- Burned out
Work-life balance is not something that start-up founders often get, so the risk of burning out is high. Burnout was given as a reason for failure 5% of the time. The ability to cut your losses where necessary and redirect your efforts when you see a dead end — or lack passion for a domain — was deemed important to succeeding and avoiding burnout, as was having a solid, diverse, and driven team so that responsibilities can be shared.
What can make conversations about burnout difficult, especially in Silicon Valley, is the widespread belief that building a successful company will always involve some degree of possibly hazardous overwork.
As former Uber board member and CEO of Thrive Global Arianna Huffington puts it:“The prevalent view of start-up founders in Silicon Valley is a delusion that in order to succeed, in order to build a high-growth company, you need to burn out.”
Amid the pandemic, burnout became even more prevalent among tech workers: 68% of tech employees said they felt more burned out working from home, according to a survey by Blind.
Various founders have spoken up about how damaging burnout can be.
Former Zenefits CEO Parker Conrad said,“I think people are unprepared for how hard and awful it is going to be to start a company. I certainly was.”
- Didn’t use network /advisors
We often hear about startup entrepreneurs lamenting their lack of network or investor connections so we were surprised to see that one of the reasons for failure was entrepreneurs who said they did not properly utilize their own network. As Kiko wrote, “Get your investors involved. Your investors are there to help you. Get them involved from the start, and don’t be afraid to ask for help. I think we made the mistake early on of trying to do (and know) everything ourselves, perhaps out of insecurity over being so new to the business world. This is a mistake.”
- No Financing /investor Interest
Tying to the more common reason of running out of cash, a number ofstartup founders explicitly cited a lack of investor interest either at the seed follow-on stage (the Series A Crunch) or at all.
- Bad locations
The reason start-ups prosper in some hubs is probably the same as it is for any industry: that’s where the experts are.
Location was an issue in a couple different ways. The first was that there must be congruence between your start-up’s concept and location.
Location also played a role in failure for remote teams. The key being that if your team is working remotely, make sure you find effective communication methods; else lack of teamwork and planning could lead to failure.
- Lack passion
There are many good ideas out there in the world, but 9% of start-up fail due to lack of passion, post-mortem founders found that a lack of passion for a domain and a lack of knowledge of a domain were key reasons for failure no matter how good an idea is.
- Sacrificing users to(supposed)profit/Ignore Customer
When I said at the beginning that if you make something users want, you’ll be fine, you may have noticed I didn’t mention anything about having the right business model. That’s not because making money is unimportant. I’m not suggesting that founders start companies with no chance of making money in the hope of unloading them before they tank. The reason we tell founders not to worry about the business model initially is that making something people want is so much harder.
I don’t know why it’s so hard to make something people want. It seems like it should be straightforward. But you can tell it must be hard by how few startups do it.
Because making something people want is so much harder than making money from it, you should leave business models for later, just as you’d leave some trivial but messy feature for version 2. In version 1, solve the core problem. And the core problem in a startup is how to create wealth (= how much people want something x the number who want it), not how to convert that wealth into money.
The companies that win are the ones that put users first. Google, for example. They made search work, then worried about how to make money from it. And yet some startup founders still think it’s irresponsible not to focus on the business model from the beginning. They’re often encouraged in this by investors whose experience comes from less malleable industries.
It is irresponsible not to think about business models. It’s just ten times more irresponsible not to think about the product.
- Loose Focus
Getting sidetracked by distracting projects, personal issues, and/or general loss of focus was mentioned 13% as a contributor to failure. As My Favorites wrote on the end of their startup experience, “Ultimately when we came back from SXSW, we all started losing interest, the team was all wondering where this was eventually going, 6 and I was wondering if I even wanted to run a startup, have investors, have the responsibility of employees and answering to a board of investors.”
- Pivot gone bad
The startup was one of the highest-profile competitors to top electric skateboard company Boosted, and last year announced plans to enter the electric scooter market — a push that seems to have doomed Inboard.
Founder (and now-former CEO) Ryan Evans told The Verge his team had locked down ‘a very large order’ from ‘one of the largest European scooter operators,’ which explains why the company quickly pivoted away from trying to sell its first e-scooter directly to consumers earlier this year. But Evans said the development timeline for Inboard’s e-scooter ‘outstretched’ its financial runway.”
After investors refused to inject more funds, the company was forced to shut down.
