The 3 biggest reasons founders failby Derek Lidow Everyone has an opinion about why somebody they know failed as an entrepreneur. Every failed business owner has their own story about why things didn’t work out. Figuring out what really went wrong is difficult. Saying you ran out of money, which many entrepreneurs give as a reason, is never the entire story. What caused an entrepreneur to run out of money is more important to know because it can help others know what to avoid. Researchers hear the story often about an entrepreneur that ran out of money because there were not enough customers. But this story doesn’t help anyone understand why there were not enough customers. Was it because the economy unexpectedly made everyone feel poorer? Was it that the product was bad? Or did the entrepreneur not do any potential customer outreach before developing the product when it would have been obvious that nobody actually cared about it in the first place? It is important in this research to dig deep enough to find the root cause problem. Why entrepreneurs fail is also difficult to know because failure means different things to different people. A business with no business that can’t pay rent and closes is obviously a failure. But what about a business that is sold, but sold for less money than the entrepreneur invested themselves? Or sold for less that the investors put in? Or sold for as much as the entrepreneur invested but the business never let the entrepreneur draw a salary from the business? Or what about the entrepreneur that raised money, drew some salary, grew the business and sold the business but did not get any money from the sale? This doesn’t sound fair, but it happens all the time, matter of fact it happens about three quarters of the time with founders of startups with VC investors. The point is that there are many disappointing outcomes besides just closing up shop. This is a difficult subject to research. There are also observations from people like Paul Graham, the cofounder of Y Combinator, who naturally deals with many entrepreneurs and knows their stories and has independent opinions on why their startups failed. But this brings up another complication in getting to the truth, because every paper and every observer is basing their findings on different types of entrepreneurs. Paul Graham deals mostly with entrepreneurs in their 20’s who are developing software companies. Some research is done based upon research in specific geographic areas or countries where the challenges are different than in other areas. Several recent papers on the subject attempt broad reviews of published evidence. Comparing their findings with the opinions of the popular press, we can say that there are three broadly interconnected reasons that cause the failure of most early-stage startups, that we would classify as stage 1 and stage 2 from our sprint on “Leading from idea to mature enterprise.” These findings apply equally to early-stage high-tech startups and the businesses of solopreneurs. The fact that most failures can be boiled down to some combination of three things that can often be corrected with proper preparation is great news. 1. Flawed understanding of the customer and their needs and wants. This is evidenced if the expected customer does not respond to the product or service as expected. This general fault can be described as many things: insufficient demand, poor product-market fit, poor timing, poor marketing or poor sales. 2. Dysfunctional leadership and team dynamics This is evidenced by co-founders and other critical members of the leadership team’s inability to agree on the enterprise’s mission, strategy, organization, or the delegation of authority to others to make decisions on their behalf. This is usually referred to as co-founder misalignment, high turnover, or loss of critical talent. 3. Insufficient planning and execution This is evidenced by not being able because of lack of funds, resources or execution to reliably or cost-effectively deliver the intended product or service. This general fault can be described as: ran out of money, inability to ramp, inability to recruit needed talent, or supply-chain delays or failures. Unsurprisingly, our first 23 sprints specifically aim to help our users avoid these three causes of failure. The first 6 sprints focus on getting an accurate understanding of the customer. The next 10 sprints focus on how to create and lead highly productive and effective teams and organizations, and the next 6 sprints are how to not under- or over-plan by focusing on potential profit margins, bank balances, brand description and choice of appropriate funding sources. With gratitude, Derek and Ben P.S. If you like what we’re doing, please consider recommending this newsletter to another person you think would benefit from us. It really helps us build out our free content platform.
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