An Inside Look: Here’s Why Many Startups Fail

Why Startups Fail

Photo Credit: http://funnyfails.net/

With so many digital startups competing in the same space it’s inevitable that some of them will fail. Whatever the reason, failing is never a nice feeling and in business can be a horrible experience to go through. Yet it doesn’t always have to be a bad thing.

Failing can be seen as a learning opportunity for you to move on to your next bigger project. Tweet this.

The ‘Customer Development Process’ by Steve Blank and the Lean Startup theory by Eric Ries were developed specifically to reduce risk for startups. Even though most startups and digital agencies have heard of them, most still don’t put them into practice.

In this post, I’ve outlined some of the key steps from these theories to ensure you put them into practice so your startup has less chance of failing.

Prove assumptions (or – make sure your idea is a good one)

Digital startups face fierce competition and in order to achieve growth they need to prove that the assumptions they have made about their product/services are true. Do people need or want what you are selling? What’s the lifetime value of the customer? And importantly how much is it going to cost you to get new customers? If you find that no one wants what you are offering or that the lifetime value of your customer isn’t significantly higher than the cost to get that customer, then you likely don’t have a successful business model in your hands.

Paul Graham suggests there are three phases startups go through. The initial phase is where founders try to figure out what needs to be done, the second phase is analysing how they can get it to market fast, and the final stage is ensuring growth. To be profitable, startups need to prove the assumptions they’ve made in their business plan are correct as soon as possible.

So how can you go about ensuring that the assumptions you’ve made – that your business is destined to be wildly successful – are true?

Start by talking to as many people as possible and sharing your idea. By talking to different people and getting their reactions, you can easily see the strengths and weaknesses of your product, and thus, you have lots more time to make improvements. For example, if you find you start to squirm when asked about a specific area of your product or service you know this is a weak spot and can address the problems.

Joel Gascoigne, founder of Buffer, had an interesting experience when he, together with a friend, tried to launch OnePage years ago. They discovered that thousands of miles away, another person also had the same idea and had snatched the domain name ahead of them. This stopped them in their tracks but as it turned out, their competitor never launched successfully. This experience taught them an important lesson: “ideas are cheap, and it’s the execution that truly matters.”

The moral of the story here is that more often than not, someone else will have thought of your idea but it’s up to you to put in the work and prove it can be successful.

Action Step:

Are you building a product but have kept it “top secret”? Go out and share what you’re building to other people. Their insights will prove to be invaluable in the long run.

The Customer Development Process

cust dev process

Image credit: http://steveblank.com/

So why do so many start ups fail? One of the most common reasons is lack of customer development. There’s no point in collecting all that lovely customer feedback if you don’t do anything with it!

The old adage ‘build it and they will come’ isn’t true for startups, and this point is highlighted in Steve Blank’s book The Four Steps to Epiphany. Blank introduces the theory of Customer Development which has been described as one of the three pillars of the lean startup.

To ensure you have good customer development you need to:

Get out of the building – Steve suggests that business ideas shouldn’t live in a silo – you need to get out into the big wide world and check that the assumptions you are making about your product are true.

Understand your market type – Different startups face different challenges and this is largely dependent on the type of market you are in. Are you introducing a new product into a new market? Or a new product into an existing market? Or perhaps you are creating a new marketing entirely? Understanding the challenges these different markets face can help you avoid possible pitfalls.

Learn from your mistakes – Don’t launch too soon. You need to spend some time learning from the evolution of your start up, finding out what works and what doesn’t and you do not want to have to do that in public if it falls flat on its face

The Four Steps to Epiphany introduces the importance of a paradigm shift from making assumptions to validating those assumptions by turning them into hypotheses. By doing this, you are then able to test these hypotheses to see whether your business will succeed.

Testing your hypotheses

1. State your hypotheses – What are your core business assumptions?

2. Test your hypotheses – Get out and speak to people to seek validation of your assumptions.

3. Test your product concept – After speaking with other people you’ll get a better understanding of the problems they face. Now look at your products solution – do they marry up? Feed this back into product development.

4. Evaluate customer feedback - Were steps 2 and 3 successful? Did you validate your assumptions? If so then you are ready to move on and push ahead – if not then you might need to continue to refine your product and carry out further tests.

A great example of successful customer development can be seen with Alan Michaels back in the 1980s when he took Convergent Technologies from zero sales to a $400M exit in four years. Michaels had invented a single board computer and took his product out to market. The first company he encountered liked what they saw and said they’d order 3 and see how they got on. Michaels was hoping for more like 3000 so went on to the next company but the same thing happened. Finally, when introducing his product to the third company he really started listening – they liked the product but wanted an operating system and a set of applications. To that company he sold 10,000 units of his product.

Action Step:

If you must fail, fail faster! Building a dream is one thing, but building a product that customers will be more than willing to buy is another. Go out and introduce your product to the market early on. Build an email list of people who can test the principle of your product even before you start development. That way, you can start getting feedback much earlier which can influence the direction of the product.

