Why Some Startups Succeed (and Why Most Fail)

There is a consistent set of factors that lead to startup success and failure.

By Patrick Henry on Entrepreneur.com
February 18, 2017

 

Why do companies fail?

According to an article in FastCompany, "Why Most Venture Backed Companies Fail," 75 percent of venture-backed startups fail. This statistic is based on a Harvard Business School study by Shikhar Ghosh. In a study by Statistic Brain, Startup Business Failure Rate by Industry, the failure rate of all U.S. companies after five years was over 50 percent, and over 70 percent after 10 years. 

This study also asked company leadership the reason for business failure, giving a list of four main reasons for failure with sub-categories below those. They also gave a list of 12 leading management mistakes. It is worth checking out the details. This research-based analysis confirmed some of my observations. I bracket the Statistic Brain finding into seven key reasons for that entrepreneurs experienced business failure:

  1. Lack of focus
  2. Lack of motivation, commitment and passion
  3. Too much pride, resulting in an unwillingness to see or listen
  4. Taking advice from the wrong people
  5. Lacking good mentorship
  6. Lack of general and domain-specific business knowledge: finance, operations, and marketing
  7. Raising too much money too soon

All of these focus on the decision-making of the entrepreneur and general business knowledge.

In another study, CB Insights looked at the post-mortems of 101 startups to compile a list of the Top 20 Reasons Startups Fail. The focus was on company level reasons for failure. I think this list is instructive, but each of these reasons for failure is due to a failure in leadership at some level. The top nine most significant from this study are:

  1. No market need
  2. Ran out of cash
  3. Not the right team
  4. Got outcompeted
  5. Pricing/cost issue
  6. Poor product
  7. Need/lack business model
  8. Poor marketing
  9. Ignore customers

Notice that all of these are business- and team-related issues, even the ones that relate to the product. Issues like there are always tied to leadership and the leader’s ability to build a strong team and drive a business model and business thought process and discipline. Also, keep in mind, if running out of money is the ultimate reason for failure, there are always other factors that cause this result.

Why do startups succeed?

Next, I looked for sources of information of why businesses were successful. I found some good research from Harvard Business School, Performance Persistence in Entrepreneurship, which suggest that serial entrepreneurs that have prior success are more likely to have success, and that the best VCs are good at picking serial entrepreneurs. However, that really didn’t answer my question about the qualities of the entrepreneur.

The best comprehensive research that helped to answer the “reasons for success” question that I could find was from The Ecommerce Genome by Compass in their Startup Genome report, which looked at 650 internet startups. Although this research is tech industry specific, I still think it is very instructive. The report stated 14 indicators of success. Some of the 14 were a bit redundant, but you should review the report yourself. This analysis also confirmed some of my observations. I bracketed these 14 indicators into nine key factors for success:

  1. Founders are driven by impact, resulting in passion and commitment
  2. Commitment to stay the course and stick with a chosen path
  3. Willingness to adjust, but not constantly adjusting
  4. Patience and persistence due to the timing mismatch of expectations and reality
  5. Willingness to observe, listen and learn
  6. Develop the right mentoring relationships
  7. Leadership with general and domain specific business knowledge
  8. Implementing “Lean Startup” principles: Raising just enough money in a funding round to hit the next set of key milestones
  9. Balance of technical and business knowledge, with necessary technical expertise in product development

Read the full article here.