Ask Christa! Business Basics Series (4/6) - Why Do So Many Startups Fail? (S3E29)

Introduction and Listener Question

Hi everyone and welcome to Ask Christa! the place where you can ask questions about how to work through business challenges and workplace issues. I'm Christa Dhimo and today I’m answering the listener question, “Why do so many startups fail?” 

This episode is episode FOUR of six in my Business Basics Series, where I’ve consolidated some of the most common listener questions I’ve received since launching 3 months ago. 

And I’ve been surprised with the number of questions I’ve received asking for perspective for why startups fail, what startups need to do to succeed, and how to become more comfortable OVERALL with the prospects of becoming a business owner and starting up your own business. So I’m going to touch upon some of these points, starting with a common assumption people have about founders.

You Don’t Need to be Risk Tolerant to Be an Entrepreneur: You Need Vision

Some might try to say that founders are built differently because they are risk tolerant—they are not as afraid of risk. They are willing to take risks. But I challenge that assumption. 

It might appear that way, but if you look at entrepreneurial studies, it’s not that the entrepreneur is risk tolerant per se—it’s that they are compelled to put themselves out there fueled by the spirit of and deep belief of HOW their product will change the world. In a way, the VISION they have for their product overtakes the FEAR they likely still have about failing.

Founders who so deeply believe in what they are building will describe their drive as though they are the vessel for their idea—their product—to take shape and become available to and for others. 

My point is they may appear fearless and risk tolerant, but the best entrepreneurs who connect the MOST with their mission, often say it wasn’t really a choice. If they’re willing to admit it, you’re going to hear that YES, they were anxious. NO, they didn’t think they were born to be a founder, but they knew they couldn’t be pinned down to just one role in a highly structured environment with day in and day out structure. YES, they failed—a lot, but the LITTLE failures bothered them the most—things that in hindsight they should have known. And NO, they did not enjoy the process of raising funds, or managing the investment pace. Most enjoyed keeping up with the learning it took to build the value of their business, but not all enjoyed managing growth WHILE providing product to their customers, AND keeping a high performing organization going, AND setting up to develop the next product.

But you will also hear how they lived by the vision of how their business would impact the world, and lived WITH the mission of how their product or products would impact their customers-- on a daily basis or whatever the frequency might be. 

And that’s not about being tolerant of risk or having something special about how they are willing to take risks. For many founders, it’s about what compels them to keep going, and the most successful startups have that strength of vision and depth of mission.

It Doesn’t Have to Be a Big Vision, It Just Has to Be Meaningful

By the way… the vision and mission do not need to be big to be meaningful. but it DOES have to be meaningful, because THAT is what will fuel you to understand the VALUE of your product, to CONVEY the value of your product: how it will compete and win customers, how it will attract and retain the best talent your industry has, how it will continue to grow and continue to create value because of HOW VALUEABLE it is.

Look at your town if you have little shops there. Look at shops in your city. Study some of the smaller businesses that are living their vision—and look at how they started up and kept going. 

Again, the idea doesn’t have to be BIG. It just has to be meaningful.

And if you startup without that meaning—without a deep belief in what you envision—you probably won’t build the momentum to get through a build, product setup, launch, and those first critical three years of selling and running your business with a viable product.

Often times, the lack of that depth of vision and purpose or mission, is the one kicker that will quickly dissolve a startup. But of course, there are more basic reasons, too.

Why Do So Many Startups Fail?

So back to the question: why do so many startups fail? 

A lot of times, startups run out of cash and cannot continue to raise capital. And this is unfortunate because– economic anomalies aside (and we’ve had a few of those in the last twenty years)—spending out your cash without using it to focus on the value of your product as a direct VALUE TO your business, which should be the GOAL of your funding model—spending out your cash can most times be avoided if you plan well enough and raise the cash you need to create enough value to get to the next round.

Now—this gets tricky, because as I mentioned moments ago, economic anomalies DO happen, and there are always other risks that are out of your control. You also can’t plan your way into and out of everything. Some things have to be tight and some things have to be loose so you can move around and be efficient, but the hard truth in business is that sometimes failure is simply about, bad timing. Think of the businesses that were in their early stages when the global financial crisis hit in 2008. If early stage startups funded just before the COVID-19 pandemic. Running out of cash isn’t always from a faulty plan, but… I have to say… a lot of times it is. 

