3 Reasons Tech Startups Fall Into a Death Spiral

Instant failure would be better than a long and slow demise from diminishing returns.

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By Harry Red


Opinions expressed by Entrepreneur contributors are their own.

In a tech startup you can reach a point where your efforts bring diminishing returns. For all the hard work you put in, your customers just won't bite. That leads to a death spiral, which is worse than failure.

Related: Do You Recognize the 8 Early Warning Signs of a Failed Startup?

You can jinx your startup in a thousand different ways. But the following three lie at the core of many others.

1. Wrong customer segment

Chasing the wrong type of customer makes entrepreneurship unnecessarily difficult. When you hit the gas and brake pedals at the same time, you might pick up speed, but everything you do suffers from useless friction.

Successful entrepreneurs pick customer segments very carefully. When I interviewed Evan Macmillan, founder of conversational artificial intelligence company Gridspace and cofounder of Zappedy (sold to Groupon in 2011), he told me:

"A lot of companies struggle because they go after consumer problems using far-fetched technologies. Then there's the double risk that the tech never delivers on the promise and that it doesn't meet the whims of consumer taste."

Hence Macmillan serves enterprise customers. Could he make his software create value for consumers? Possibly. But with technology risk, targeting consumers comes with a price tag.

Manish Kothari is a successful entrepreneur and president of ventures at SRI International, a major research institute spun out of Stanford University. Kothari routinely selects tech startups to invest in and support. In an interview, he shared a valuable conclusion: "If you're doing a tech play, you need to have a large, accessible market, plus sustainable and frankly massive differentiation -- because the investment required is higher."

So over to you, tech entrepreneur. Do you have a significant market and an incredible way to stand out? If not, better make sure you're aiming at the right customers.

2. Slow iteration with customers

By now, many tech entrepreneurs realize they need to continually improve their ideas with feedback from the market. Good on them.

Question for you though: how quickly do you go through this process? More important, what are you doing to speed up the rate at which you extract responses from your customers?

Related: Don't Let a Startup Failure Hold You Back

Zor Gorelov, cofounder and CEO of artificial intelligence company Kasisto, ran into this problem. His target customers are banks, so experimentation went slowly at first. Thus, he and his team worked to speed it up.

"With enterprise, the process of trying out new stuff is very complicated.... So we launched a product called MyKAI. It's a consumer version of our product. We use it to allow users to connect their bank accounts to it and experience what conversational banking can be like."

Instead of waiting for customers to implement his full solution for themselves, Gorelov could go to banks and show them how his software performs with their own customers. Faster iteration.

You can take the same tack. Can you create a small, more practical version of your technology to entice your potential customers? Don't worry about revenue, your goal here is simply to learn faster.

As serial entrepreneur and founder of Influencive Brian D. Evans points out: you can't save time, you can only spend it. Make sure the time you spend making things for your customers nets you the maximum amount of learning.

3. Technology looks worse than alternatives

I get it. You have a passion for solving problems with technology. So do I. The problem? Your customer won't see it the way you do. Where you see features, they see staff training costs. Where you see exciting new ways of doing things, your customers see integration nightmares. And most of all, your customer weighs your solution against how they already do things, namely, their alternatives.

Macmillan says: "At the end of the day, if what you do can't be measured against an alternative, it's very hard to show you're making progress."

And Kothari takes measurement to an extreme. On his first day in charge of sales at a new company, his immediate questions were: "How do I measure this? How do I know it's working? How do I get real data?"

So make your value propositions measurable. Does your product increase something for your customer -- say conversions, sales, cost efficiency or such? If so, figure out how to make it apparent. Create charts, infographics, interactive visuals, whatever it takes to make it clear. If you fail to make your value measurable against your customer's best alternative, you unknowingly put a curse on your sales process.

Related: 5 Ways to Recover from Startup Failure

The more you depend on technology, the stronger your solution must hold for all the above. Otherwise, it's death spiral time.

Harry Red

Founder and CEO of Infyrno

Harry Red is an entrepreneur, writer and tech guy. He is also founder and CEO of Infyrno, and driven to help his fellow entrepreneurs build great companies.

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