There’s a joke about startups. “For every 10 startups you see in the market, 11 of them will fail.” I didn’t want to think that my startup would be the one to fail, and no entrepreneur does. I thought I knew it all…or at least would learn it all during the process of launching my startup. Jason Huertas, author of My Startup Failed, says this is common, writing:
“You think that you know it all. After all, you’re already successful in your mind, so who cares what others have to say? Fight that urge every day…You know nothing.”
After my own failure, I became obsessed with understanding how and why things go wrong. As of today, I’ve read 100+ failed startups stories. I recently compiled my learnings from this into The Startup Checklist, and this post shares a few things in particular that stood out to me.
# 1. There is no market for your product
In the majority of failures, there is one basic reason: Lack of market. “I’ll assert that market is the most important factor in a startup’s success or failure,” said Marc Andreessen. Our research proves he is right.
The one main reason for failure with both B2B (44%) and B2C (50%) startups was a lack of market. Even the best team with the best product can fail if the market is nonexistent.
Why does this happen? Why do founders get this wrong again and again? John O’Nolan shared some insight in his Travelllll Post-Mortem:
“We didn’t know what traction was, and by that measure, we didn’t know that we didn’t have any. Our first media pack boasted our “10,000 page views in just 48 hours of launch” and our monthly traffic was 3–4x that of any travel blog we knew about. We knew we were a big fish… we just didn’t know how small the pond was.”
If you’re going to spend your time making a product, make sure there is a big market for what you’re building.
# 2. Get ready to fail in three years
When a startup fails it seems to happen overnight. In reality, that’s almost never the case. Most of the time, there was a visible, steady decline in one or several points. And these points go unnoticed and unfixed until it’s too late to save the company.
Have you ever asked yourself about the amount of time you are ready to spend building your startup before it becomes profitable or fails? Not how much money, but how much time? I will tell you. My research shows that it took an average of almost four years for a B2B startup to fail. And an average of almost three years for a B2C startup to fail.
How do you feel about that timeline?
# 3. Confront brutal facts
The majority of failed startups worked hard on the proof of technical part of the process, but skipped the business model and idea validation steps.
Get out of the building!
When you just start your business, you know very little about how it will operate. Focus on validation! Idea and business model validation is a full-time job.
One of the biggest issues we found in our study was the lack of idea validation. This affected 17% of B2C startups.
In most cases, your ideas are the opposite of market needs. That’s why, from the outset, you need to be your own worst critic. Confirm your idea from as many angles as possible. Don’t start to brainstorm on the value prop of your product until you’re sure that you’re building something that people not only want but actually need. Don’t fall in love with the solution. Fall in love with the problem.
In Adrian Tan’s post-mortem on his startup’s failure, he writes:
“Validate your business model early (!): And I mean seriously early. Before building a product and before writing that first line of code. At all times during your journey, you should have a clear answer of, ‘Why am I doing this?’ and ‘Who am I building this for?’ As mentioned above, while learning from your possible customers, ask them, ‘Would you pay for a solution like this? How much?’”
You have proved nothing until you have your first 10 paying customers.
# 4. Your potential customers lie
While in the customer development stage at Clever.do we got positive feedback from our potential users. Numbers showed that there was strong interest in our idea and our product. What idiots we were to think this was enough, and that the responses were true.
If we had conducted a deeper investigation we would have changed our decision on the launch of our startup. Just because people say it’s a good idea doesn’t mean it is.
The reality showed that even if a potential customer has this or that problem, and wants to get the solution, he or she will rarely actually take a step to overcome this problem. If the problem isn’t pressing enough to cause palpable pain, people will live with it, and avoid the pain of spending money to fix it.
Ask your potential customers what they are doing to minimize their problem. If they are doing nothing, it’s not a problem waiting for a solution.
Marcus Holmes, in his post-mortem analysis of Gigger, writes:
“The main lesson here is that you can’t just listen to what your customers tell you when it seems to be what you want to hear. You have to get their active demonstration that they will invest whatever is required to use your product, whether that’s time, money, or both. Get them to run a ninja warrior course if you have to, but don’t call signups on a landing page or friendly phone conversations ‘validation.’”
