Countless startups start with projections of sky-high revenues, but it never works out. But there is a better way — that also explains why startups fail.
Fact: At least 75% of startups fail.
Shikhar Ghosh, a senior lecturer at Harvard Business School, revealed that 70% to 95% of startups fail – depending on how you define failure.
If failure refers to failing to see the projected return on investment, then the failure rate is 70 to 80 percent. And if failure is defined as declaring a projection and then falling short of meeting it, then the failure rate is a whopping 90 to 95 percent.
Interesting side note: 90 to 95% of all projections fall short. In other words, business plans suck.
No Business Plan Survives First Contact With Customers.
Countless startups start with projections of sky-high revenues, but it almost never works out. No business plan will meet projections. We can’t predict the future under conditions of extreme uncertainty, under which startups need to operate.
Welcome to The Innovation Gospel.
Hence, we need a different understanding and startup metrics to measure the progress for innovating.
—P.S.: You are reading part two of a three-part series about The Startup Genome Project — an initiative carried out between 2010 and 2012. In this post, I am mainly referring to the second Startup Genome report, and summarize the findings for you. Needless to say, I recommend you to download a free copy of the report and study it yourself.
- The Startup Path: Measurable & Repeatable
- Startup Failure: Why 75% of all startups fail
- Startup Success: What makes only a FEW startups successful
Why startups fail: Premature scaling
I get asked a lot why startups fail and whether there are proven studies or reports about it.
Yes — there are!
Starting a startup, and any form of business is highly uncertain in nature. Even though there are stages a startup moves through, we can’t guide startup founders with exact steps and actions that lead to success.
Startups, however, are a beast. You never know how they turn out.
However, over the last ten years, we have gained a much better understanding of tools and processes startups should follow for building products to acquire customers and retain them.
The theories and models that have had the most widespread adoption are effectively applying scientific management principles to startups. The two best-known theories are Customer Development and Lean Startup.
Eric Ries, the Chief Lean Startup Ambassador, is a former student of Steve Blank who left an influencing impact on the startup world with his book ‘4 Steps to Epiphany’.
Based on Steve’s and Eric’s work, Bjoern and Max started The Startup Genome Project in 2010 aiming to decode the mystery of startup success and thereby reduce the massively high failure rate of startups.
Based on data from +3200 startups they have found that 74% of startups fail due to premature scaling.
The Startup Genome Team trained machine learning algorithms, to assess if startups focus on the things, which are most important in their current stage.
The team looked at the five dimensions of a startup to evaluate successful startups versus unsuccessful ones. Successful startups keep the (1) customer dimension as the primary indicator of progress, in tune with (2) product, (3) team, (4) financials and (5) business model.
Examples of premature scaling
- Spending too much on customer acquisition before product/ market fit and a repeatable, scalable business model.
- Overcompensating missing product/market fit with marketing and press.
- Building a product without problem/solution fit.
- Investing into scalability of the product before product/ market fit.
- Adding “nice to have” features.
- Hiring too many people too early.
- Hiring specialists before they are critical: CFO’s, Customer, Service Reps, Database specialists, etc.
- Hiring managers (VPs, product managers, etc.) instead of doers.
- Having more than one level of hierarchy.
- Raising too little money to get thru the valley of death
- Raising too much money. It isn’t necessarily bad, but usually makes entrepreneurs undisciplined and gives them the freedom to prematurely scale other dimensions, i.e. over-hiring and over-building.
- Raising too much is also riskier for investors. It is better to practice to give startups the amount they actually need and wait to see how they progress.
- Focusing too much on profit maximization too early.
- Over-planning, executing without a regular feedback loop.
- Not adapting the business model to a changing market.
- Failing to focus on the business model and finding out that you can’t get costs lower than revenue at scale.
—Please note: This data was collected in 2010 to 2011 – mainly in Silicon Valley. In local startup ecosystems, there were different conditions for startups and so funding raised, and other metrics may vary. The Startup Ecosystem Report 2012 shed light into different startup communities around the globe. Check it out here.
Here is a great infographic summarizing a few of the Startup Genome findings (below is just a preview).
Why do startup founders fall into the premature scaling trap?
Because of The Startup Founders Paradox.
It is easy to understand: startup founders take action because they strongly believe in their idea. However, this belief can often lead them to failure. Any idea is always just a guess about what customers want and how the market would react to a new product or service offering.