For Frances Dewing, the founder of Rubica, a last-ditch attempt to save her cybersecurity startup from failure amid Covid-19 led her to pivot from focusing on consumers and small businesses to larger companies.
In the end, the new direction didn’t ring true with investors:
“We were all really surprised given how relevant and needed this is right now,” Dewing said. “Investors didn’t agree with that or see it in the same way.”
- Poor marketing
Knowing your target audience and knowing how to get their attention and convert them to leads and ultimately customers is one of the most important skills of a successful business. The inability to market was a function of founders who liked to code or build product but who didn’t relish the idea of promoting the product and came up in 14% of the startup post-mortems.
As Overto wrote, “Thin line between life and death of internet service is a number of users. For the initial period of time the numbers were growing systematically. Then we hit the ceiling of what we could achieve effortlessly. It was a time to do some marketing. Unfortunately no one of us was skilled in that area. Even worse, no one had enough time to fill the gap. That would be another stopper if we dealt with the problems mentioned above.
- Disharmony among team /investors
Don’t start a company with someone you dislike because they have some skill you need and you worry you won’t find anyone else. The people are the most important ingredient in a startup, so don’t compromise there.
It is unclear to what extent the COVID-19 pandemic had hampered Hubba’s growth and customer base. However, one source BetaKit spoke with claimed a months-long battle between [Hubba CEO and founder Ben] Zifkin and Hubba’s board of directors regarding the ongoing viability of the company.”
At Pellion Technologies, the end came more quietly, as its major backer Khosla Ventures lost faith in the company’s ability to execute:
“According to former employees, all of whom requested anonymity, Khosla Ventures lost confidence that Pellion could make enough money serving a niche market. The lithium-metal technology worked for products like drones, but the big money in the battery world is in the automotive sector. Investors weren’t willing to sink the money needed to develop the battery for electric vehicles.”
In March 2019, Khosla decided the company would be shut down and removed Pellion’s name from its online firm portfolio.
- Loose Need/lack Business model
Failed founders seem to agree that a business model is important – staying wedded to a single channel or failing to find ways to make money at scale left investors hesitant and founders unable to capitalize on any traction gained. As Tutorspree wrote, “Although we achieved a lot with Tutorspree, we failed to create a scalable business….Tutorspree didn’t scale because we were single channel dependent and that channel shifted on us radically and suddenly. SEO was baked into our model 7 from the start, and it became increasingly important to the business as we grew and evolved. In our early days, and during Y-Combinator, we didn’t have money to spend on acquisition. SEO was free so we focused on it and got good at it.”
- Product mis-timed
“Timing, more than anything else, is what I think is to blame for our unfortunate fate. Our approach, I still believe, was the right one but the space was too overwhelmed with the unmet promise of AI to focus on a practical solution. As those breakthroughs failed to appear, the downpour of investor interest became a drizzle.”
VR platform Vreal intended to build a virtual reality space for video game streamers to hang out with their viewers and raised almost $12M in its 2018 Series A. However, the available hardware and bandwidth capabilities didn’t evolve as fast as the company had expected, and though it delivered on its promise, Vreal struggled to attract any significant usage:
“Unfortunately, the VR market never developed as quickly as we all had hoped, and we were definitely ahead of our time. As a result, Vreal is shutting down operations and our wonderful team members are moving on to other opportunities.”
For some companies on our list, an unforeseen factor like the Covid-19 pandemic contributed to product untimeliness. AI-powered vending machine startup Stockwell AI shut down in July 2020 as consumers stayed at home and avoided surface contact. The company’s CEO Paul McDonald wrote in an email to TechCrunch,
“Regretfully, the current landscape has created a situation in which we can no longer continue our operations and will be winding down the company on July 1st. We are deeply grateful to our talented team, incredible partners and investors, and our amazing shoppers that made this possible. While this wasn’t the way we wanted to end this journey, we are confident that our vision of bringing the store to where people live, work and play will live on through other amazing companies, products and services.”
- Poor product
“Scale Factor used aggressive sales tactics and prioritized chasing capital instead of building software that ultimately fell far short of what it promised, according to interviews with 15 former employees and executives. When customers fled, executives tried to obscure the real damage.”
Bad things also happen when you ignore what users want and need, whether consciously or accidentally.
