Why Funded Startups Die

Why Funded Startups Die

The Internet is filled with heart-rending startup post-mortems. Naturally, you’ve got to fail, as a certain startup investor once told us. But we’re guessing you’d rather see your business survive than post inspirational quotes and thank the world for ‘blessing you with challenges’. We’re going to look at the top reasons for startup failure, focusing on venture-backed startups. We’ll also add some preventive care tips from startup investor and founder Jussi Hakunti.

The funding’s not really a huge problem. Wait, what?

The most commonly cited reason for startup failure (42%) is no market need for a product. Usually, it’s the classic product/market fit issue. Startups should be very flexible to make changes and to learn from problems and failures. Startuppers often resist pivoting, and making the right adjustments after setbacks. As consultants, we’ve met startup CEOs who badly wanted to develop a project we saw no future for. Market mismatch? No uniqueness whatsoever? Let’s just say we’d be apprehensive about putting our devs to work on something like that.

“The funding itself is not a problem”, says Jussi. “You need to understand that even though you have funding, if your original business idea is not doing well, you need to be transparent about it”. Be honest to your investors and say: this is not going to fly, we need to do something. “Companies often fight too long to understand that this situation is something they cannot fix anymore. They’re burning more money on a product or idea that doesn’t work”.

‘Well, that escalated quickly…’, or execution

The issues start popping up. A dip in engagement. Suddenly, people are opening your million-dollar-idea app and exiting it within seconds. You get comments from customers not being able to find what they want. There are scalability issues that come when you become unable to support growth. And there are bugs. Lots of bugs. What we’ve also noted when advising startups is their unwillingness to pay attention to the quality of their earlier code. Startups sometimes recoil from changes, thinking cleaning up their bad code is an unnecessary cost. We’ll be blunt – if you don’t rewrite your crap code, you’ll bury your product (you can be sure we’ll deal with that in another article).
Three things worth remembering at this point:

  • Ideas – or market fit – are worthless without execution.
  • Execution can also correct an initially so-so idea.
  • You may not be the first to do something – but you can be the first one to do it right.

The product’s just as strong as the team

If you’re the entrepreneur you can get carried away with your brilliant idea. That’s great. This is also why you’re doing this in the first place. But running a business and developing a product can be two different things. There are things which are harder to anticipate, especially if you’re not a pro developer yourself. These include scalability, integrating with new, more efficient technologies, dealing with overloads due to an unexpected number of users. Because if your product is poor, someone on your team is to blame.
And here we’re onto another major problem and cause of startup failure: bad team. It’s the third-most-cited reason that sends startups packing. In a survey carried out by tech blog ArcticStartup and CoFounder magazine, 37% founders stated that getting the right team together is the biggest challenge.

Sure, startup life can be draining. Your team can get stressed, and then they can’t perform that well any more, they start seeing too many risks… When the stress levels get high, team members start seeing problems with the others on the team. “You didn’t make this decision, or you made the wrong one and now we’re in deep shit here”. Your team members can sink the startup if they begin to fight. The biggest problem, according to Jussi, is that by that time “the focus is somewhere else – not on taking the product out there and making it functional”.

But what about the devs??

Naturally, a tech startup also has developers to worry about. Hire? Hire who? Get remote devs? Here’s what Jussi tells us:

  • People just joining the startup – especially an early-stage one – don’t join for the salary. Startups don’t really pay huge salaries – they try to generate a good environment for the team members to grow. That, of course, changes once you have funding. Some great people don’t necessarily want much to do with the startup, they just want to get a good salary. They may like working there because of the challenges, but they are also evaluating their time that they spent with the company: could the other startup be paying me more now?
    • Partly because of my earlier experiences. I wanted to avoid having a big local team, which would make us start operating like a big company with all the limitations and responsibilities, more funding, better workspace. Whenever things get worse, or you need some extra time to develop your ideas, you still need to pay some salaries to the hired guys. That happens even if you don’t have any idea how to use them and they are just sitting there at the office.
  • In the case of a remote team, you just specify the task and pay for the task done. Once the task is done you may need some extra time to see how things are moving forward. Then, if you have clear plans on the next step you can start to spend money again. When you have your own employees, then you just have to pay them. Even if there is nothing to do. If you don’t have any real job for them to do, you are practically wasting time and money. So, do you release these guys? It’s not easy to do that to somebody.

Product/market fit (and refusing to pivot), a bad product and a team that pulls you down – these are the top sins we’ve identified. What are your thoughts on startup failure?

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