Why Startups Fail & How to Avoid it

Magic Sauce

The research tells us that pre-Covid, 90% of startups fail (that includes all startups). 

There's a nice, confidence raising figure for you eh.

20% in Year 1, 30% in Year 2 and the rest in years 3-5 (if you can't do the maths on the last bit then you should definitely get a CFO as your first co-founder).

What those stats don't tell us is 'why'?

WHY?

There's a myriad of reasons, but the most common are:-

Poor management

Cash Flow

Lack of Funding

Poor market/product fit

Founding team implosion

Covid (and an inability to pivot to the 'new normal')

Some of that stuff is surmountable, some of it not. 

Fintech for instance has had a huge focus in the post-Covid world, so I could just tell you to go build a fintech platform because investors are desperate for deal flow in that area. You may get money but still fall foul of all of the other reasons above, so let's tackle those in brief.

Poor Management

The stats tell us that a startup with more than one founder is more likely to gain funding and it's more likely to succeed. Accept your limitations and try and find a team to fit around you that make up for the skills you don't have or could improve upon your 'gifted amateur' skills. I know this because I've been a lone founder and it's (as the name would suggest), lonely. It also means that you don't have a ton of cash for experts to do the stuff you're rubbish at (at least at the start). It's taken me time but diarising stuff and to-do lists really help to motivate you do the stuff you hate doing. I still push stuff down the list, but I'm getting better at it. You also need to remember that as you build a team, you need those people to buy into your vision. If you're talking to prospective co-founders or employees, really dig into what they want now and in 3 years (don't necessarily give them your vision in any detail beforehand, you want to hear who they are).

Cash Flow

Getting a good cashflow template is a real boon. Sticking to it is another, but you have to own it, particularly with a high growth tech startup. Once you get that first £100k+ of funding, people are going to want to know what you're spending money on and that you're sticking to the plan for it. Test your assumptions by dropping your revenue by 1/3rd and 2/3rds to see what effect it has on your burn rate (your investors certainly will). Don't use hiring costs for people way before you'll need them, think lean.

Lack of Funding

Well, that's most startups in honesty. To give yourself the best chance possible, you either need to research the hell out of how to raise money and spend time building relationships with the kind of investors you want involved in your business. Otherwise, try and get onto an acceleration programme, into an accelerator, or onto programmes that can deliver the help you need. Only around 3% of startups end up actually attending an accelerator and not many more get invested in (something Magic Sauce is trying to change by making acceleration and investor visibility accessible to a larger audience).

Poor Market/Product Fit

It's something we try and address with our free canvas available on the Magic Sauce site. Some investors say they aren't swayed by market size (and it's right, that's not important on its' own). Your product has to be compelling and able to solve problems for its' audience. History is littered with startups that built something without first checking the size of the potential audience, whether a problem actually needed solving (that had a price ticket attached), or whether their product was usable by the target audience. Identify your audience, talk to your audience and keep them involved. Test and iterate. I have a motto that goes, "you can kick seven shades of shit out of an idea, but it's illegal to do it to a founder". Founders that can adapt their vision and product to meet the need of an audience succeed (with a ladle of resilience and ability to listen).

Founding Team Implosion

Horrible to witness and some good startups have fallen by the wayside, usually because of dollar signs in someone's eyes. Protect the company, look to have solid "bad leaver" clauses in your Shareholders Agreement and robust Articles. Make sure that you're all clear on vision and who should get what from the outset. Foundrs.com has a great (and simple tool) to give you a ballpark of who should get what to get the conversation rolling.

Covid

Covid has shot many a tech startup down in the last year, while others have thrived (see health/med/pharma/fintech). It doesn't mean your idea isn't investible, but it means you may be a bit less "sexy" right now if it's not ready for market or already building traction/sales. Look at how you can pivot into different markets or adapt your platform. Investors like more than one revenue stream and potential audience (as do lenders) as it can provide an additional revenue stream and may bring forward the potential to step into a market you planned to hit in a few years. An example is one startup I helped last year. Their proptech business was focused on residential house checks. We had a chat and they pivoted into commercial property checks (properties were empty, they needed checking over).

That lot sounds simple, and it's deliberately broad and high level. Each startup is unique and has its own advantages and disadvantages. Experience and good advice for your own situation is the best remedy and proactive path.

Feel free to add opinions, evidence or questions of your own.

Kris Jones

CEO, Techvelocity/Magic Sauce, Advisor, Mentor and Speaker

If you want a chat in confidence then get in touch here

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