Here’s what Shoes of Prey wrote about its vision to enable consumers to personalize their own shoes:
“We learnt the hard way that mass market customers don’t want to create, they want to be inspired and shown what to wear. They want to see the latest trends, what celebrities and Instagram influencers are wearing and they want to wear exactly that — both the style and the brand.”
- Regulatory/legal challenges
“As you may know, late last year the U.S. government imposed 10% tariffs on many products imported from China. … However, as of early summer, the “trade war” continued, and the tariff was increased to 25% which affected our entire Coolest product line.”
Mobile savings app Beam met its end quickly after falling afoul of the Federal Trade Commission. FTC Acting Director of Consumer Protection Daniel Kaufman stated at the time of its shut down of the company:
“The message here is simple for mobile banking apps and similar services: Don’t lie about your customers’ ability to get their money when they need it.”
Smart luggage manufacturer Bluesmart also fell victim to legal challenges. The company shut down in 2018 after most major US airlines enacted a policy requiring all airline travelers to remove lithium-ion batteries from their checked luggage:
“We have bittersweet news to share. The changes in policies announced by several major airlines at the end of last year—the banning of smart luggage with non-removable batteries—put our company in an irreversibly difficult financial and business situation. After exploring all the possible options for pivoting and moving forward, the company was finally forced to wind down its operations and explore disposition options, unable to continue operating as an independent entity.”
- Pricing/cost issues
“But like any start up, there comes a time when you need to take a hard look at the company’s long term viability. Although we designed a business that customers absolutely love, it proved hard to scale into the profitability it needed to be a sustainable social enterprise. As the scale of our chocolate production grew, so did the tensions between the very things that made Hey Tiger special. Ultimately while succeeding in one goal, we couldn’t make the other.”
The 2019 shutdown of genetic testing and scientific wellness start-upArivale came as a surprise to many partners and customers, but the reason behind the company’s failure was simple: the price of running the company was too high compared to the revenues it brought in:
“Our decision to terminate the program today comes even though customer engagement and satisfaction with the program is high and the clinical health markers of many customers have improved significantly. Our decision to cease operations is attributable to the simple fact that the cost of providing the program exceeds what our customers can pay for it. We believe the costs of collecting the genetic, blood and microbiome assays that form the foundation of the program will eventually decline to a point where the program can be delivered to consumers cost-effectively. Regrettably, we are unable to continue to operate at a loss until that time arrives…”
- Not the right team
“I was blindsided by the difficulty of hiring. Hiring was something I’d done successfully for years, including in the early days of Field book and in a previous start-up. But at a time when every engineer wanted to work on AI, self-driving cars or cryptocurrencies, a SaaS start-up with modest, sporadic growth wasn’t very attractive. I knew that investors would need to see strong, consistent growth before our Series A, but I didn’t expect that engineers would need to see it to even join before Series A.”
Lack of experience, combined with mismanagement, was one of the factors behind the downfall of Katerra, the high-flying construction start-up which raised nearly $1.5B in funding. As The Information summarizes,
“The SoftBank-backed start-up said it could slash the cost of building and renovating apartments, luring big-name investors. But the company, run by a tech veteran with no previous construction experience, ignored escalating problems and at one point tried to burnish revenue information shown to its board and financial backers.”
For Stratup launch, the passing of its founder meant the company couldn’t continue on in the same way, as Failory reported:
“Despite everything looking great on paper and the best of minds working together on this project, nothing could have predicted Paul Allen’s passing away in October of 2018, which would soon spell out the same fate for Stratolaunch. It became clear that Stratolaunch had been powered only by the vision of its founder, which wasn’t necessarily shared by those left in power after him.”
- Flawed business model
“Essentially, revenue continued to flow to proprietary vendors. The switch to open source did not take place at a pace anywhere close to the speed that would enable us to operate and grow our business, despite commitments from many to the contrary. We have also found that Covid-19 has actually redirected funds away from automation projects and into building-out raw infrastructure, further delaying adoption.”
“Selling Lumina to a proprietary vendor who is naturally antithetical to our mission proved an impossible task and for this reason we must now close our business,” it concluded.