Customer validation

One of the most important parts of customer development is customer validation. Customer validation is simply about finding out if there is demand for the product or service you are offering, and if there is, identifying whether you’ll be able to turn this product into a repeatable scalable business model.

Often startups don’t have the benefit of ongoing customer relations to really know if a product will be successful before it’s launched. As a result they have to rely on educated guesses which is a risky business. It’s imperative for startups to validate what they deem to be true in order to ensure their business model is scalable. Yet this kind of validation is hard to achieve without the benefits of capital or additional resources. Of course, without this validation how can you determine the marketability of your product and how can you lure potential investors?

Founders of Backupify wrote this great post on the numerous customer validation experiments they tried and tested and rated the success of each. These include techniques such as:

  • Reducing trial times from 30 days to 15 days
  • Trialing different pricing options
  • Outsourcing cold calling
  • Improvements to their website
  • External product reviews
  • Infographics
  • Hosting a webinar
  • Syndicating bloggers
  • Referral email campaign to current customers

In total they trialed 32 different customer validation techniques and there is sure to be several things in that list that could help your business.

For customer validation to be successful, you as the CEO of your startup need to be involved. You can’t just expect to delegate this work out and see success in the early stages. When selling to businesses, hiring salespeople to do the job for you may seem to be the best move to monetise your product quickly but until you are making profit, you have to continually go back to the customer discovery process to make sure that you have a profitable business model. Why? Because this is one of the most common areas of failure for startups.

This crucial stage of development often gets delegated to other people and means the CEO misses out on key pieces of information that could stop a business from floundering. This story recounted from Steve Blank tells the tale of how a CEO did exactly this and as a result found out that his allegedly successful sales pipeline actually was phantom and that when it came down to it his beta customers weren’t planning on buying their product.

If you are selling to businesses – and are unsure whether your product or service is marketable then take the lead from Steve Blank and ask your customers “ If I offered you this product/service for free would you be prepared to implement it immediately?” The answer might be obvious – I mean it’s free! But often digital services are more complex and the disruption involved will mean your customer needs to be 100% sold that your product can enhance or improve their business for them to implement it straight away. If they decline – what does that say about your product?

Action Step:

If you are selling to businesses – take a look at your sales pipeline. What percentage of your pipeline do you think are really going to close? Be brutally honest with yourself. If you identify a lot of potential sales going down the pan then it’s time to head back to the drawing board and rethink your customer development process.

Celebrating failure

Let’s address a tough question. What do you do if you can’t sell your product? What do we do if failure is inevitable? Dan Martell said it beautifully, “We sometimes need to learn those lessons the hard way to lay the foundation for the next venture.”

Failure can often put you at a better vantage point to succeed. After all, just because we didn’t get it right the first time, does it really mean we failed? Or did we just find one thing that didn’t work out so well? Often failure is seen as a sign to give up rather than as a springboard to learn from your mistakes and catapult you to the next level.

Sprouter made an announcement about their demise due to lack of capital two years ago which saddened many. The irony is that it was a startup which hoped to help other startups. Sprouter was hugely popular back then, and it’s closing down was unexpected. Sarah Prevette said that building a community is one thing, but learning how to build a scalable business model is another. They failed to monetize and the costs just caught up with them.

Prevette commented on the event: “Everybody fails, and you should strive to fail as quickly as possible and understand that it’s a constant evolution. Hopefully we can change that perception that failure is bad.”

So how do you go about celebrating our failures? The first step is to redefine them. Stop considering them as failures and instead consider them as learning curves.

Joel Gascoigne took his past ‘failures’ and learnt from them in order to help the successful launch of Buffer.

“When I started building Buffer, I had already experienced building a previous product where things did not go quite according to plan. Luckily, this prepared me to be patient with uptake of the service, and to be willing to change things quite a lot until I reached something that would be truly valuable for people. It also taught be the value of customer development: to take advantage of those emails coming in by asking people questions. With my previous product, I did not reach out to enough people and say “is this a problem for you?” in order to validate whether the product was something people may want.”

Action Step:

Change your thinking when it comes to thinking about past failures. Think of a time when you “failed” and now start thinking about it as a learning curve. What did you learn from that experience? How can that specific incident help you ensure you don’t repeat your mistakes and learn from your experiences?

Summary

Running a startup is ‘survival of the focused’. No one ever said it would be easy, but failure can be avoided – often by looking at some of the common mistakes other startups have made.

Be prepared to change your focus and really listen to what your customers or potential customers want rather than simply driving full steam ahead with an idea that you think is good.

If you feel that your product isn’t getting as much traction as you like then you might want to have a chat with me to discuss what your options are. I’ve helped many digital businesses grow into successful, thriving companies. Get in touch – I’d be glad to help.

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