No one loves to focus on failure, so let’s make this a fast read focused on information that might save your business. Researcher CB Insights analyzed 242 startup failures to find the surprises that shut them down.
When startups fail
To understand this data, first imagine yourself as a startup founder. You’re smart and successful. You’re fired up to change the world. You are eating, drinking and sleeping the can-do attitude. You raise a solid round of financing to build the dream. Your investors are 100% behind you. Reality check.
The most frequent time for a startup to fail is about 20 months after raising the first round.
That’s right, a little more than a year after seeing seven figures flow into your bank account, that’s when the dark night of the soul comes for startup failures. How bad? 70 percent of startups don’t make it past the first round. Sometimes, founders post notes from their nightmare:
CureForward: CEO Frank Ingari wrote in an email, “The company enjoyed patient and substantial support from our investor. It took us longer than planned to generate revenues sufficient to attract new, additional investors at a stage of development where expanding the investor group was the natural and right thing to do.
Omniref: “This isn’t how we hoped things would turn out, but unfortunately, we were never able to find a sustainable business model that justifies the (considerable) expense of running the site”
DineIn: After an acquisition offer and extensive legal diligence, “They backed out leaving us with a huge legal bill both for Dine In and myself personally, a huge debt to note holders, and no VCs to turn to.”
Hardbound: “I’m talking to people a lot smarter than me. I’m thinking of new ideas that might solve some of the challenges we faced. I’m open to change, basically. Side note: if you have ideas, feedback, or suggestions, I would love to hear it! My goal now is learning.
I particularly like that last one–it’s Nathan Bashaw writing on his Medium blog–because you can hear that founder’s optimism ringing loud and clear. You can run out of money, but no one but you can call it quitting time. It’s the sound of a healthy fail.
Why startups fail
Many startups fail from complex storms of things outside of their own control. Yet there was one, single reason that dominated the results.
It accounted for a full 42 percent of startups failing. It is lack of sales. Some say they could not raise their next round or shifted blame to investors for running out of money. Sales volume, sales funnel acceleration, and customer churn are certainly key metrics for most investors.
- The hard truth is, even when you’re growing, if you’re not posting some of the top numbers in your chosen software or product sport, you’re less investable (or, say, riskier) than those outgrowing you.
Proofing against startup failure
Customer growth tests the company and the team far more than building a product does. Building a product is inherently under the control of the team. It is a relatively “inside looking” process. Building a sales organization, however, is inherently outside facing. Managing a sales operation is a constant dance with the market–and the market dances like a starving, drunken shark.
Paying customers have personalities and put demands on the organization that a product just doesn’t. Guiding the constant tension between the product roadmap and sales is where the best founders are found. The chasm between building product and sales, together, is also where you’ll find bones of those who couldn’t complete the crossing.
- To future-proof your startup and make it one of the 30% that makes it past the first round, build sales from the idea out. Make sales growth integral to every single decision you make from day one.