Joe Johnson, Ph.D.
Entrepreneur. Investor. Startup Expert.
Most entrepreneurs have met with failure at least once in the course of their professional lives. There’s a reason that the fear of failure stops many from even attempting to start a business. Namely, that new businesses do fail more often than not. In an ideal world, our amazing ideas would automatically transpose themselves into profitable enterprises. However, sometimes the formula isn’t quite right. The launch may have been too early, too late, or otherwise failed to catch the target audience’s attention.
Oftentimes, following a failure, the easiest thing to do is to simply pack up and move on, erase the memory of the crash landing, and fix one’s eyes on the next opportunity. That said, while it’s necessary to take steps moving forward, it’s also important to spend time considering the past so that its lessons may be fully internalized and steps taken to apply them whenever possible.
Where Research Can Fail
There are innumerable articles relating the myriad ways in which startups have failed. The most glaring problem with these pieces is that the information they contain is frequently self-reported. As readers, we’re only privy to those details that the failed founders are willing to share. If they claim that they weren’t able to secure sufficient funding, then we must take them at their word – without any ability to challenge either the story’s details or overall veracity – pending more information becoming available in the future. Sometimes, the reasons why a business has failed are exceedingly clear. Perhaps we’ve personally noticed the failed products in the bargain bin or have watched one bad hire after another walk through the door. In any case, be sure to take all such stories with a grain (at least!) of salt. Those founders apparently willing to share their failure stories may not be as forthcoming with all of the nitty-gritty details.
For the purposes of this article, the data set describing reasons for failure was comprised of 193 public blog posts made by startup founders and principals and aggregated by Fractl. While a small sample, it still serves to highlight some important areas to bear in mind.
Dissecting Your Startup Failure
When it’s time to do the post-mortem on your startup, there are some points that should always be examined for errors. While it’s unlikely that any two startups will fail in exactly the same fashion, a host of common factors are frequently to blame. That said, it’s important to note that the likelihood of these factors leading to failure varies between bootstrapped and externally-funded startups.
These are some of the most common ly relayed problems faced by that startups:
Business Model Viability
Not every idea is a home run and even good ideas can sour when saddled with a poor business model. Approximately 25% of bootstrapped startup failures can be blamed on a bad business model, along with approximately ⅓ of startups raising less than $1 million. For both of these groups, this is the single, most common issue. For startups raising over $1 million, it’s the second most common problem with approximately 32% self-reporting a lack of business model viability.
Having a workable business model is absolutely key – both for a successful launch and for securing external funding. A poor business model can lead to a variety of issues down the line, such as failing to differentiate oneself from the competition, not understanding the market, and encountering unanticipated obstacles.
A business model should clearly outline a company’s plan for generating revenue. When components of the plan aren’t practical, either because they haven’t been thoroughly researched or are based on faulty assumptions, the plan can fail. Throughout a startup’s lifespan, a business model may evolve in part or even change completely in order to meet the needs of the market. When a business model remains static, startups may find that they have difficulty growing or competing.
To combat this problem in the future, consider the early utilization of a business model canvas to test your hypotheses about your unique value proposition. Speak with your target audience and determine whether they’ll purchase your product or service and at what price. Consider whether you can truly deliver that product or service in a way both enticing to the target audience and with sufficient differentiation in the marketplace. Additionally, you’ll have to determine whether you have the resources in place to make it happen. There are plenty of great business ideas out there, but – for a variety of reasons – their respective viability is all over the proverbial map.
We’ve all heard of companies that have run out of money. Perhaps they were unable to obtain the funding they required or maybe they simply burned through cash at a greater-than-anticipated rate. Smaller companies, especially seasonal businesses, frequently experience cash flow problems during slower periods. Income can be unpredictable, making budgeting and planning both essential and challenging.
Of startups analyzed by Fractl, 46 claim to have run out of cash. Most surprising is the detail of which startups didn’t use this issue as an excuse. Only four of the 40 bootstrapped startups claimed that running out of cash lead to their failure, which indicates that the other 42 startups received some level of outside financing. Whether this was due to an innate frugality on the part of those four companies or simply a matter of their having shut down before reaching that point is unclear. At the same time, eight of the bootstrapped startups blamed their failure on an inability to secure financing or investors.
I’ve previously discussed financing and how it can be difficult for startups to secure outside investment (even bank loans). There is no single reason for this situation. A poor business model, lack of connections, an inexperienced team, and the current economic landscape of the country all combine to render startup financing an extremely challenging proposition.
Spendthrifts will often have it easier when it comes to navigating this particular issue. Keeping a cap on one’s budget and spending wisely are the two key points. For those who’ve experienced difficulty in securing adequate financing, a more thorough analysis may be necessary both to determine why and to overcome the hurdle in the future.
Failure to Win Market Share
When a product or service fails to impress a market, it’s difficult for a company to survive. If your business model is based on the perceived needs of a specific target audience, advance research must be done in order to determine whether there’s truly a need for your product or service. Will you be fulfilling an existing need or creating a new demand? These two paths require different approaches and plenty of marketing dollars.
A product or service may fail to gain traction because:
- It’s not properly advertised
- A market doesn’t presently exist for it
- It’s not adequately differentiated from the competition
- It doesn’t fulfill its purported need
- It’s too expensive
- It wasn’t sufficiently researched
- The company has a bad reputation
If your startup failed because it didn’t gain sufficient market share, there are likely deeper reasons at work. Were marketing dollars misallocated? Was the product too difficult to use? Did you focus on the wrong target audience? Increasing your research efforts and focusing on consumer feedback may help you to overcome this issue in the future.
While doing a postmortem on your failed startup, don’t neglect to note all of the things you did right. At the end of the day, it’s important to understand the mechanisms behind both our failures and successes, so that we can improve our business methodologies and ensure that we’re meeting the needs of our target audience. Taken in total, these lessons can help you to transform yesterday’s failure into tomorrow’s success.
About the Author
Dr. Joe Johnson is an entrepreneur, investor, and startup expert. He is the founder and principal of GoodField Investments and the GoodField Foundation (www.GoodField.com).
Joe has a Ph.D. in Entrepreneurial Leadership and an MBA. He is the author of the upcoming book on The Science of Why Most Entrepreneurs Fail and Some Succeed.
Most importantly, he is the incredibly blessed husband of one amazing wife and father of six wonderful children. He resides in Bradenton, Florida. For more information on Dr. Johnson and his work, go to www.JoeJohnson.com.