If startup founders didn’t believe in their ideas, they would never have the courage to risk everything — time, money, relationships, health, reputation. But precisely because entrepreneurs believe so deeply in their ideas, they jump into action by investing in creating a business, building a product, and then spending the money to try and sell it.
What most startup founders almost always overlook is one inevitable fact:
Startup founders’ beliefs are only guesses about what their customers want — unless proven otherwise.
The solution to the startup founders paradox is to recognize that you are facing an unknown problem and solution.
—Startup founder advice: Don’t become a victim of your thoughts. In one way, it’s great that you have the guts to act on your dreams, but thinking that your thoughts will always turn into reality is false. Be aware that ideas are only guesses at first. Smartly validate them.
—all: This doesn’t only hold true for startup founders, but for everyone who gives feedback on startup ideas. Even mentors, or advisors — in fact, anyone involved in startups — who gives seemingly valuable feedback, mostly just guesses what they think is best for the startup, what customers want and how the market will respond.
The worst and most problematic thing is that most feedback givers don’t take a customer-centric perspective!
They only share their thoughts purely based on their world-view. But as we know, there are 7 Billion interpretations of “our” reality, not just ours 😉
Be careful. Don’t listen to them if they are not your ideal customer.
Let’s redefine expectations about failure
We must revise our expectations about failure — globally!
In Silicon Valley startup founders consider failure a badge of honor. They rather shut down a startup that doesn’t grow than hang on to it that turns into a zombie startup — a startup not worthwhile fighting for.
Don’t waste your 20’s, or 30’s, or 40’s being a zombie.
In most startup hubs around the world, I see this phenomenon that startup founders can’t quit. Can’t move on.
I am not saying that startup founders should quit quickly. You need stamina. In fact, a lot of it. Persistence too. Oh and will-power.
The Dip: Knowing when to quit and when to stick
However, at some point, it might be obvious not to work on this idea anymore. In ‘The Dip’, Seth Godin advises you when to Quit —and when to stick with whatever you are doing.
It’s better to move on, take your learning’s from the first startup and put them into action in a new one. That’s the life of a startup founder. After a few attempts, you recognize patterns. You will be more emotionally stable, better at leading a team in addition to creating and executing your vision.
What is the success bar for startup founders?
A good Baseball Player, for instance, with a .350 average is considered to be a success, even though he has a .650 failure rate. In other sport games, it’s similar. The best strikers in soccer score less than one goal on average per game. Their success threshold is different than scoring one goal per game.
For startup founders, it’s hard to say.
Startup experts like Tim Ferriss — investor in Facebook, Twitter, Uber and Evernote — believe strongly in learning, creating success systems and developing good habits.
#1: Learn every f*cking day
There are many skills startup founders need to acquire, I rather look at the soft skills.
As a startup founder, ask yourself how much you learn generally? About yourself? About people? Markets? Doing business? Leadership? Managing projects? Getting stuff done?
- Do you learn and improve daily?
- Have you set up a personal and team-wide productivity system?
- Are you able to focus on daily, weekly and monthly tasks and see and go after the big picture?
#2: Follow the right habits
Tim Ferriss and other startup experts firmly believe that systems and good habits will make you successful.
Improve your soft skills continuously and you’re in the fast lane of a successful life.
As a startup founder ask yourself the most crucial question after quitting: Do you have energy left to start over again?
#3: Do you have energy left to start over again?
I strongly believe in systems, learning and habits to reach success.
When startup founders see their soft skills as something they acquire for the rest of their life, emphasize their importance, and make it a conscious effort to improve several soft skills, they pave the path to success.
Success does not necessarily mean financial success — but can be manifold: in terms of emotions, love, relationships, health, freedom and self-improvement.
Only a FEW startups are successful — let’s explore startup success in the next post.
- Steve Blank: “No Business Plan Survives First Contact With Customers.”
- Shikhar Ghosh: 70% to 95% of startups fail
- Startup Genome Project (now called Compass.co)
- The Second Startup Genome report: Premature Scaling
- Forbes: The Startup Founder’s Paradox
- Harvard Business School: Revision of expectations about failure
- Danielle Morrill: Zombie Startups
- Seth Godin: The Dip: A Little Book That Teaches You When to Quit (and When to Stick)
Next on StartupGeist
- Startup Success: What makes only a FEW startups successful?
- Startup Fundraising: The Crazy Startup Madness.
- The Road to the Holy Startup Grail: How to Find Product/Market Fit