Start-up failure and success

There has to be a better way!

Over the past 20 years I have founded and funded numerous technology start-ups. During that time, I have seen a clear pattern emerging: start-up failure has become an accepted industry norm and it has an impact that reaches far beyond financial loss to investors. Having experienced my own journey of failure as a founder more than once, I have felt the very real, deep personal impact of that failure on me, my family and my colleagues.

As I sat at home licking my wounds from my most recent start-up failure, a thought took hold – and it soon became an obsession for me. I started talking to founders, and what they shared with me didn’t surprise me at all. Many of the first-time founders I spoke to were lost, with no map to guide them; even the more experienced founders, burnt out or stressed out, felt alone, isolated, with nowhere to turn for support.

“More than 100 million start-ups are founded every year (that’s about three every second), but 92 per cent of them will fail within three years – and the crazy thing is that this is largely preventable.”

I quickly discovered that start-up failure is ingrained in the ecosystem. Concepts such as “fail fast”, misunderstood and misapplied, are thrown around without much thought. The traditional venture capitalist approach to failure is to place many bets on the understanding that, while most ventures will fail, a very few may turn out to be “unicorns” and return vast profits that will make up for all the losses. It is a wasteful approach.

The financial waste in failed start-ups is fairly widely understood; less recognised is the largely unspoken issue of human waste. I’ve seen the dark side of start-ups: 49 per cent of founders in one survey reported some mental health issue. By their own admission, more than 30 per cent of founders have experienced depression while 27 per cent have suffered serious anxiety. Founders are fatigued!

However, isn’t the start-up game meant to be fun, exciting and glamorous? Don’t we keep seeing successful start-up founders smiling on the front pages of the business press, having completed their latest triumphant capital raising or IPO? The culture of “I’m crushing it” makes it hard for founders to admit they are struggling.

The irony is that most start-up failure is preventable. In its simplest form, start-up failure is often a consequence of “self-harm”: rather than crumbling in the face of overwhelming external competition, start-ups typically implode. This is good news because it means you can do something about it!

Self-harm

More than 100 million start-ups are founded every year (that’s about three every second), but 92 per cent of them will fail within three years – and the crazy thing is that this is largely preventable.

Just think about that for a second. In any other area of your business or personal life, if 92 times out of 100 a course of action didn’t work, you’d think of doing something quite different. Yet in the start-up world, these high failure rates are accepted with a shrug because “that’s how it is”. Why?

Most founders think about failure as an “external” event – something that happens to you, causing you to fail. More often failure is an “internal” event. It’s about self-harm: you are doing something or not doing something that causes you to fail. Sadly, most start-ups fail from the inside.

When I ask founders why start-ups fail, some show a degree of understanding, but many more have never even given it a thought. One of the inspiring things about founders is their drive and passion, but idealism can often blind them to the common causes of failure.

Delving deeper into why start-ups fail, 10 primary reasons emerge:

  1. founder(s) lack capacity
  2. founder(s) lack capability
  3. founder disharmony
  4. start-up ran out of cash
  5. start-up had too much funding
  6. investor–founder disharmony
  7. solving an irrelevant problem (desirability)
  8. ineffective business model (viability)
  9. poor execution (feasibility)
  10. external threats/competition (adaptability).

Every failed start-up will manifest one or more of these causes. The important thing to note is that most of them can be influenced; that is, most such failures are caused by poor planning, a poor team or poor execution within the organisation. Only on rare occasions is a start-up outcompeted. The good news is that if these failures can be understood, they can be avoided.

Unicorn tears

It’s easy to think about the financial impact of failure. Millions of dollars of investors’ money is flushed away every time a start-up goes under. Billions of dollars are wasted every year. As a founder myself, I have also seen the results of failure on another level — the personal impact. I have seen founders whose marriages have broken up, founders who suffer from depression, founders who have turned to alcohol or drugs or have even become suicidal. This is the dark side of start-ups that no one wants to talk about. We love to focus on the glamour and the unicorns, but not on the unicorn tears.

Start-up failures take a huge personal toll on founders. They have taken a risk, put themselves out there, worked themselves to the bone, then the business goes under, usually in a very public way. They must go home and tell their partner that they don’t know how they’re going to make the mortgage payments or the school fees. They have lost their job, and the rest of their team have lost their jobs too.

We should be concerned with investors losing their money – it has a huge impact on the economy. However, we should also be concerned with founder waste. For our society to progress, we need innovators and risk-takers. We need start-up founders. Too many of those innovators are wasted, chewed up and spat out, never to return to the start-up ecosystem. Some may say this is Darwinism at work, that only the strong survive. Yet most founders simply aren’t equipped with the skills they need to be successful, and we are only now starting to explore and understand why start-ups fail and how to prevent that. I want those founders, having learned from their mistakes, to come back and build bigger and better start-ups.

Jamie Pride, entrepreneur and venture capitalist: author of Unicorn Tears

This story first appeared in issue 22 of the Inside Small Business quarterly magazine.

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