At Aria Insights, the concept of outfitting drones with sensors to collect data from extreme environments seemed promising. But while the company got off the ground and found a few high-profile investors — including Bessemer Venture Partners — it ultimately couldn’t find a compelling use for that data, and, therefore, couldn’t adequately monetize its business model:
“CyPhy Works rebranded as Aria Insights in January 2019 to focus more on using artificial intelligence and machine learning to help analyze data collected by drones. ‘A number of our partners were collecting and housing massive amounts of information with our drones, but there was no service in the industry to quickly and efficiently turn that data into actionable insights,’ Lance Vanden Brook, former CyPhy and current Aria CEO said at the time of the rebranding.”
Various music startup post-mortems also pointed to the difficulty of finding a viable business model in the industry as a reason for startup failure.
UK-based blockchain music startup JAAK pointed to several reasons for its undoing, including its scaling challenges, in a series of Tweets on the company’s corporate account:
“6 years is a long time in startups, especially pre-revenue ones, and, ultimately, we failed to secure the funding required to get to market. Markets change and we didn’t change quickly enough.
- Got out competed
“The consumer robotics sector is an inherently challenging space – especially for a start-up. Over the past six years, we have taken on this challenge with consistent passion and ingenuity. From the first trials of development to accelerators and funding rounds, we have fought to bring MekaMon to life and into the hands of the next generation of tech pioneers. Unfortunately, for Reach Robotics, in its current form at least, today marks the end of that journey.”
Co-founder John Rees also weighed in:
“I’m still taking stock of it all but the short version is that it is true what they say – that ‘hardware is hard’ and consumer hardware is even harder due to the reliance on the Christmas sales period.”
Children’s apparel delivery service Mac & Mia found itself in a tough spot, facing competition from highly successful companies like Stitch Fix, and shut down only a year after its 2018 launch:
“Mac & Mia faced a host of competitors in the children’s delivery box space, including the aforementioned Stitch Fix, which launched its kids clothing service in 2018. Stitch Fix went public in 2017 and has a market cap around $2.7 billion. At least 20 other upstarts have launched similar delivery services for children’s clothes.”
- No market needs
There were ‘one or two reasons’ for Quibi’s failure: The idea behind Quibi either ‘wasn’t strong enough to justify a stand-alone streaming service’ or the service’s launch in the middle of a pandemic was particularly ill-timed. ‘Unfortunately, we will never know, but we suspect it’s been a combination of the two.’”
CEO Justin Kan of Atrium was direct about the difficulty of disrupting law firms, telling TechCrunch in an interview,
“If you look at our original business model with the verticalized law firm, a lot of these companies that have this kind of full stack model are not going to survive,” Kan explained. “A lot of these companies, Atrium included, did not figure out how to make a dent in operational efficiency.”
For a company like wedding dress retailer Brideside, Covid-19 obviated the need for its offerings:
“With two-thirds of weddings cancelled in 2020 and an uncertain year ahead, our chapter has come to an end.”
A month after Paul Graham, Jessica Livingston, Trevor Blackwell, and Robert Morris started the Y Combinator seed accelerator in 2005, they picked “make something people want” as their motto.
Our study shows that failing to do this is one of the easiest ways to guarantee startup failure.
- Ran out of cash/fail to raise new capital
“Daqri faced substantial challenges from competing headset makers, including Magic Leap and Microsoft, which were backed by more expansive war chests and institutional partnerships. While the headset company struggled to compete for enterprise customers, Daqri benefited from investor excitement surrounding the broader space. That is, until the investment climate for AR startups cooled.”
Despite fostering partnerships with Boeing, General Electric, and NetJets, aeronautical engineering startupAerion Corporation was unable to convince investors of its potential:
“The AS2 supersonic business jet program meets all market, technical, regulatory and sustainability requirements, and the market for a new supersonic segment of general aviation has been validated with $11.2 billion in sales backlog for the AS2.
However, in the current financial environment, it has proven hugely challenging to close on the scheduled and necessary large new capital requirements to finalize the transition of the AS2 into production.
Given these conditions, the Aerion Corporation is now taking the appropriate steps in consideration of this ongoing financial environment.”
European budget airline Wow Air met a similar fate; Chairman SkuliMogensen wrote to employees:
“We have run out of time and have unfortunately not been able to secure funding for the company… I will never be able to forgive myself for not taking action sooner.”
OTHER REASONS EFFECTING START UPS ARE
The passion and devotion of the founder(s), often sources of the initial creativity and productivity of the organization, can become limiting or a destructive factor. It may simply limit further growth and success, or it may lead to bitter conflict and divisions as the scale of demands made on the organization increases, or it may result in outright failure.
