Why Startups Fail

In working with local startups and students in the DC area, one question seems to be on everyone’s mind these days. Although it seems basic, it’s a question that stirs debate from the classroom to the boardroom. Why do Startup’s Fail? Out of curiosity, I asked my kids this question for a true unbiased opinion. Their response "Because they suck" and "Because they do not know what they are doing". Nothing like a straight dose of reality from an 11 and 9 year old! So I pressed my search to another source of fantastic unbiased results, Quora. Top answers from Quora reveal “inability to acquire and retain a substantial number of customers” and my favorite “when resources are poorly managed”.

The truth is, most startups fail because they waste valuable dollars building and marketing a product or solution that no one wants! As Harvard professor Tom Elsenmann points out in one of his blog postings, when entrepreneurs “run lean” they formulate hypotheses about major elements of their business model, then they devise experiments to test those hypotheses with minimal waste of time and resources. This “test” as he describes is a process where a minimum valuable product (MVP) is developed to gain customer insight/feedback, or test your hypotheses. When you experience a set back or “failure”, entrepreneurs should adjust or “pivot” until you confirm a true product market fit (PMF). Scaling a model prior to a successful PMF is risky and increases your risk for massive failure.

Those who invest early in MVPs to establish a solid product market fit have an easier time developing a true go-to-market strategy and increase their chances of securing seed funding or a Series A round. This is the foundation of Eric Ries’ and Steve Blank’s work with customer development methodology, which launched the Lean Startup movement. By taking advantage of open source, agile software and iterative development management, lean startups can operate with much less waste and focus on customer development, not product development.