And while no plan is perfect, the more money you seek to raise, the more your investors will go deep on diligence BECAUSE they want to see what the plan looks like. They want to know how you plan to spend the invested dollars SO THAT you reach your goals, preferably with a little left over as you prepare for your next raise. 

And take note, you should also BE receiving plenty of support throughout this process, including from your investors, advisors you may have brought on board, and of course, mentors. If you feel you don’t have that level of support, but you want to get started, then seek out your local small businesses groups and chamber of commerce and other key players focused on businesses in your area. I’ll talk more about this in a moment.

Aside from running out of cash, another reason startups fail is poor market fit, and again, this can usually be avoided—or at least you can reduce any surprise—if you go through the usual funding process where you own the burden of explaining, even when it’s a grant for low dollars, what you know about your market: what unmet need is out there that YOUR product will fill? Meaning, how will YOUR product do for YOUR customer what NO OTHER product can do? 

You also have to know: who are your competitors? How good are they compared to you? How much of the market do they already have? How will you price your product so that it’s appealing for your consumer, competitive for the market, AND pays your bills?

And all of that goes into the equation of what it takes to run a business in an efficient manner so you are industry-compliant, paying your employees on time, and paying your taxes. Big surprise, this is another common reason why startups fail, and is perhaps one of the most unfortunate because again—you should have plenty of support around you to keep you from basic business mistakes … which, by the way, aside from PAYING your employees, includes how you TREAT your employees and whether anyone, especially good and skilled humans, want to work there. 

If you can’t lure the right good humans away from steadier companies that are likely more stable than YOUR startup, and if you can’t keep them, you won’t succeed.

Additional Resources 

For your resources, I’ve included the LinkedIn page for the US Chamber of Commerce. I included their overall site back in Season 1 while answering questions about how to startup a business and whether all startups need advisors.

I also provided an article from Tom Eisenmann from Harvard Business Review in May 2021 called “Why start-ups fail.” It has a great subtitle: It’s not always the horse or the jockey. It’s a dense but very informative article and offers a few business cases to learn from also.

The last additional resources are about personal traits of effective leaders in startups AND entrepreneurs in general. 

I’ll start with leadership traits for startups. Startup leadership traits are one of the most predictive aspects of a startup’s success. There’s A LOT we can’t predict when it comes to a startup’s success, but we can FOR SURE make some predictions based on who the founder is and what kind of leadership style they have, AND who the investor is and what kind of leadership styles THEY have. A lot of people don’t consider how important investors are as leaders in the startup lane, and just because you have the purse doesn’t mean you’re build or trained to motivate and guide and advice and collaborate with founders for a successful startup outcome.

The article I selected is from the University of San Diego online written by Carlton C. O’Neal. It’s called “Top traits of an effective leader [for startups and beyond].”  It’s well written, accessible, and relatable. It also includes various links to other articles about leadership.

Then there are entrepreneurial traits, which may or may not always jive with effective leadership traits. However, those who possess effective leadership traits typically go on to be considered some of the best leaders no matter which industry or domain. Many consider Oprah Winfrey and Mark Cuban in the rare community of highly successful entrepreneurs who also possess keenly effective leadership traits.

I’ve included a paper from Kerr et al., from 2017 called “Personality Traits of Entrepreneurs: A Review of Recent Literature.” It’s written with academics in mind; typically a literature review enables one place for scholars to reference and determine where gaps remain and how far the existing literature has taken us by way of studies. BUT, as with all papers like this, you can skip around and learn a great deal—particularly that we still have a ways to go before we effectively measure entrepreneurial personality traits… and I believe that’s because far more people would be entrepreneurs and founders if the barriers to entry weren’t so high… but… that’s for another episode…

Final Thoughts

Here are final thoughts: startups aren’t for everyone, but they for sure aren’t exclusive to only those willing to take big risks. AND, overall, when we look at WHY so many startups fail, there are a lot of ways that failure can be avoided, or at least reduced. 

This includes better founder preparation and support—and not necessarily the fully dedicated time you need in an incubator or as part of an accelerator program where your product or business—or even YOU as a founder—feel you do not belong in simply because the turn-key solution type of structure isn’t the right fit. It could be by way of founder resources available via LinkedIn, or various startup and founder resources available through your local small business group or local chamber of commerce. There are capital access platforms available also, such as Scroobious, which I’ll add to the Additional Resources section. I talked a bit about them and their founder, Allison Byers, during the last episode, episode 28. 

Wrap Up & Submitting Your Questions

OK, and it’s a WRAP for Episode 29!

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