One of the well-known but little talked about facts is that 97% of startups (some say even 98%) close after 1–2 years. We usually don’t hear about the ones that fail because the media is too busy celebrating “success” to report everything equally. Simon Sinek called it the “Facebook/Instagram world” where we are “good at putting filters on things”, showing everyone that life is amazing even when it is not (see here in his piece about millennials).
This habit of pretending, of not really sharing (oversharing but not the real thing, not our real feelings and what’s really going on with us) and of not truly connecting as humans, seeped to the media as well and shaped the way we define “success”, especially in business and in the startup ecosystem.
For some reason, the simple truth of what a business is or should be has been forgotten and instead, we began celebrating fundraising and exits instead of great products and services and long lasting businesses, which provide work places and advance the economy of countries.
Every time a startup raises finds the media breaks out in a song and every time a startup is sold to another company — once again we praise and congratulate the founders.
No one sticks around long enough to check what happens to that startup a second after that funding round (did it complete the product? Commercialize? Develop more or new products? Does it still exist?) or after the sale (what happened to the employees? Were they employed by the purchasing company? Or kicked to the curb?).
Research shows that 46% of the businesses (startups included) that fail within the first 1–2 years of their life, do so due to incompetence.
In fact, it is also not uncommon for startups to fail even after raising large sums of money. CB Insights did a post mortem on over 200 startups that failed after raising money between 2014–2017.
There are many reasons why a startup would fail after raising money and they can all be summed up by “poor management”. Failure to read the market, failure to develop products that are needed for long term, failure to assemble or manage good teams — lots of reasons, all of which come back to the founders, to the management, to the understanding of business. [more about that here].
Truth be told, we can’t really blame them. Most of the startups are founded by young people with bright ideas but little to no real life and work experience. How can we expect a 20 something year old fresh out of university to be a good manager? To know what it means to be CEO? To have business management and development understanding? Finance understanding? Heck, how can we even expect that from a 30 something or even 40 something year old who worked as a programmer for all their professional life up until the point they decided to found a startup?
What scares me most though, is not the rate of startup failures, but the lack of lesson learning. You see, even after they fail, the founders are more busy putting out sob stories about how they have tons of branded t-shirts and how their friends raised money and how they are sad they didn’t raise money, than they are actually trying to understand what happened and learn from it. Most founders of failed startups go on to found more companies, and fail again and again because they repeat the same mistakes again and again. Coupled with the culture of praising the “start” part (fund raising) rather than the “up” part (the actual products and long lasting stable business), these founders stand no chance.
If you write a post about your startup failure and all you can say about it is you wore your branded t-shirts proudly every day, drew hope from seeing your friends raise money or making big exits and that you will found another startup or become a mentor to startups (really?!) — then Mr… have you got your lions crossed!
If your post get several hundreds “likes” and comments of “Way to go!”? OMG, so many people have got their lions crossed!
As long as your KPIs for success are:
- Raising money
- Making an exit
- Having branded t-shirts
- Being able to persuade investors to invest using lots of buzzwords with zero market research
You will continue to fail and thinking you can move on to consulting for others and mentoring others is, at best, naïve if not outright fraud.
Once you remember that a startup is a business like any other, that is should be about creating products and services with added value to the market, about creating jobs and driving economy, that the “start” phase should be short and you should aim for becoming profitable as soon as possible — only then will you be able to make your way towards real success.
To do that, though, you must be honest enough with yourself to admit that you don’t know everything, that you may need help and counsel from someone more experienced. Maybe even bring in a CEO from outside or at least a business developer with a proven track record.
For the rest of us who are not startup founders but the general public — the service providers, the mentors, the clients, the media… we must change our definition for success. We must change the way we reward founders and leaders and make them understand that they have to work hard and truly excel.
Our KPIs should be:
- Great products and services — ones that we really need and use
- Better understanding of us — better product market fit
- Long term business — stable businesses, profitable and able to provide for many people.
- Prosperous and forward moving economy on a national and global level.
Raising funds should not be the end goal. It has always been and should continue to be just a tool, a step on the long journey to establishing a business.
Thanks for the comments 🙂
Excellent summation.
I’m biased, oh so biased. I feel things fail because of three things.
1. Poor planning
2. Poor analysis
3. Poor working assumptions.
We are 100% aligned.
True, there are many reasons a startup can fail and many of them can be grouped. Some of the failures I’ve seen are caused by such basic things that one has to wonder what in the world made the founder (s) think that was a good idea, or that he/she was ready to begin and run a business.
I’ve started 8 companies and mentored others. In the long list of what needs to be done, raising money is way down the list. Many of these young people starting new endeavors don’t even know what type of structure they need. Will the company be a C corp, and LLC, a partnership, a proprietorship, etc?
I talked with a young college graduate a few months ago and she couldn’t tell me the difference between a balance sheet, and a profit and loss statement.
There is also a point in the growth of all companies where the need for management skills overtake the need for creativity. Many entrepreneurs are not by nature good managers and they are hesitant to turn their brain child over to the management of another.