadership and the leader’s ability to build a strong team and drive a business model and business thought process and discipline. Also, keep in mind, if running out of money is the ultimate reason for failure, there are always other factors that cause this result.
Why do startups succeed?
Next, I looked for sources of information of why businesses were successful. I found some good research from Harvard Business School, Performance Persistence in Entrepreneurship, which suggest that serial entrepreneurs that have prior success are more likely to have success, and that the best VCs are good at picking serial entrepreneurs. However, that really didn’t answer my question about the qualities of the entrepreneur.
The best comprehensive research that helped to answer the “reasons for success” question that I could find was from The Ecommerce Genome by Compass in their Startup Genome report, which looked at 650 internet startups. Although this research is tech industry specific, I still think it is very instructive. The report stated 14 indicators of success. Some of the 14 were a bit redundant, but you should review the report yourself. This analysis also confirmed some of my observations. I bracketed these 14 indicators into nine key factors for success:
- Founders are driven by impact, resulting in passion and commitment
- Commitment to stay the course and stick with a chosen path
- Willingness to adjust, but not constantly adjusting
- Patience and persistence due to the timing mismatch of expectations and reality
- Willingness to observe, listen and learn
- Develop the right mentoring relationships
- Leadership with general and domain specific business knowledge
- Implementing “Lean Startup” principles: Raising just enough money in a funding round to hit the next set of key milestones
- Balance of technical and business knowledge, with necessary technical expertise in product development
Are the reasons for success the opposite of those for failure?
There are things that you must possess to be a successful entrepreneur, but they won't guarantee success. That said, it stands to reason that if you fixed the reasons for business failure, you would at least improve your chances of success. So, I decided to look at the side-by-side comparison of the reasons for failure and the factors for success.
If you look at both the reasons for failure and the factors for success, it is clear that commitment to a plan is key. This, of course, implies having a plan. This does not mean that you are completely inflexible, but you can stay the course. This is why the most successful companies have one or two pivots. I do not think that every little business adjustment or fine-tuning as a pivot.
A true pivot is a change in course of direction that results in a material change in the product-market strategy. It could be along the product axis or the market axis, but it has to be enough of a change that it really requires an adjustment in strategy and a corresponding adjustment in resource allocation. At least, that’s my definition. Passion and motivation are the obvious factors. Every entrepreneur, business coach, consultant, advisor, newscaster, investor and industry analyst talks about passion. Steve Jobs is quoted all the time about this. It’s probably become too cliché and overused at this point.
What I like about this analysis is that it goes to the root of the passion. People that are successful believe in what they are doing. The successful entrepreneur feels that they can make an impact and a difference in the world. There is so much inertia and negativity around getting a startup off the ground, much less getting it to “escape velocity,” that if you don’t have this deep-seated commitment to making an impact, you will surely give up. Successful entrepreneurs are competitive. They play to win, and they hate to lose. This trait may show-up differently with different personality types, but I have never met a successful entrepreneur that doesn’t have a competitive spirit and a will to win.
The next two things go hand-in-hand. I kept them separate since I think mentorship is so important, and it has played such a huge role in my career success. Just because you are willing to learn does not mean that you are willing to seek a mentor and listen to their guidance. By the way, I’m not advocating that you take every piece of advice and guidance from your mentors, but if you have selected strong mentors that have significant domain, technical or business expertise, you should at least consider thoughtfully consider what they have to say. Otherwise, why have them around as a mentor? It gets to humility. It’s one of those things when you think you have it, you don’t.
Successful startups are businesses. It therefore stands to reason that you need to establish and implement solid fundamental business principles and practices to improve your chances of success. Many technical founders fall in love with their product idea and consciously or unconsciously believe that if they build a better mousetrap, the world will beat a path to their door. However, both the success and failure studies show that you need leadership in the company with general and domain-specific business knowledge to be successful. Of course, you also need to have strong technical expertise in your chosen product development area.
Does this mean that a technical founder cannot be successful as a CEO? No, it doesn't. Look at Dr. Irwin Jacobs, the co-founder and founding CEO of Qualcomm, as a classic example. Dr. Jacobs is a brilliant engineer and former professor at MIT. However, he also has a brilliant business mind and a lot of business knowledge. Prior to Qualcomm, Dr. Jacobs ran another company, MA-Com, so he had experience running a company. He also surrounded himself with a strong management team. There are many other examples of this success formula, but there are far more where there is a seasoned businessperson who has domain expertise leading the company, and a strong technical team driving product development. Steve Jobs (Apple, NeXT, and Pixar) is the classic example as a business-oriented founder. Meg Whitman (eBay) and Eric Schmidt (Google) are great examples of CEOs who were brought into companies at an early stage to complement an exceptional team of technical founders.
Finally, having a clear and realistic idea of how long things take, setting intermediate milestones for every 12 to 18 months, and raising just enough money it to get to the next set of key milestones, is not only important to capital efficiency, it is also important for success.
How do I become a member of the $100 million club?
Interestingly, according to the Kauffman Institute, in its article The Constant: Companies that Matter, the pace at which the United States produces $100-million companies has been stable over the last 20 years despite changes in the economy. The study sates, “Anywhere from 125 to 250 companies per year (out of roughly 552,000 new employer firms) are founded in the United States that reach $100 million in revenues.” My former company, Entropic, achieved this status. How do you become part of that club? You need some luck and a good sense of timing. However, as said by the Roman philosopher Seneca, “Luck is what happens when preparedness meets opportunity.”
Beyond that, you need a plan, persistence, perseverance, a willingness to be flexible, and a world-class team. You also need to be frugal, bright, and cultivate strong mentors. The best way know to do all these things well and efficiently is to follow a systematic process where you plan, commit, track results, promote accomplishments and raise the necessary capital, or "fuel in the tank," to drive the growth of your startup.
Plan. Commit. Win.