Having witnessed many startups struggle (see note at the end) and quite a few fail in the last few years, this is an attempt to write a note of caution to current and future founders.
I had started the list because I wanted to learn how to become a better angel investor, but it might hopefully be useful to other startup investors and some founders.
Below are a few drivers of startup failure, in no particular order, the list is not exhaustive and the drivers are definitely not mutually exclusive either.
1- Co-Founder Imbalance
Startups will struggle/face unnecessary difficulties when:
- Founders don’t have a similar commitment: Is one founder 100% committed & the other is hedging bets? Maybe exploring other options, or sometimes for personal reasons cannot dedicate as much time/energy/brainshare to the venture?
- Lack complementary skills: This is a “great to have” otherwise the startup will struggle in the early stages before it can afford to hire someone to cover the gaps. Three founders with no tech background or capability starting a tech startup will be challenging.
- Incompatible values: This one will exhibit itself when opportunities to work with partners/clients/suppliers arise and some of the founders have issues with it.
- Divergent long term goals: Do all founders want to spend the same amount of time building the company or one is thinking about a 2 year exit and the other founder is building for the long term? Are all founders planning to raise external funding or one is hoping they can bootstrap?
None of these is lethal on its own, but each causes structural stress on the founders and the startups. Stress that could be managed with high quality communication between the founders this ideally happens before starting and is required during the building phase. And please PLEASE make sure you do a founders agreement!
2- Burning money because of Ego
Wasting money is obviously a bad thing in startups, some run-out out of money before they are able to secure further funding, others with more money create bad habits across the organization usually choosing to buy themselves out of challenges.
Here are some of the bad precursors:
- Early stage startups sponsoring events or spending big $$$ on outdoor advertisement: unfortunately this gives 2 bad signals, lack of frugality and little understanding of conversion funnels. Might makes you look cool/legit though. Avoid unless you secure incredible(barter) deals!
- Hiring too early, especially a BizDev lead: I have seen a surprising number of startups hire a team at a very early stage before there’s any visibility on survival or funding. This is exacerbated when those employees are lead to believe this is a secure transition and depend on the startup to support their residency and their families. Several startups hired business development people during the period when the founders should have been doing 100% of that task to get to know the customer better. This is usually driven by a team of founders who all want to avoid the sales/biz dev work.
- Spending any serious marketing money before the funnel/product are working: understand your full conversion funnel, your segments, your churn rates, get a sense of your lifetime value before pouring any money into marketing campaigns.
A few founders also burn a lot of time on building their personal brand while the product is still suffering. Product before brand, always. Don’t prioritize a panel slot at a third-tier conference above spending time pushing the product forward.
3- Being overly optimistic or not paranoid enough
At the core, of course, founders have to have some optimism or belief that the business will succeed to start the venture but a dose of realism and paranoia is useful to stay alive.
Have heard these or a variation a few times, please do NOT count on any of these happening:
- “We will launch on the AppStore and do FB download ads
we will have 20K DAUs by December!”: No this won’t happen your 10,000 downloads will lead to maybe 5000 signups which will turn 3000 active users the first week but maybe 500 active users 8 weeks later. Optimistic estimates of active users before you launch will hurt you, only after you understand your funnel can you -maybe- start estimating conversion from download to active.
- “I will close the fundraise a couple of months after launch”: Will not happen. Have heard this line from many entrepreneurs in MENA, unless you have a track record in a previous startup most regional investors will want to see your traction before commitment and even then getting the money will take more time.
- “This accelerator program is going to be huge for us!”: No it won’t.
Best case scenario it will include some good quality mentorship and point you in the right direction.
If you want to be realistic, be prepared for -most of- these to happen and usually simultaneously:
- Shockingly low conversion rates
- Higher than expected churn
- Complaints and bad reviews
- Team internal disagreement/fights
- … (Be ready)
4- The Idea
Maybe due to attachment to the idea or maybe due to lack of hustle, money or imagination, the original idea ends up shackling a startup team. The team keeps trying to make it work while the market is sending a clear signal that it is not interested.
Listen to your customers, do not send a survey if you have fewer than 500 customers, instead, talk to them, try to sense how they are using (or not using) your product and make changes based on their feedback.
Most founders are familiar with the lean startup methodologies and can rattle-off the lingo but then spend a year wasting money on outsourced developers, release a product that gets a lukewarm response and instead of listening to the customer and iterating believes spending more money on marketing is the solution.
It goes without saying (or maybe it does not, there’s so much founder bashing), that as entrepreneurs and supporters of entrepreneurs we hold a lot of respect for founders who in many cases quite stable and sometimes lucrative jobs to take a risk and do something they are passionate about.
An often quoted but apt excerpt from a Theodore Roosevelt speech:
It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.
What is this based on?
Since early 2013, with the team at AstroLabs, we have worked with 100s of different startups across the MENA region. Originally, through a program called Scaling Online Startups and later through our Academy, training many batches of startups at incubators and accelerators across the region. And during the past 15 months at our tech hub/Coworking space which is home to more than 75 startups.
From the combined experience above, we have witnessed firsthand about 20 individual startup failures and had at least 5 post-mortem meetings to discuss what happened in detail with the founders. The article was based on most of those.