According to Shikhar Ghosh, professor of Management Practice and Entrepreneurial Management Unit at Harvard University, 75 percent of venture-backed companies will fail. However, many tech startup founders treat funding as the "holy grail" of startup success. In fact, most believe that, if they just landed their next round of funding, all of their dreams will come true. Unfortunately, this isn't the case.
"The fact that you have gained outside investment doesn't always translate to success," says AJ Agrawal, contributor at HuffPost. "There are thousands of startups that have failed even after they have received investment. It's easy to become complacent when you receive an injection of funds. That's why you need to look beyond the money. Think about what you would do with the money and how it's going to pay off."
Avoid these common startup-killing mistakes as you carve your path towards startup success:
Top 5 Reasons Tech Startups Fail
1. Failure to Achieve Product/Market Fit
When building a tech startup, it's important to ask yourself one simple question: Are people willing to buy what you're trying to sell? According to CB Insights, 42 percent of failed startups attribute their failure to bad product-market fit. The most common reasons for bad product/market fit include confusing value propositions, poor assumptions based on ineffective data analysis, and market share miscalculations.
"You can always feel when product/market fit isn't happening. The customers aren't quite getting value out of the product, word of mouth isn't spreading, usage isn't growing that fast, press reviews are kind of 'blah,' the sales cycle takes too long, and lots of deals never close," says Andy Rachleff, CEO and cofounder at Wealthfront.
To achieve product/market fit, repeatedly test your assumptions with customers and provide your customers with unparalleled customer experience. For example, MailChimp has accrued a whopping 15 million customers since 2001 by routinely optimizing the customer experience. The software company chose a highly competitive market segment but differentiated themselves with great design and quirky copy. To date, the company has never accepted venture capital. Instead, MailChimp has invested in sloth growth, routine testing, and customer feedback to create a winning strategy.
2. Running Out of Money
Simply "running out of money" doesn't necessarily mean that the startup didn't have enough to capital begin with. Instead, the startup likely mismanaged runway. In other words, a startup's last round is only as good as its ability to manage customer acquisition costs, curb unnecessary product improvements, avoid inefficient hiring practices, and more. The best startup founders master these principals (while making a few mistakes along the way) before ramping up expenses.
"One of the problems with raising money is it teaches you bad habits from the startup," says Jason Fried, cofounder at Basecamp. "If you're an entrepreneur and you have a bunch of money in the bank, you get good at spending money.
For this reason, an increasing number of Silicon Valley investors have begun to favor profitability over growth. Unfortunately, startups with a "spend to win" mentality are the first to fold. Why? Today, venture capitalists are no longer willing to bankroll startup's expensive operations.
Ready to scale like a tech giant? For more insight, check out the Startup Unicorn Checklist.
3. Hiring the Wrong People
When your team is small, there's no room for dead weight. According to Business Insider, Instagram only had 13 employees when it was purchased for $1 billion dollars by Facebook in 2013. In this instance, team members were hired and expected to execute flawlessly. Now more than ever, today's tech startup hires should possess an entrepreneurial spirit, share the organization's cultural identity, and deliver growth-oriented results.
According to the U.S. Department of Labor, the price of a bad hire is at least 30 percent of the employee's first year earning. For tech startups, investment in the wrong person could cause significant setbacks. For one, managers will need to spend valuable time and money training the new hire. Additionally, teams will need to spend even more funds on recruiting a replacement for the bad hire. However, more than capital lost, the real impediment is disengagement.
"When a disengaged hire doesn't pull his weight, good employees get burned out making up for it," says Falon Fatemi, CEO and founder at Node. "I once hired a function leader who didn't plan well and generally disrespected other team members' priorities. As a result, we lost two — nearly three — key employees. That's an exceptionally high price to pay. You'll never wish you waited longer to fire someone like that."
The best startups use GitHub, Unicorn Hunt, and AngelList to scout top tech talent. These websites attract software developers, designers, and startup veterans from around the world. With the right hiring strategy in place, startups can find highly qualified candidates and achieve accelerated growth.
4. Getting Outpaced by Competitors
The world's leading tech startup founders are attuned to the unique wants, needs, and demands of their target audience. Why? When a tech startup fails to innovate, the startup will likely be outpaced by the competition and left in the dust. To stay ahead of the competitors, startups should utilize consumer experience management platforms to gather data, assess trends, and validate assumptions in real-time.
For example, if incoming data indicates that a segment of consumers is reducing spending, the startup might drill a bit deeper to find out why. For most startups, staying relevant isn't a matter of obsessing over what the competition is doing; instead, it's a matter of continually gathering customer insights and funneling them into all-new strategic developments.
"You know the comings and goings of your industry colleagues. You notice when they veer off the road, stop for gas, or blow a tire, and at those points you can learn from their escapades —without ever feeling the need to react to their every move," says Jim Fowler, CEO and founder at Owler. "It's competitive insights like those that will provide you the opportunity to outpace the competition."
5. Scaling Without a Business Plan
Too often, startup founders are invested in the "big picture" and not on execution. A business plan forces founders to focus on the nuts and bolts of the startup. Without a business plan in place, startups face real challenges when trying to get from point A to point B. In this instance, the startup might know what success looks like but lack the executional direction needed to get there.
"While writing a business plan, you are forced to consider how you’ll run every aspect of your business —marketing, managing, financing, and more. In fact, the very areas you’re tempted to skim over are usually the places where you need to really drill down. The business plan gives your startup a blueprint for success," says Rieva Lesonsky, CEO at GrowBiz Media.
When building a business plan, the U.S. Small Business Administration recommends incorporating the following components: Executive summary; company description; market analysis; organization and management; service or product; marketing and sales; funding request; and financial projections. Use this mission-critical document to guide the organizational and strategic direction of the startup.
Unlock Startup Success at RocketSpace
No one likes failure. However, failure is something that every entrepreneur will experience at one point or another. The best way to recover? Accept it, analyze what went wrong, and set your sights on a new horizon. If you're in the process of scaling a tech startup, you can reduce your likelihood of failure by surrounding yourself with the right people. RocketSpace is a global tech ecosystem of tech founders, entrepreneurs, investors, and mentors!
Over the years, RocketSpace has supported 18 tech startups in achieving billion-dollar valuations. Additionally, nearly 90 percent of startups that have called RocketSpace home are still in business today. Industry-wide, nine out of ten startups are destined to fail. At RocketSpace, you'll find other high-growth tech startups eager to change the world!
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