Beating the statistics: The underlying reason so many startups fail

reason startups fail

Flint & Spark co-founder Lee Linden. Source: Supplied.

Eighteen months ago, CBInsights released a list of reasons why startups fail, based on analysis of 101 startup postmortems.

The analysis identified the top 20 reasons for failure that were derived from the patterns portrayed in the postmortem’s stories.

 

I decided to challenge this list.

Not because I doubt it in any way, but because I wanted to see if I could find a common ground for all these reasons — one core reason’ that fuels all the others.

And I found what I was looking for!

A closer look at these 20 reasons reveals most of them were caused due to lack of deep understanding of the startup’s target audience and could have been prevented (or, at the very least, the effect on the startups’ life could have been minimised) if a consumer-driven approach was applied.

Sounds like fluff?

Maybe, but if you’re planning on beating the statistics, this fluff’ might be your secret sauce.

Let’s put it to the test.

No market need

The number one reason for failure, cited in 42% of cases, demonstrates this point most vividly. Coming up with an idea is the easy part. Refining, adjusting and re-designing it to make sure it meets a real market need is the trickier part.

Why? Because it requires you to really understand what people want.

However, what they say they want isn’t necessarily what they actually want.

In the words of Henry Ford: “If I had asked people what they wanted, they would have said faster horses.”

It’s your job as an entrepreneur to understand the underlining of what people are saying — in Ford’s case, to get from point A to point B faster — and refine our ideas around that instead of just listening to their words and come up with a literal solution.

It’s also important you listen to the right people — those being your potential consumers and target audience. Your co-workers, dev team, best friends and mum don’t count, even if they fit the profile of your target audience.

Yes, it means you might have to pour some precious funds into getting this feedback, such as investing in some research or a survey. However, if your success relies so heavily on that, maybe you should look at it as your most important long-term invest — the one that can help you beat the statistics.

This brings us to the second reason on CBInsight’s list.

Running out of cash

This reason for failure is not caused due to lack of funds, but due to the wrong use of funds.

And what has that got to do with understanding your consumers?

Consumers hold the answers to where, how and what you should spend your money on.

Their reactions can prevent you from spending time and money on developing a feature they’re not interested in and can encourage you to keep working on something else for which they’re willing to pay a premium. That means they’re not just helping you save money but also helping you to stay focused (reason 11) and set the right pricing (reason five).

Their characteristics can direct you to where you can find them (and others like them) but even more than that, it will prevent you from throwing money on the wrong marketing tools, channels and messaging (reason eight).

Their behaviour can tell how friendly or unfriendly your product or interface is (reason six), and if you deeply analyse their behaviour and interaction with your product instead of ignoring them (reason nine), you can easily adjust it to better accommodate their preferences of use.

Bottom line

The money you invest in understanding your consumers at an early stage saves you from spending it in the wrong avenues while keeping you focused on more yielding opportunities. As a result, it helps to prevent you from running out of cash before you got the chance to prove yourself.

Speaking of cash, your investors are in fact a target audience of their own, and your offering to them is significantly different from the one you are offering your consumers. If you acknowledge this and make sure to speak differently to them, you have a much better chance of getting their interest and funds (and risk-proofing your startup from reason 16).

We can keep going through this list, and yes, some of the reasons are not consumer-related — such as not having the right team, a lack of passion and burn out  but I think the point is clear by now.

A profound understanding of your consumers and target audiences is a critical ingredient for startup success.

Usually perceived as a pure marketing tool, consumer understanding (and the consumer insights drawn from it) is in fact one of the most powerful, intangible business assets you can have, and if properly used, it can positively affect every aspect of your startup, be it marketing, product, pricing, innovation or customer service.

In a world and time where consumers hold the power to build and destroy ventures, startup founders and teams must lead a consumer-driven business from day one and let consumer insights guide their overall strategy.

NOW READ: Why did Shoes of Prey fail? Because it listened to customers

NOW READ: Dear Human: I’ve fallen out of love with my startup

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Linda Ginger
Linda Ginger
1 year ago

And this insight doesn’t only apply to start-ups. It applies to corporates and everyday businesses. There is a piece of research [n>1,000) that attributes 77% of failures being due to external factors which lines up with your article but also includes lack of knowledge about the market i.e. competitors etc.

Lee Tishler Linden
Lee Tishler Linden
1 year ago
Reply to  Linda Ginger

Thanks Linda. As someone who’s been working at a major global corporate – I couldn’t agree more!

Jordan
1 year ago

I like your thinking and your effort to distill the CBInsights list. I have really enjoyed using that list and th matching one about reasons for success, both of which rate market timing as the top reason at 42%. Meeting the market is at the core of any venture. As Linda points out, this is true for all ventures, large and small, new and old, rapid growth and slow growth.

Two points I will make about Lee’s analysis. One, I’d prefer you use the word customer to broaden the relevance from consumer focused ventures to the entire spectrum. Might seem like semantics but, so often these days I see the majority of start-ups trying to be about consumers, often missing the reality that their actual channel to market is through other businesses. Not every business goes direct to retail consumers and not every business ever has any retail consumers but, every business has customers.

Two, this analysis is at the core of how a truly disruptive business succeeds. A deeply disruptive business can’t start by listening to the market because the market doesn’t understand what’s possible, the point you make about Henry Ford. So let’s really encourage our founders not to extrapolate an entire market from their own solo experience or pain. That can certainly be the inspiration but, staying intimately connected to your customer experience and customer satisfaction as you enter and grow the market is the ‘secret sauce’.

This is not new, not revelationary, it has been the hallmark of success for over a 100 years. I think it is great that Lee is ‘rediscovering’ this essential truth in the current data. Thank you Lee for seeing and for sharing.

Lee Tishler Linden
Lee Tishler Linden
1 year ago
Reply to  Jordan

Thanks Jordan.
I see your point regarding the “consumer/customer”, but when I wrote this piece I thought about the fact that many startups have/aim for consumers that are not necessarily paying customers (users, consumers of content, etc.), so I decided to focus on the consumers as the end users of the product/service, as at the end of the day it should be refined around their preferences of use and consumption, regardless of who or where they buy it from. I do agree though that for many businesses customers should be the focus.
And regarding your second point – totally agree, thanks for pointing that out.

Linda Ginger
Linda Ginger
1 year ago
Reply to  Jordan

Agree re use of customers vs consumers. Transformative opportunities are likely to be found in the value chain. And you’re also right re customers/ value chain not knowing what they want but they do know what they value, care about and what would give them a great experience – ‘basis of competition’.