Let’s face it, most startups fail. One study found that up to 75% of startups fail. Our own estimate is that 95% of seed level startups fail.
Many studies come up with a list of reasons for the high failure rate. These include:
- 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
However, our own work shows something more basic happening, especially at the seed level. Certain core beliefs, or myths, that cause failure and results in the symptoms listed above. That is, the root cause of the list above is myths about how to run a startup. These belief systems are so ingrained in the startup’s mentality that they almost guarantee you will suffer from one or all of the above.
So, what are these myths?
- I have no money, so I must hire the cheapest people
- I cannot raise money until I get “X”
- I do not need Sales and Marketing until I am ready to sell the product
I have no money, so I must hire the cheapest people
We see this all the time. Entrepreneurs are building their team based on the lowest cost people they find. All successful startups are built around great people, who generally are not going to work for peanuts. Steve Jobs never tried to find the cheapest engineer – he was obsessed with the best and nothing less.
The first thing that is wrong with this belief is that the lowest cost people will almost always be the highest cost. We hear: “The most expensive mistake I ever made was hiring a cheap engineer.” over and over again in the startups we work with. And these are the lucky ones that survive to try again.
It is not to say that budgets are not important – they are very important. An entrepreneur must be good at making do with a small budget. Successful startups figure out how to do this AND work with only the best. Here are a few tips:
1. Never hire a full- time person until you are sure you are ready to scale: Ready to scale generally means you just cashed the multi-million dollar check from a VC. In the seed stage, it is almost always a mistake to hire a full-time person. If I have my choice between a 40 hour a week mediocre engineer with no startup experience versus one hour, at $500/hr., of a world-class product designer with dozens of success under their belt, I would choose the expert every time because the expert will tell you the right thing to do and the mediocre engineer will happily do whatever you tell them to do, and learn a lot, on your dime, in the processes of doing it.
2. Get Startup Experts: Startups are not a smaller version of big companies. Most people are taught how to operate in a big company – not a startup. Their idea of what to do is distorted by this training and experience. It is not that what they are doing is wrong, it is just wrong for a startup. This is especially true in the early seed stages where products are MVPs (Minimally Viable Products), and you’re mostly doing MV (Market Validation). Most companies would consider an MVP as doing a lousy job and would wonder why anyone would not just copy the marketing strategies of existing successful companies.
3. Look for leverage: Use product development companies that already have reference designs that are 90% of what you need. Find strategic players that will give you “free work” as part of a strategic partnership. Take two existing products and make them one. Do anything to avoid re-doing something that has already been done or someone is already doing. Your goal, in the beginning, is to develop a repeatable business process and product that generates a profit. Perfecting the product, or the marketing, or sales, comes later. Your job is to spend money on the things that are not yet proven, not spend all your money on things that are already proven.
4. Only fund things that lead to the next funding level: Your job at the 3Fs (Friends, Family, and Fools) funding level is to do enough MV to show that a problem exists that people will pay money to solve and your solution has some reasonable chance of costing less than what people will pay. Your job at the seed level is to prove that people will, in fact, buy the product, and validate the cost for creating these sales (Customer Acquisition Cost). You likely do not need a prototype – but maybe an MVP which is very different – to do any of this MV. You need data, and specifically marketing data.
I cannot raise money until I get “X”
X can be a prototype, a customer, revenue, etc. The truth is, if you cannot raise money right now, you will fail. There are investors who fund every level of a startup: 3Fs, Seed, A rounds, B rounds, etc. It’s a myth to think there is a chicken or egg problem with startups.
Without the ability to raise money, you are almost certain to fail. Most businesses need capital, and most entrepreneurs do not have enough of their own to complete the job. Even if you’re lucky (or skillful) enough to have a nice little pile of cash, at some point, you are almost certain to need more – and without the ABILITY to raise it, you will not reach the cash flow positive point.
Our own experience is that some people have the ability to raise money, but most do not. I wish I could say that it is something teachable, but this does seem to be the case. Raising money is a talent, like throwing a football, or driving a race car. Some people have it, and some do not. Training and strategy can make you better, but it is no substitute for natural talent. My own opinion is this has more to do with investors than it does entrepreneurs. We see many great startups, with good teams and great ideas fail simply because no one will fund them; meanwhile, we see hopeless startups raise money as if they were falling off a log.
You must find out quickly if you have this talent. If not, acquire this talent, or build a business that will never require any additional funding until after you have established profitability – which always takes 3 to 10 times what you think. The only way to know if you have this talent is to try.
Why try to sell a product until you have it – right?
Wrong, for two reasons: first, how do you know a product will sell unless you try, and how could you possibly know your CAC (Customer Acquisition Cost) unless you try. Without empirical data to show a product will sell, and that the CAC will be low enough to produce a profit, no one will (or should, including you) invest serious money into your business. Without serious money, you cannot get into production.
There is a more subtle point here – subtle, but important: without trying to sell a product or Market Validation, you will never know exactly what to sell. Many people knew that a digital music player would sell – the first one came out in 1979 and promptly bombed. Apple figured out exactly what type of digital music player would sell – one with iTunes, a sleek user interface, even the infamous curved edges. Markets are complex, and small, seemly unimportant details can make all the difference. How you Go To Market (GTM) can mean all the difference between success and failure. Having grown up with the first computer operating systems, I can tell you DOS was far from the best – but partnering with IBM was a brilliant GTM strategy that made up for product deficiencies.
As a start, plan on spending 50% of your budget (money and time) on the product and 50% on marketing. You may need some adjustment depending on your circumstances, but if your spending 95% on product design, and 5% on marketing, you are almost certainly going to fail.
The problem with Startup myths is that they are deeply held beliefs that we accept without any critical thinking. This makes us vulnerable to listening to those that are consistent with this thinking and not listen to those that do not fit the myth: the engineer who says he can design the product for a preposterously low budget, the friend who says it’s a great idea, and the investor who says come back when you have a prototype. The myths darken the lens of the rose-colored glasses to the point that we cannot see the real world anymore.
Commit to finding great people – and figuring out how to pay for it. Make sure one of those people has the talent for raising money. Focus on product development in parallel with Market Validation. Do these three things, and you will avoid the top 10 symptoms associated with startup failure.