This is the first article in a three-part series on Startup failure & success by Jamie Pride, author of Unicorn Tears: Why Startups Fail & How To Avoid It, published by Wiley in February 2018.
Over the past 20 years, I have founded and funded numerous technology startups. During that time I have seen a clear pattern emerging: startup 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 startup 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.
I quickly discovered that startup 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 startups is fairly widely understood; less recognized, is the largely unspoken issue of human waste. I’ve seen the dark side of startups: 49 percent of founders in one survey reported some mental health issue. By their own admission, more than 30 percent of founders have experienced depression while 27 percent have suffered serious anxiety. Founders are fatigued!
However, isn’t the startup game meant to be fun, exciting and glamorous? Don’t we keep seeing successful startup 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 startup failure is preventable. In its simplest form, startup failure is often a consequence of ‘self-harm’: rather than crumbling in the face of overwhelming external competition, startups typically implode. This is good news because it means you can do something about it!
More than 100 million startups are founded every year (that’s about three every second), but 92 percent 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 startup 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 startups fail from the inside.
When I ask founders why startups 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 startups fail, 10 primary reasons emerge:
- founder(s) lack capacity
- founder(s) lack capability
- founder disharmony
- startup ran out of cash
- startup had too much funding
- investor–founder disharmony
- solving an irrelevant problem (desirability)
- ineffective business model (viability)
- poor execution (feasibility)
- external threats/competition (adaptability).
Every failed startup 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 startup outcompeted. The good news is that if these failures can be understood, they can be avoided.
It’s easy to think about the financial impact of failure. Millions of dollars of investors’ money is flushed away every time a startup 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 startups that no one wants to talk about. We love to focus on the glamour and the unicorns, but not on the unicorn tears.
Startup 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 startup founders. Too many of those innovators are wasted, chewed up and spat out, never to return to the startup 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 startups fail and how to prevent that. I want those founders, having learned from their mistakes, to come back and build bigger and better startups.
In part 2, Jamie will discuss why founders fail and why choosing the right co-founder can make or break your business.