Some key benefits and cost to have more than one founders
- Emotional support during the challenging times
- Potential for better decisions made on key strategic issues
- Attract top-flight talent that wouldn’t work as an employee into multiple key roles
- Increased equity dilution
- Potential for longer decision-making times on key strategic issues
- Potential leadership battles
Common problem: choosing a small, obscure niche to avoid competition. You should know that you can only avoid competition by avoiding good ideas.
What is a niche product? It is a good or service with features that appeal to a particular market subgroup. A typical niche product can be easily distinguished from other products, and it will also be produced and sold for specialized uses within its corresponding niche market.
The Entrepreneurial team that succeeds is NOT the one that comes first with the idea; it is the one that scales first; and the one that is able to face competition with a disruptive differentiation solving a somewhat similar need in the market and with a marginal niche it’s difficult to achieve.
this shrinking from big problems is mostly unconscious. It’s not that people think of grand ideas but decide to pursue smaller ones because they seem safer. Your unconscious won’t even let you think of grand ideas. So the solution may be to think about ideas without involving yourself. What would be a great idea for someone else to do as a start-up?
Many of the applications we get are imitations of some existing company. That’s one source of ideas, but not the best. If you look at the origins of successful start-ups, few were started in imitation of some other start-up. Where did they get their ideas? Usually from some specific, unsolved problem the founders identified.
Our start-up made software for making online stores. When we started it, there wasn’t any; the few sites you could order from were hand-made at great expense by web consultants. We knew that if online shopping ever took off, these sites would have to be generated by software, so we wrote some. Pretty straightforward.
It seems like the best problems to solve are ones that affect you personally. Apple happened because Steve Wozniak wanted a computer, Google because Larry and Sergey couldn’t find stuff online, Hotmail because Sabeer Bhatia and Jack Smith couldn’t exchange email at work.
So instead of copying the Facebook, with some variation that the Facebook rightly ignored, look for ideas from the other direction. Instead of starting from companies and working back to the problems they solved, look for problems and imagine the company that might solve them. What do people complain about? What do you wish there was?
Don’t get too attached to your original plan because it’s probably wrong. If in each new idea you’re able to re-use most of what you built, then you’re probably in a process that converges.
In some fields the way to succeed is to have a vision of what you want to achieve, and to hold true to it no matter what setbacks you encounter. Starting start-ups is not one of them. The stick-to-your-vision approach works for something like winning an Olympic gold medal, where the problem is well-defined. Start-ups are more like science, where you need to follow the trail wherever it leads.
So don’t get too attached to your original plan because it’s probably wrong. Most successful start-ups end up doing something different than they originally intended — often so different that it doesn’t even seem like the same company. You must be prepared to see the better idea when it arrives. And the hardest part of that is often discarding your old idea.
But openness to new ideas must be tuned just right. Switching to a new idea every week will be equally fatal. Is there some kind of external test you can use? One is to ask whether the ideas represent progression. If in each new idea you’re able to re-use most of what you built for the previous ones, then you’re probably in a process that converges. Whereas if you keep restarting from scratch, that’s a bad sign.
Fortunately, there’s someone you can ask for advice: your users. If you’re thinking about turning in some new direction and your users seem excited about it, it’s probably a good bet.
Failure to pivot
Not pivoting away or quickly enough from a bad product, a bad hire, or a bad decision was cited as a reason for failure in 7% of the post mortems. Dwelling or being married to a bad idea can sap resources and money as well as leave employees frustrated by a lack of progress. Imercive is one company that went under due to a failure to pivot. The company, which shut down in 2009, originally intended to let people order from local restaurants via instant messages. After that concept proved too difficult and expensive to be functional, founder Keith Nowak decided to think bigger. Instant messaging could be used to help people interact with all kinds of businesses, not just restaurants — and in turn, it would help those businesses interact better with their customers. But by the time Nowak recognized this new, bigger opportunity, Imercive had already spent most of the money from its seed round. Without any results to show for it, nor any proof that the new vision could gain traction, the company had to close down.
fight between founders
fights between founders are surprisingly common. About 20% of the startups we’ve funded have had a founder leave. It happens so often that we’ve reversed our attitude to vesting. We still don’t require it, but now we advise founders to vest so there will be an orderly way for people to quit.
