The six reasons why startups fail (and only one is unavoidable)
Why do so many startups fail? Dr Bernard Bulkin, who has worked in venture capital for 21 years, says there are six main reasons
Why do so many startup companies go under? An oft quoted statistic is 90 per cent in the first five years. Yet despite these grim statistics, angel investors and venture capital firms continue to invest. They all seem to believe that they are going to back the next big thing – which means a high rate of failure is inevitable.
Why do so many startups fail, and are many of these failures avoidable? If I say to people that I am writing about why startups fail, they often say, oh, it’s because of—well that is the first mistake! There is not one reason that accounts for even a significant chunk of the failures.
Conversely, I think there are six big things (and some little things) that trap new businesses, and many manage to get into several of them. The sad thing is all but the first are avoidable, if only we could learn the lessons of the past. Unfortunately, founders might not know these lessons; their investors should know better, but they often don’t.
Here is a take on why start-ups fail.
The six big startup traps
First, the reason that is not avoidable: the technology doesn’t work, and it can never be made to work. Some of these are frauds, and anyone who has looked at investments over several years will have seen several fraudulent companies. But this is the minority, even in this category. Too often something demonstrated at the lab bench just can never work at scale, and neither the founders nor the investors can see this.
Second, the market. The company doesn’t understand the market for their product. I often meet founders who have worked on their technology but never spoken to a potential customer. Big companies buy technology from their tier 1 suppliers, not from startups. And retail customers need educating to adopt new technology, which takes time and money.
Third, the company doesn’t appreciate the quantity and quality of engineering to go from prototype or lab to product made at scale. Tech founders coming from a physics, biology or chemistry background don’t understand how much engineering expertise is going to be required to get to a commercial process.
Fourth, leadership is crucial. Are technical founders the people who can lead a business? Indeed, do they even understand the fundamentals of how business works? Most important, are they self-aware about the skills and competencies that they lack.
Fifth, the board fails the company. Board members need to be aligned, and committed, not just appearing once a quarter and pulling in different directions. A board chair needs to recognise the competency gaps of the CEO and be taking steps to remedy them. The chair also needs to work at getting the company to have a realistic plan – both financial and operational.
And sixth, money. It takes a lot to go from the germ of an idea to a real, self-sustaining business. Getting it from the right sources, with the most advantageous terms, is a skill that is often missing. We often see that companies find it possible to raise relatively small sums of money, and so they stay timid, limping along without ever becoming viable. Moreover, and this goes back to both board and company leadership, they are ignorant about the role that debt can play in enabling the growth of the business.
More startups can succeed if we are willing to learn lessons and do things differently, rather than accept a high rate of failure as inevitable.
Dr Bernard J Bulkin OBE is the author of Why Start-ups Fail. He has worked in venture capital for 21 years and is an Emeritus Professorial Fellow of the University of Cambridge