“I have learned fifty thousand ways it cannot be done and therefore I am fifty thousand times nearer the final successful experiment.”
– Thomas Edison
When developing a growth strategy for an organization we often rely on benchmarks and best practices. Imitating what has successfully worked for other companies is a proven and widely used approach.
Less common, but equally as useful, is to examine business failures. By observing what has not worked for other organizations, growth leaders can not only avoid running into common landmines, but also identify warning signs of trouble before they become fatal.
Fortunately, growth leaders have many publicly available resources to learn from. One of the most comprehensive and useful reports is published by CB Insights, a business analytics firm focused on high growth private companies and investor activities. They keep a running list of failed startup post-mortems, which is now up to 368 and counting. And from that list they identified the top 20 reasons why startups fail.
In this article, I will share the top 10 reasons, and my insights for how growth leaders can avoid them. While there is not a perfect correlation to non-startups (i.e. established organizations that are already in a market with their product and/or service offering) I think most of the lessons apply equally as well.
Note: The percentages add up to more than 100% because many startups suffered from more than one reason for failure.
Here they are:
1 – No market need (42%)
I like to call this the “solution looking for a problem” syndrome.
Unfortunately, this is extremely common among entrepreneurs. They get so excited and passionate about their new product and/or service innovation that they gloss over a fundamental requirement for business success: there has to be a problem in the market that buyers want to solve.
Strategy for growth leaders: Do not fall in love with your offering until you have validated there is a market for it. You have to make something that people want to buy.
2 – Ran out of cash (29%)
This one doesn’t really need much explanation. There are two old business truisms that apply here:
- “Cash is king”
- “It takes money to make money”
There are many costs involved with starting and scaling a business. Very rarely do you find a startup that is able to finance its growth entirely from operations. Most startups need investment capital to get going, and established businesses also need liquidity to fund their growth.
Strategy for growth leaders: Create a realistic growth plan that accounts for all your costs, and build in a cushion for the unexpected. Recognize that money is a finite resource, which needs to be carefully allocated and managed.
3 – Not the right team (23%)
Almost all problems in business are ultimately people problems, and so are the solutions. To execute your growth strategy you need to build and manage a team of professionals who believe in your mission and are dedicated to your vision of the future for the organization. This team needs to include capability across a diverse set of skills (i.e. finance, product, marketing, sales, client success, etc.)
Strategy for growth leaders: Growth leaders have the primary responsibility of getting the right people on the bus, and then organizing them into the rights seats.
4 – Got outcompeted (19%)
This reason for failure has some subtlety to it. Many growth strategists preach that organizations should not pay any attention to competitors. This is a mistake. While you should not be consumed by what competitors are doing, you cannot afford to ignore them either.
The truth is that while many startups were outcompeted by other companies, they also failed to execute at differentiating their solution in a crowded space.
Strategy for growth leaders: You must position your offering(s) against any competitive or alternative solution. If you have a demonstrably different or superior value proposition then competitive worries disappear since nobody will ever be in your exact market with your exact product. Continuously improving your products and/or services is a proven strategy for success.
5 – Pricing /Cost issues (18%)
Pricing is one of those business topics that is as much art as it is science. Most startups, and more than a few established businesses, struggle with how to price their offerings.
The challenge is that no matter how scientifically a pricing strategy is created, it ultimately has to survive the final test of what the market will accept. Your pricing has to be high enough to cover costs and hopefully make a profit, yet low enough so that it does not become an insurmountable obstacle to making a sale.
Strategy for growth leaders: The best approach to pricing is to define all the variables and then create a plan to test them out. In addition to the “retail” price of your product and/or service, there is a long list of items to also consider, such as: segmentation, bundles, incentives, payment plans, terms and conditions, etc. Test until you find the combination that optimizes conversion and profitability.
6 – User un-friendly product (17%)
Regardless of whether it is B2C or B2B, every buyer has options – including sticking with the dreaded status quo! Ignoring the user experience is a risky move that many organizations make (sometimes unconsciously). Products or services that are difficult or confusing to use, ultimately will fall aside to solutions that are easier.
Strategy for growth leaders: In addition to having a formal client success function in the organization, growth leaders should relentlessly focus on the user experience for the customers. A great place to start is to define your typical “buyer’s journey” – the process a prospect goes through to become a customer of your organization – then evaluate every step along the way, looking for areas to improve the experience and results.
7 – Product without a business model (17%)
It is hard to argue that a business model is not important – in fact, it is foundational for a company! This reason for failure is a bit like pricing in that there is not always a “correct” or “perfect” answer, but merely an answer that is better than other alternatives. The way to get to a solution is to test, and to remain open to other options.
Strategy for growth leaders: The challenge for many startups, and even more established organizations, is that their growth leaders do not explore all their options. Sticking to a single sales channel or failing to find ways to monetize client relationships can stall growth. Your business model and growth strategy should be based on research, your experience, and the market feedback you receive…your sales revenue is a pretty good indicator of a successful business model!
8 – Poor marketing (14%)
Defining a target audience, knowing how to get their attention and then converting them to leads and ultimately customers is one of the most important skills of any successful business.
A surprising number of startups and more established companies are not good at promoting their products or services. Sometimes this is due to lack of expertise (easy to address by making a hire or outsourcing to an agency) but more often than not it is due to a lack of clarity around your ideal client profile or the value proposition you deliver.
Strategy for growth leaders: The place to start is to define the value proposition your products and/or services deliver to customers. Next, get clarity on who your ideal customers are and where to find them. Then you are in a position to work on your branding, marketing campaigns, and go-to-market tactics. If you don’t have a competent go-to-market leader on your management team (you should!) then either go hire one, or make the decision to outsource the marketing function to a proven third party.
9 – Ignore customers (14%)
Ignoring customers is why companies fall victim to reason #6 above: User un-friendly product. It sounds crazy, but many organizations are so focused on landing new business that they completely neglect those who have already purchased from them. Growth leaders and their teams need to get out of the building and interact with buyers.
Strategy for growth leaders: Invest in customer service and client success. Pay attention to any feedback, and constantly seek more insight on how customers are using your offerings, what features they like and dislike, and their suggestions for improvements or new solutions. Don’t just listen to this valuable input, take action to make improvements. If you ignore customers, they will ultimately go somewhere else.
10 – Product mistimed (13%)
Many entrepreneurs and established company product executives are perfectionists. This is not necessarily a bad trait, but it can become a problem if it prevents your organization from going to market with your products and/or services.
In this case, perfect is the mortal enemy of “good enough!”
Occasionally (particularly with startups in emerging markets) you see companies that developed a solution the market was not yet ready for. More often than not, however, the case is that companies miss their market opportunity by not having a saleable offering ready to sell.
Strategy for growth leaders: The old saying that “you don’t get a second chance to make a first impression” applies here. Growth leaders need to learn to recognize when their offerings are “good enough” versus perfect. Don’t waste your market opportunity.
Learning from failure
Experience tells us that there are as many reasons for business success as there are for failure.
The top 10 reasons for failure highlighted above present growth leaders with a useful list of risks to be aware of and ideally to avoid entirely.
As always, please share your feedback, and feel free to give me a call if you need help.
-Onward
About the author: Kimball Norup is the founder of 1CMO Consulting, a business strategy and growth advisory firm based in Sonoma, California. To read prior articles, or sign up to receive future ones by email, click here.