A founder leaving doesn’t necessarily kill a start-up, though. Plenty of successful start-ups have had that happen. it’s usually the least committed founder who leaves. If there are three founders and one who was lukewarm leaves, big deal. If you have two and one leaves, or a guy with critical technical skills leaves, that’s more of a problem. But even that is survivable. Blogger got down to one person, and they bounced back.
Most of the disputes I’ve seen between founders could have been avoided if they’d been more careful about who they started a company with. Most disputes are not due to the situation but the people. Which means they’re inevitable. And most founders who’ve been burned by such disputes probably had misgivings, which they suppressed, when they started the company. Don’t suppress misgivings. It’s much easier to fix problems before the company is started than after. So don’t include your housemate in your start-up because he’d feel left out otherwise. Don’t start a company with someone you dislike because they have some skill you need and you worry you won’t find anyone else. The people are the most important ingredient in a start-up, so don’t compromise there.
Choosing the wrong platform
A related problem (since it tends to be done by bad programmers) is choosing the wrong platform. For example, I think a lot of start-ups during the Bubble killed themselves by deciding to build server-based applications on Windows. Hotmail was still running on FreeBSD for years after Microsoft bought it, presumably because Windows couldn’t handle the load. If Hotmail’s founders had chosen to use Windows, they would have been swamped.
PayPal only just dodged this bullet. After they merged with X.com, the new CEO wanted to switch to Windows even after PayPal cofounder Max Levchin showed that their software scaled only 1% as well on Windows as Unix. Fortunately for PayPal they switched CEOs instead.
Platform is a vague word. It could mean an operating system, or a programming language, or a “framework” built on top of a programming language. It implies something that both supports and limits, like the foundation of a house.
The scary thing about platforms is that there are always some that seem to outsiders to be fine, responsible choices and yet, like Windows in the 90s, will destroy you if you choose them. Java applets were probably the most spectacular example. This was supposed to be the new way of delivering applications. Presumably it killed just about 100% of the start-ups who believed that.
How do you pick the right platforms? The usual way is to hire good programmers and let them choose. But there is a trick you could use if you’re not a programmer: visit a top computer science department and see what they use in research projects.
Slowness in launching
Companies of all sizes have a hard time getting software done. It’s intrinsic to the medium; software is always 85% done. It takes an effort of will to push through this and get something released to users.
Start-ups make all kinds of excuses for delaying their launch. Most are equivalent to the ones people use for procrastinating in everyday life. There’s something that needs to happen first. Maybe. But if the software were 100% finished and ready to launch at the push of a button, would they still be waiting?
One reason to launch quickly is that it forces you to finish some quantum of work. Nothing is truly finished till it’s released; you can see that from the rush of work that’s always involved in releasing anything, no matter how finished you thought it was. The other reason you need to launch is that it’s only by bouncing your idea off users that you fully understand it.
Several distinct problems manifest themselves as delays in launching:
- working too slowly.
- not truly understanding the problem.
- fear of having to deal with users.
- fear of being judged.
- working on too many different things.
- excessive perfectionism.
Fortunately, you can combat all of them by the simple expedient of forcing yourself to launch something fairly quickly.
Lunching too early
Launching too slowly has probably killed a hundred times more startups than launching too fast, but it is possible to launch too fast. The danger here is that you ruin your reputation. You launch something, the early adopters try it out, and if it’s no good they may never come back.
So what’s the minimum you need to launch? We suggest startups think about what they plan to do, identify a core that’s both
(a) useful on its own and
(b) something that can be incrementally expanded into the whole project, and then get that done as soon as possible.
This is the same approach I (and many other programmers) use for writing software. Think about the overall goal, then start by writing the smallest subset of it that does anything useful. If it’s a subset, you’ll have to write it anyway, so in the worst case you won’t be wasting your time. But more likely you’ll find that implementing a working subset is both good for morale and helps you see more clearly what the rest should do.
The early adopters you need to impress are tolerant. They don’t expect a newly launched product to do everything; it just must do something.
Having no specific user in mind
You can’t build things users like without understanding them. I mentioned earlier that the most successful start-ups seem to have begun by trying to solve a problem their founders had. Perhaps there’s a rule here: perhaps you create wealth in proportion to how well you understand the problem you’re solving, and the problems you understand best are your own.
That’s just a theory. What’s not a theory is the converse: if you’re trying to solve problems you don’t understand, you’re hosed.
