Recently I was meeting with a group of founders. We were reminiscing over all dumb things we did over our careers. One founder mentioned the recent video from Better.com’s CEO insensitively laying off 900 employees and admitting to “pissing away $200M.”
“At least I did not kill my startup like that!” one founder exclaimed.
This set off a discussion about all the ways startups collapse. Stories of failed startups are uncommon. However, for every sensational fail like Theranos, there are many more that simply fade into irrelevance. After a lengthy discussion, we came up with ten things that can kill a startup, as well how leaders can commute a startup death sentence.
1. No Sales
You can have the greatest idea in the world, but if nobody pays money for it, you might as well throw it away. Startups that cannot sell are startups that cannot survive.
Solution: Always be closing. Sales must be the top priority for everybody, especially the CEO.
2. Angry Customers
While customers of startups often know they are taking a risk, that tolerance has limits. Unhappy customers spread bad news quickly. When every sale is important, angering customers with poor support, unfulfilled promises, or unfixed bugs can be devastating.
Solution: Dedicate a person (or team) to customer success. Have a mechanism to capture and respond to customer feedback.
3. Irresponsible Cash Burn
Most startups burn cash. Not all cash burning is good. Burning cash to hire (the right) people or procure necessary supplies is good. Burning cash on ludicrous parties, lavish offices, or expensive vendors not only shows a lack of leadership, but it also shows a lack of control.
Solution: Aggressively scrutinize spending. Implement spending controls to prevent any executive (including the CEO) from spending more than a set amount.
4. Lack of Product (Management)
This may seem obvious, but plenty of startups get funded based on innovative ideas, and then faceplant when they confront the reality of product development. Even releasing flawed products, that are fixed later, is better than releasing nothing.
Solution: Hire a product manager, set goals, and meet them. Do not allow perfection to become the enemy of good (or even mediocre) product.
5. Internal Strife
It is profoundly difficult to build a product, bring it to market, and convince customers to buy it. It is impossible to do those things if the people in the company are going in different directions. Unifying everybody around a common set of goals and values is mandatory for success. Equally important is getting rid of the people will not get on board.
Solutions: Provide leadership coaching for executives. Require unity to a strategic plan a condition for executives to remain employed.
6. Financial Shenanigans
Most founders find budgets, sales forecasts, and unit economics boring because…well they are boring. However, they are also supremely important to running a company effectively. When leaders begin messing around with the finances, to either hide failure or reassure jumpy investors, there is nowhere to go but down.
Solution: Empower finance team to report independently to the board. Perform annual, independent financial audit.
7. Outmaneuvered
When an innovative product emerges, competition is inevitable. Startups that become stuck on early success and fail to keep pace with their competitors can get outmaneuvered and rendered irrelevant. Moreover, if a large competitor (like Microsoft) enters the market, they can outspend smaller players resulting in the same result.
Solution: Pay attention to the competition and meet those product development goals.
8. Failing to Plan
While it may be a cliché, failing to plan is a plan to fail is an accurate statement. It is easy to become distracted with everyday struggles and problems. Moreover, it is equally easy to dismiss planning as overly formal, especially in fast-moving DevOps companies that promote a “fail fast” mentality. The purpose of a business plan goes beyond formality. Plans set boundaries and keep the company focused. Moreover, they prevent any one person (or team) from redirecting the company into some other product or effort.
Solution: Document an annual strategic plan. Get buy-in from the team. Enforce it. Stick to it.
9. Arrogance
When money floods in, some leaders transform into lunatics. This can lead to spectacular flameouts, such as WeWork. When arrogant leaders fancy themselves as prophets, the company is on a one-way trip to an early grave.
Solution: Do not enable craziness. A healthy dose of skepticism and reason can quickly defuse a lunatic.
10. Lost Vision
Among all the things we discussed, the most insidious killer of all startups is one of the most difficult to detect: a loss of vision. Vision is what a startup hopes to achieve and become. It is the intangible why of a company that Simon Sinek references. Large companies with an established customer-base and entrenched internal power structure can stagger along for decades with no vision. Startups cannot. The company’s momentum, enthusiasm, and focus all depend on the vision. Many startups lose vision when the founders exit, or the products fail to gain traction in the market. Immature leaders will dismiss talk of vision and core values as “touchy feely” nonsense.
It is vitally important for startup leaders to cultivate, communicate, and command a clear vision, mission, and core values. Many of the other items on this list can trace their origin back to the loss of vision within the company.
Solution: Document the company’s vision, mission, and core values. Refer to them regularly.
Conclusion
Startups are fragile things. Unlike big companies, which can weather mistakes, startups have less of a safety net. The primary advice this group of founders had was simple: stay on target. Startups routinely get lost and distracted along the path to success. Whether you lead a startup or work at one, stick to a plan.
Moreover, money is seldom why a startup fails. Rather, its leadership (or the lack thereof) that causes the chain of events that lead to lost money, lost deals, and lost opportunities.
