Roundtable: Why Do Startups Fail?

So far in this series, our VC panel has tackled the point at which a company is ready for venture capital, the valuation methods they use, and what they like to see in an investment pitch. In this final installment, John Greathouse, Andrew Parker, Alex Taussig, Sarah Tavel, and Rob Go switch gears to look at some of the most common reasons why young companies ultimately disappoint.

Back to part one: When is a company ready for venture capital?

Based on your experience, what are some of the most common reasons why a startup company fails?

John Greathouse, General Partner, Rincon Venture Partners

John Greathouse - Company Valuation MethodsStartups NEVER run out of money. Instead, they run out of people who are willing to give them money. There is a difference. Startups that fail are unable to convince customers, investors, and other stakeholders that their value proposition is worthwhile.

The best way to validate your value proposition is via third parties, which can manifest itself in many forms (customer dollars, vendor support, distributor investments in training their sales teams, investor capital, etc.). Show us an alliance of sophisticated third parties that are vested in your success and [VCs] are more apt to have confidence in your underlying value prop.

Rob Go, Co-Founder, NextView Ventures

Rob Go - Company Valuation MethodsThe easiest answer is that most startups fail because they are going after a bad market. It’s very hard for even a great entrepreneur to be successful when they face negative market headwinds.

Aside from that, I think there are many opportunities for failure. Startups could be focusing on solving the wrong problem, they might fail to build a great product, they could be over- or under-capitalized, or they may even make a strategic blunder. But many successful companies have encountered these opportunities for failure and found a way to get through them.

I think that it often comes down to the ability of the founders to be intellectually honest and very, very flexible in adjusting their course until they have something that is working. This usually can only happen if you aren’t over-capitalized and haven’t invested too heavily in the wrong kind of company that’s building the wrong kind of product.

I think staying lean early on until you feel confident that you have something customers really want is important. Calling it quits early is important as well. Twitter, Turntable.fm, and many others were essentially re-starts when the founders quickly realized that they were going after the wrong opportunity and wanted to start over.

Andrew Parker, Principal, Spark Capital

Andrew Parker - Company Valuation MethodsThere are typically two reasons:

A) The company didn’t build a product that people cared about, or

B) founders leaving or founders fighting.

“B” is typically a symptom of “A”, but sometimes “B” is the nail in the coffin.

Alex Taussig, Principal, Highland Capital Partners
Alex Taussig - Company Valuation Methods

Startups fail because they run out of cash.

They can run out of cash for many reasons, but a few are more common than others. First, they might be providing a solution to a problem no one has. Second, they could be providing a solution to a real problem, but can’t figure out how to make customers aware of that solution. Third, they may have matched the solution to a problem and made customers aware of it, but the cost of marketing, selling, and maintaining the product was too great relative to the value of those customers. Finally, they may have suffered from poor planning, raising their burn in anticipation of revenue that never arrived.

Sarah Tavel, Senior Associate, Bessemer Venture Partners

Sarah Tavel - Company Valuation MethodsThere are so many ways a startup can fail; it might be easier to ask why some startups succeed. Starting a business is HARD, and there is a lot that needs to go right. That said, I think the basic and most common reason startups fail is because they don’t build something people really want, and few teams can identify that their product is not working and iterate rapidly enough before running out of cash.

Back to part one: When is a company ready for venture capital?

photo by: Podknox

Share Your Thoughts

  • http://www.chasminnovations.com Robert DiLoreto

    Great points…what I would add is the following:

    Too high of a belief that “if we build it, they will come.   The lean
    start-up processes that many start-ups follow almost give the impression that
    you will be on an auto-pilot to success if you follow the program…meaning once
    to build your “MVP” and are ready to launch, all you need to do next is put up
    a “PRICING & PLANS” section on your website, install the latest
    sales/marketing 2.0 tools, and you will be off to the races. (Both lean
    start-up principles and web 2.0 tools are great…What I am saying is that a
    complementary, strategic, proactive approach in targeting ideal users,
    customers, and partners may be needed.)

    Some may argue that the “cost to acquire a customer” will be elevated, but if executed correctly, the ROI and swiftness to this approach can be huge. 
    (THESE COMMENTS FAVOR B2B START-UPS VS. B2C.)

    Disruptive technology start-up’s don’t have enough focus on targeting “C-Suites” of large organizations who sponsor and fund important open innovation initiatives…This strategy also presents an opportunity for a customer-funded event Vs. going back for another round of angel investment.  These companies are eager to identify early stage,
    disruptive technologies and platforms while investing in a customer development
    partnership.  They have a strong “voice” that can confirm and validate your product development road map.  These open innovation leaders also understand
    that you cannot be “sole-sourced” to them as you need to grow your user,
    customer, and partner base in other directions as well.

  • http://www.wagepoint.com Bill Murphy

    This is a great post. In the end though it is all about people and people fail. They fail to make the right decisions, or they fail to balance their ego, or they fail to convince or they fail to project and plan based on fundamentals of the market. People fail all the time, it is a fact of being human. It is about creating a team that can work together to prop each other up,  that can fill the gaps, those weak points where failure may occur. Anyway, the analysis of any failure should be of interest to us all, to all the people. Good job.