And yet a surprising number of founders seem willing to assume that someone, they’re not sure exactly who, will want what they’re building. Do the founders want it? No, they’re not the target market. Who is? Teenagers. People interested in local events (that one is a perennial tarpit). Or “business” users. What business users? Gas stations? Movie studios? Défense contractors?
You can of course build something for users other than yourself. We did. But you should realize you’re stepping into dangerous territory. You’re flying on instruments, in effect, so you should
(a) consciously shift gears, instead of assuming you can rely on your intuitions as you ordinarily would, and
(b) look at the instruments.
In this case the instruments are the users. When designing for other people you have to be empirical. You can no longer guess what will work; you have to find users and measure their responses. So if you’re going to make something for teenagers or “business” users or some other group that doesn’t include you, you have to be able to talk some specific ones into using what you’re making. If you can’t, you’re on the wrong track.
Raising too little money
Most successful start-ups take funding at some point. Like having more than one founder, it seems a good bet statistically. How much should you take, though?
Start-up funding is measured in time. Every start-up that isn’t profitable (meaning nearly all of them, initially) has a certain amount of time left before the money runs out and they have to stop. This is sometimes referred to as runway, as in “How much runway do you have left?” It’s a good metaphor because it reminds you that when the money runs out, you’re going to be airborne or dead.
Too little money means not enough to get airborne. What airborne means depends on the situation? Usually, you have to advance to a visibly higher level: if all you have is an idea, a working prototype; if you have a prototype, launching; if you’re launched, significant growth. It depends on investors, because until you’re profitable that’s who you must convince.
So if you take money from investors, you have to take enough to get to the next step, whatever that is. Fortunately, you have some control over both how much you spend and what the next step is. We advise start-ups to set both low, initially: spend practically nothing, and make your initial goal simply to build a solid prototype. This gives you maximum flexibility.
Spending too much
It’s hard to distinguish spending too much from raising too little. If you run out of money, you could say either was the cause. The only way to decide which to call it is by comparison with other startups. If you raised five million and ran out of money, you probably spent too much.
Burning through too much money is not as common as it used to be. Founders seem to have learned that lesson. Plus it keeps getting cheaper to start a startup. So as of this writing few startups spend too much. None of the ones we’ve funded have. (And not just because we make small investments; many have gone on to raise further rounds.)
The classic way to burn through cash is by hiring a lot of people. This bites you twice: in addition to increasing your costs, it slows you down—so money that’s getting consumed faster has to last longer. Most hackers understand why that happens; Fred Brooks explained it in The Mythical Man-Month.
We have three general suggestions about hiring:
(a) don’t do it if you can avoid it,
(b) pay people with equity rather than salary, not just to save money, but because you want the kind of people who are committed enough to prefer that, and
(c) only hire people who are either going to write code or go out and get users, because those are the only things you need at first.
Raising too much money
It’s obvious how too little money could kill you, but is there such a thing as having too much?
Yes and no. The problem is not so much the money itself as what comes with it. As one VC who spoke at Y Combinator said, “Once you take several million dollars of my money, the clock is ticking.” If VCs fund you, they’re not going to let you just put the money in the bank and keep operating as two guys living on ramen. They want that money to go to work. At the very least you’ll move into proper office space and hire more people. That will change the atmosphere, and not entirely for the better. Now most of your people will be employees rather than founders. They won’t be as committed; they’ll need to be told what to do; they’ll start to engage in office politics.
When you raise a lot of money, your company moves to the suburbs and has kids.
Perhaps more dangerously, once you take a lot of money it gets harder to change direction. Suppose your initial plan was to sell something to companies. After taking VC money you hire a sales force to do that. What happens now if you realize you should be making this for consumers instead of businesses? That’s a completely different kind of selling. What happens, in practice, is that you don’t realize that. The more people you have, the more you stay pointed in the same direction.
Another drawback of large investments is the time they take. The time required to raise money grows with the amount. When the amount rises into the millions, investors get very cautious. VCs never quite say yes or no; they just engage you in an apparently endless conversation. Raising VC scale investments is thus a huge time sink — more work, probably, than the startup itself. And you don’t want to be spending all your time talking to investors while your competitors are spending theirs building things.