Yes, your potential customers will tell you they like your product. In reality, even email opt-ins, beta signup totals, and targeted surveys don’t work. There is a very big difference between people entering their email address on your landing page and people paying each month for your product.
You should test customer behavior, not customer opinion.
Some time after we launched, we found things to be very different than our pre-launch research had suggested:
- Most of the people in the beta list didn’t even use the product.
- Those who used the product didn’t stay with it for more than a few days.
- They didn’t use it every day, which was a crucial component of the product.
- None paid for it.
#5. Poor marketing will kill you
Even when you have your idea validated and the product is ready, it is tough to drive customer acquisition growth. The reality is brutal. Reason #2 for B2C startup failure is poor marketing. It affected 29% of the companies in our research (compared to only 7% of B2Bs).
Marketing is something you do in order to increase your sales and make more money. It doesn’t matter how perfect your product is. Even a great product will NOT market itself.
In 10 lessons from a failed startup, Mark Goldenson writes:
“Marketing requires constant expertise. The main failure of PlayCafe was marketing. Dev and I came from PayPal, a strongly viral product at a company almost hostile to marketing. Our efforts in SEO, SEM, virality, platforms, PR, and partnerships weren’t terrible, but drawing users to a live event requires constant skillful work. Like creating content, I no longer think marketing is something smart novices can figure out part-time. As the web gets super-saturated, marketing is the difference-maker, and it’s too deep a skill to leave to amateurs.”
If you want to survive, you need to spend a lot of time researching distribution channels. You need to identify those that will reach your target audience the best way. You need to hire people who are experienced with the unique realities of startup marketing. The most important thing is getting your product into the hands of customers. You should spend an equal amount of time on MVP development and distribution.
# 6. Running out of money is Game Over
You need to get your first customer, money to start a company, money you need to become profitable, money in case of hard times for your startup.
You need to have a financial plan. You should set clear deadlines and budgets. You shouldn’t overspend, like we did it with Clever.do. Even when we saw that our MVP wasn’t working, we spent more money on more things. It seems obvious in retrospect, but at the time, it felt like the right thing to do.
Plan how to spend your money wisely. Don’t spend too much on the product building. At least until you are sure that you are building the product people need. In any other scenario, you will waste money on a product that nobody wants to buy.
Be brutally frugal in the early days. Forget business cards, office infrastructure, employee perks, and all the shit about registering a company. You can avoid 80% of expenses by working from home and hiring employees who will work remotely. Don’t hire until you have a product. You should not spend on the things that only distract you from the main goal. Until you have sales. Conserve money for when you really need it.
20% of B2B startups, and 15% of B2C startups, ran out of cash.
How much money can your company make in a best/worst case scenario? You should answer this question regardless to investors because you need to know if your company is a fundable startup or a lifestyle business. — Gil Sadis, The Mistakes that Killed My Startup.
# 7. Don’t wait too long with final decisions
Launching a startup is about creating a vision, turning an idea into reality, and pursuing a dream. Do you know any entrepreneur who wants to shut down his dream? I don’t.
Every founder knows how much time, effort, and money it took him to launch, develop, and grow. Unfortunately, as I mentioned above, it takes three years to fail. You as an entrepreneur are walking through a valley of death all the time along the journey, and you need to always be considering when it’s time to exit that valley, ideally before it transforms into your personal and financial nightmare. The faster you make this decision, the less pain you’ll have in the future.
Pawel Brodzinksi writes:
I think that one is a bit sentimental. Since the service was our child we were reluctant to make a decision about closing it faster and limit losses. We’ve been tricking ourselves thinking that everything would be fine while we couldn’t get the application back to work properly.
Building a startup is hard, it is not a hobby. It’s a mindset and an attitude. It can be both the best and the worst thing in your life. I wouldn’t say it’s easy. But I will surely spend my last dollar and all my hours to have this opportunity again. It’s worth it.