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

Startups 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

The 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

There 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

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

There 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?