Saturday, July 30, 2016

Why Startups Fail

A decade or so ago I began surveying past seminar participants that did not startup businesses as to how come, and the reasons were fairly universal:

1. Can't give up the security and benefits of present employment.

2. Life happens.  Just never made the time.

Well, the coming downturn will remove those two barriers.  I am glad the past participants know how to start up a company, when the time comes.

Another question I have been pondering recently is how come so may start-ups fail (a common state is 80% within the first five years.)

When I began teaching small business international trade over 30 years ago, I distilled what I had learned from others the previous decade, what I had done myself on their advice, plus over time, feedback from past participants in my seminars.

Assuming B2B, I learned from my mentors to compete on design, not price, working in the specialty segment.  This is an alternate universe from what is taught in schools and assumed in business media so just about every point of received wisdom is counterproductive in the specialty realm, for example, intellectual property rights are anathema.  

OK, so that is how to do it, but how come so many who try, fail?  It has taken a while, but here it is:  Why do some startups thrive and most fail?  The paradox is startups that thrive assume there are no customers, those who fail assume there are customers. This truth has always been there, but I could not conceive it, let alone articulate it.  This is ironic for what I learned and have always taught is -

1. The customer is the most important thing in business, but design is the hardest thing.

2. You must at some point ask the customer for an order.  Why not make that the first thing you do?

Now #2 begs the question "what are you offering for sale?"  The answer to that question needs be developed within the confines of those two points.  That takes a whole seminar to explain.

In seminars and emails from book readers people will present to me problems regarding business startup and my first question is always within the confines of the two items above, "Who are you customers?" Invariably they will dismiss my question assuring me they have customers, and the real problem is somewhere else.  I actually get queasy as the problem they outline is proof positive they have no customers, since if they had customers, the problem would not obtain.  For a recent example, a fellow wanted to know options for getting payment out of a certain African nation.  He had read a study that there was a shortage of Western children's clothes, so that was his market, the customers assured, by virtue of the study.  His only question was how to get paid.  Ungh! Until he had customers (defined as ready, willing and able to pay) there was no way of answering, it depends on his customers.  This delusional assumption there are customers has been near universal: countless people, all products, all countries.

There is a another giveaway in these conversations, people will talk about "my company" intimating they have a business, that is to say, customers.  In fact, as noted, they do not have customers.  What they mean is they took the time to see a lawyer, hire a CPA, had a logo and website developed, get all sorts of licenses and what not, to establish a business in legal and accounting form. I marvel that they actually did all that work, wasted the time talent and energy, before they had any customers.  Can't it be used when you have customers?  Maybe, but the time spent on that delayed the discovery of customers.

Now that I know why startups fail, I know what to look for in a google search, guess what?  Very many others have spotted the same thing.

CBInsights has been doing a running study since January 2014 on why startups fail.  By far the # 1 reason is "no market need." In other words, they did everything except those two points above before contacting "their customers" only to find out there was "no market need."  The rest of the reasons all suggest the "entrepreneurs" failed before they even ever were told "no" by the customers.  Never even approached the customers before failing.  Immense resources wasted!

Fortune has cited CBInsights with their own take.   Quora contributors likewise cite "no customers" in many different expressions, and also cite "pivot" (changing direction) as common among those who do find customers.  This is important, because you cannot get lucky and find customers, the process must feature changeability, in other words compete on design, based on customer feedback.  Another mentions "you cannot A/B test a product."  Correct! You form a hypothesis and either prove or disprove it.  With customers. First thing.  Fail fast, fail cheap.  Likewise in Quora, the other common problems all indicate the entrepreneur never met the market, for example, when "the wrong people" is given as a reason.  Elsewhere someone named David Skork gives reason #1: little or no market.  Inc. rehashes the CBInsights study of Nov and the Quora discussion of Feb 2015.  Entrepreneur magazine offers an essay by Steve Tobak, who implies the problem is no market:
It’s easy for entrepreneurs to become so focused, so wrapped up in their own vision, that they lose perspective. That’s actually one of the key benefits to seeking venture capital from firms that know your target market: they give you feedback and validate your strategy.
Hmmm.... instead of second hand info from a venture capitalist, how about talk to your customers yourself?  But anyway, the chief implication is no customers.

Fast Company lists "wrong team" number one, and "no market" as the number two reason.  No warrant  is offered for this ordering.

The last link on the google first page is to the website of one Don Silver:
Don Silver – Luxury Vagabond, world traveler, entrepreneur, big thinker and writer of thought provoking articles.
His reason is the odds are against you, so essentially he advises you to get good at marketing.  OK.

I am glad to have the reason I rooted out affirmed far and wide.

Now tomorrow I will add detail to the two essential points I noted above, and how to startup without fail.

Feel free to forward this by email to three of your friends.


Anonymous said...

Looking forward to part 2, thank you John.