We advise founders who go on to seek VC money to take the first reasonable deal they get. If you get an offer from a reputable firm at a reasonable valuation with no unusually onerous terms, just take it and get on with building the company. Who cares if you could get a 30% better deal elsewhere? Economically, startups are an all-or-nothing game. Bargain-hunting among investors is a waste of time.
Poor investor management
As a founder, you have to manage your investors. You shouldn’t ignore them, because they may have useful insights. But neither should you let them run the company. That’s supposed to be your job. If investors had sufficient vision to run the companies they fund, why didn’t they start them?
Pissing off investors by ignoring them is probably less dangerous than caving in to them. In our startup, we erred on the ignoring side. A lot of our energy got drained away in disputes with investors instead of going into the product. But this was less costly than giving in, which would probably have destroyed the company. If the founders know what they’re doing, it’s better to have half their attention focused on the product than the full attention of investors who don’t.
How hard you have to work on managing investors usually depends on how much money you’ve taken. When you raise VC-scale money, the investors get a great deal of control. If they have a board majority, they’re literally your bosses. In the more common case, where founders and investors are equally represented and the deciding vote is cast by neutral outside directors, all the investors have to do is convince the outside directors and they control the company.
If things go well, this shouldn’t matter. So long as you seem to be advancing rapidly, most investors will leave you alone. But things don’t always go smoothly in startups. Investors have made trouble even for the most successful companies. One of the most famous examples is Apple, whose board made a nearly fatal blunder in firing Steve Jobs. Apparently even Google got a lot of grief from their investors early on.
Not wanting to get your hands dirty
Nearly all programmers would rather spend their time writing code and have someone else handle the messy business of extracting money from it. And not just the lazy ones. Larry and Sergey apparently felt this way too at first. After developing their new search algorithm, the first thing they tried was to get some other company to buy it.
Start a company? Yech. Most hackers would rather just have ideas. But as Larry and Sergey found, there’s not much of a market for ideas. No one trusts an idea till you embody it in a product and use that to grow a user base. Then they’ll pay big time.
Maybe this will change, but I doubt it will change much. There’s nothing like users for convincing acquirers. It’s not just that the risk is decreased. The acquirers are human, and they have a hard time paying a bunch of young guys millions of dollars just for being clever. When the idea is embodied in a company with a lot of users, they can tell themselves they’re buying the users rather than the cleverness, and this is easier for them to swallow.
If you’re going to attract users, you’ll probably have to get up from your computer and go find some. It’s unpleasant work, but if you can make yourself do it you have a much greater chance of succeeding. In the first batch of startups we funded, in the summer of 2005, most of the founders spent all their time building their applications. But there was one who was away half the time talking to executives at cell phone companies, trying to arrange deals. Can you imagine anything more painful for a hacker? But it paid off, because this startup seems the most successful of that group by an order of magnitude.
If you want to start a startup, you have to face the fact that you can’t just hack. At least one hacker will have to spend some of the time doing business stuff.
A half-hearted effort
The failed startups you hear most about are the spectacular flameouts. Those are actually the elite of failures. The most common type is not the one that makes spectacular mistakes, but the one that doesn’t do much of anything — the one we never even hear about, because it was some project a couple guys started on the side while working on their day jobs, but which never got anywhere and was gradually abandoned.
Statistically, if you want to avoid failure, it would seem like the most important thing is to quit your day job. Most founders of failed startups don’t quit their day jobs, and most founders of successful ones do. If startup failure were a disease, the CDC would be issuing bulletins warning people to avoid day jobs.
Does that mean you should quit your day job? Not necessarily. I’m guessing here, but I’d guess that many of these would-be founders may not have the kind of determination it takes to start a company, and that in the back of their minds, they know it. The reason they don’t invest more time in their startup is that they know it’s a bad investment.
I’d also guess there’s some band of people who could have succeeded if they’d taken the leap and done it full-time, but didn’t. I have no idea how wide this band is, but if the winner/borderline/hopeless progression has the sort of distribution you’d expect, the number of people who could have made it, if they’d quit their day job, is probably an order of magnitude larger than the number who do make it.
If that’s true, most startups that could succeed fail because the founders don’t devote their whole efforts to them. That certainly accords with what I see out in the world. Most startups fail because they don’t make something people want, and the reason most don’t is that they don’t try hard enough.
In other words, starting startups is just like everything else. The biggest mistake you can make is not to try hard enough. To the extent there’s a secret to success, it’s not to be in denial about that.