By David Feinleib
VC, Entrepreneur, and Author of Why Startups Fail: And How Yours Can Succeed
Startups fail for many different reasons. Turn failure into success by avoiding some of the most common causes of startup failure:
- Failing to drive demand
- Building a product people don’t want
- A lack of passion
- Running out of money
- Scaling too fast
- Small markets
- Failing to focus
As I wrote in Seven Ways To Market Your Startup, getting the word out about your product is key. All too often, entrepreneurs focus on what they’re going to build but not on their go-to-market strategy. Imagine that your product is already built. It’s done, and it’s ready to go. Now what? What is the tagline for the product? How are you going to market it? What’s going to drive massive adoption?
Figuring out how to drive demand for your product is just as important as figuring out what product to build. Inefficient, unleveraged distribution can kill a startup. There may be millions of small businesses you can sell your product to, for example, but you need an efficient, repeatable, and scalable way to reach them.
In fact, the best products today build marketing that drives adoption in from the beginning. Consider file sharing service Dropbox, which gives free space to existing users when they sign up others. The company now has some 50 million users.
Or think about social game maker Zynga, which builds games that require the participation of friends. Zynga leveraged the Facebook social graph to reach hundreds of millions of players. Marketing is no longer separate from product—it’s built right in.
Build Something People Want
Users of Apple products don’t just use the products—they evangelize them. This is the sign of having built and marketed a product people want.
So many entrepreneurs spend months or years building a product only to find out that few people want it. How does this happen? They keep waiting for the perfect product before being willing to get their product in the hands of early adopters.
Of course, the art of being an entrepreneur is finding the balance between products that are too early, which leads to unhappy users and negative publicity, and waiting too long to get real customer feedback.
There is nothing like real-world feedback. In the case of consumer products, build a product for yourself. When it comes to products for businesses, build for yourself if you can—and if you can’t, find a few early adopter customers who will work closely with you to be real world test cases.
It’s not that the best entrepreneurs get their products right out of the gate; rather, it’s that they fail fast and iterate their way to the right product quickly—and you can too.
Pitch With Passion
You might be surprised to see this one on the list. After all, what entrepreneur lacks passion? Yet I’ve sat through countless pitches where this was exactly the case. And if the entrepreneur lacks passion about the opportunity, how can potential investors be expected to get excited about it?
Investors in very early stage ventures aren’t investing in today’s numbers—they’re investing in the opportunity and the team. They’re making a logical decision based on pattern matching and potentially, early traction. But they’re also making an emotional decision.
They see something in the team and the opportunity that gets them excited. They feel heat on the deal, the scarcity of an investment opportunity that’s going away. They make an emotional connection and go for it.
Connect with potential investors, employees, and customers on an emotional level. Sure, it helps to be naturally outgoing and passionate, but there are other ways to connect as well—through delivering great products that people love and through measurable traction and growth. If you have trouble communicating passion, consider a coach, mentor, or advisor who can help you channel your inner Steve Jobs.
Manage Your Capital
Whether you’re funding the business yourself, have raised angel money, or have raised venture, capital is frequently hard to come by. And even when it’s available, it can be very expensive.
Managing your capital is all about knowing the numbers. Even if you’d rather be building product or out marketing and selling, knowing your numbers is key.
The first step is to know how much money you have and your burn rate. Put these numbers together and you get the runway until your “cash out” date.
The “cash out date” is not the date at which you get to take hundreds of millions of dollars of cash out and put it in your bank account. It’s the date at which, if things continue to proceed as they are and you’re not profitable, you’ll run out of money. Know the date. It can be terrifying staring down a rapidly emptying bank account—I know because I’ve been there—but there is nothing that lights a fire under you quite like the impending reality of running out of cash.
The second key part is to understand how much it costs to acquire a user or customer—your Cost Per Acquisition, or CPA—and what that user or customer is worth to you—the customer Lifetime Value, or LTV.
In the early, discovery stage of a business, your CPA and LTV numbers may be all over the map. You’re still figuring out the business and the business model. You’re trying lots of different approaches to acquire users and seeing how much various customers are worth. Once you see consistency in CPA, LTV, and your growth rate, it’s time to scale.
Scale When Ready
Nothing brings a rocket ship of a startup down to earth faster than scaling too fast. It can seem like a Catch-22. How do you acquire users and customers if you don’t spend enough money to acquire them? The trick is to know when to pour gas on the fire.
Scaling too fast can come in several forms. It can mean spending a lot of money on online marketing before having a site that’s optimized to convert the visitors who arrive. It can mean hiring people, especially sales people, too soon, before you’ve got the right product and the sales approach refined to a point where it’s repeatable.
The Sales Learning Curve (SLC) can help. The SLC was created by Mark Leslie, Former CEO of VERITAS Software, and Charles Holloway, professor at the Stanford Graduate School of Business. Simply put, the SLC says that most products take longer and cost more to launch than entrepreneurs expect. You’ve walked your way up the learning curve when you have the right product, a repeatable approach to marketing and selling that product, and you know your CPA and LTV numbers. That’s when it’s time to pour on the gas.
Tackle A Big Market
It’s just as much work to go after a small market as it is to go after a big one—so why not go after a big one?
Of course, the decision about what kind of business to build is a very personal one. While I was in business school, I built an online lead generation business. It was highly profitable but relatively small. I loved building the business, but I missed working on something big and impactful. My Dad ran his own consulting business for decades and enjoyed every minute of it.
Yet when it comes to technology companies, many great teams have been beaten by small markets—there just aren’t that many customers and there’s limited revenue to go after. No matter how great a job you do on execution, ultimately it remains hard to be successful. So if you’re building a technology company and you have the aspiration to go big, start with a big market.
In a world where the barriers to entry to building products—at least software products—are rapidly decreasing, it’s easy to want to go after many different ideas. As my first venture investor told me when he wrote me a check, focus wins. The advice is as good today as it was 10 years ago.
It’s easy to get distracted. Distraction leads to lots of different features in a product. But winning is about finding one big feature that matters, a core feature so compelling that all of your users or customers want it, a feature that differentiates you from everyone else. Winning is not about having a thousand features. It’s about doing a few things really, really well.
Startups fail for lots of reasons. Fortunately, many of these reasons are avoidable. By driving demand for a product people want, focusing on what separates your product from the competition, and managing your cash along the way, you can turn your startup into a huge success.
David Feinleib is a former General Partner at Mohr Davidow Ventures and a four-time entrepreneur. To find out more about making your startup successful, get Why Startups Fail: And How Yours Can Succeed and check out David’s blog at www.vcdave.com.