During the most recent U.S. recession, Mike Kappel found himself in a difficult position. He was a serial entrepreneur and the founder and CEO of Patriot Software Company. And he was running a failing business. In a 2018 Forbes article, Kappel recounts the lessons he learned during that time. He writes, “Nobody wants to talk about a failing small business. But I’m here to tell you that business failure is a reality.”
It was 2008. The market had tanked. New business was hard to find, and jobs were scarce. Kappel’s startup, Career Marketplace— an online intermediary for job seekers and job creators— was struggling. “After a few rough years and many tough decisions I was able to save the business,” Kappel reflects in a 2019 article for Entrepreneur. “But when it was all said and done, it wasn’t the economy or the job market that hurt Career Marketplace. It was my departure from common sense business principles.”
Each year, thousands of entrepreneurs start new businesses. Perhaps you’re one of them. If so, you already know that deciding to launch a startup is no small undertaking. You want to fill a niche in your community. Or you’re following your passion. Either way, entrepreneurship requires determination, strategy, and a strong vision.
Unfortunately, according to the Startup Genome Report, 92% of startups fail within three years. For some industries, the odds of success are even more daunting. CB Insights found that up to 70% of tech startups fail, and 97% of consumer hardware startups die or become “zombies.” Luckily, there’s plenty we can learn from these failures.
So, why do startups fail?
It’s a big question. Entrepreneurs face countless obstacles in the modern economic landscape. Tim Chae, a General Partner at 500 Startups, traces most failures back to three factors: the market, the culture, and leadership.
The market, or failing to solve a market problem
Startups identify consumer pain points and create products to address them. But in today’s global economy, markets change rapidly. By the time you’re ready to launch, your product may already be obsolete. Worse, maybe it was never needed in the first place. Understanding the market, your audience, and your product ensures that your startup isn’t dead on arrival.
According to an article by Inc., this knowledge may be the single most important factor in predicting startup success. They cite a report by CB Insights that found 42% of failures stem from a poor understanding of the market. The article claims, “The biggest mistake you can make as a startup founder is to create a product or service that doesn’t solve a big enough problem.”
The other issue that many startups face is trying to rush their market readiness. Capital is not enough to keep your startup afloat. If you launch an unprepared product, you’ll either be unable to keep up with your own growth or your startup won’t hold its weight in the public sphere. Be realistic. Know your limitations.
One cautionary tale is the GoCrossCampus (CXG) game’s incredible failure. This multiplayer strategy game was a digitized, real life Risk. Students coordinated with allies to “conquer” other college campuses. The game raised over $1.6 million in venture capital funds, had a stellar team of developers, and launched with 1,000 active users. It still failed. Why?
Company founders Hargreaves and Brimer’s felt pressure to release the product before it was ready. In an interview with Business Insider, Brimer reflects, “Looking back, many things felt so damn rushed.” The company’s momentum became their biggest problem. “We had 1,000 active users per day but had to shut down the site right around Thanksgiving. Our servers couldn’t take it.” The site stayed down for six weeks. Shortly after that, Hargreaves was named “the most hated student on Yale’s campus.”
Looking back, the founders regret launching before they knew their servers’ capacity. “We should have spent the fall working on the project and then launched in the spring.” Because they rushed the product to market, a game that the New York Times lauded as “the next Internet phenomenon” crashed and burned before take off.
Employees and company culture
CB Insights also discovered that seven of the top 20 reasons startups fail tied back to employees or company culture. From founding members to investors and employees, the entire company should align across all channels.
Part of establishing your company’s culture is creating a shared, unified vision. Where is the company going? What are you trying to accomplish? What are the tangible results of your team’s success and how can you use them to keep employees motivated? Having frequent success markers keeps your team engaged and on track.
The consequence of getting off track? A scattered, distracted team with no unifying purpose. This was ultimately what derailed MyFavorites, a startup that billed themselves as “the like button for everything.” In their postmortem, founder Steve Poland observed, “Ultimately… we all started losing interest. The team was all wondering where this was eventually going.” Detailed, achievable goals and a clear vision of the company’s future keep everybody pulling in the same direction.
If you’re starting your own business because you want to work less, save yourself the expense and heartache. As the head of a startup, your responsibilities grow exponentially. On top of running the business and handling daily operation, you get to empower employees and create strong teams. Unfortunately, a lot of problems stem from inefficient leadership. As a company’s leader, you need to be able to predict and manage issues, while keeping realistic expectations in the face of incredible challenge.
Prepare for worst-case scenarios
Plenty of factors might derail your success before, during, and post-launch. Financial planning is important—you should always have an emergency fund on hand. But CB Insights found that money shortages comprised only two of the top 20 reasons startups fail. Changing markets, managing personnel, and PR fallout are much more likely obstacles. Planning for these is as important—if not more—as an emergency cash reserve.
Speaking from his own experience, Mike Kappel encourages business owners to run through worst-case-scenario strategies ahead of time. “Sometimes your products or services go stale and you receive an influx of negative reviews. Or, your marketing strategy might not be reeling in enough customers. You should have a business plan for small business in place to help you focus your strategy and increase traffic to your company.”
Face issues head-on
When things start to get rocky, it can be tempting to look the other way. Unfortunately, denying that your startup is in trouble won’t help anything. The faster you identify and correct issues, the sooner you can address them and turn things around. Systemic problems are like an infection: the longer you ignore them, the less likely you are to recover.
Ask for advice
You’re not the first person to face the challenge of launching a startup. Nor will you be the last. One of Kappel’s most earnest bits of advice? Ask for help from the right people. “Other small business owners have been in your shoes,” he assures. “They can lend you some of their expertise so you don’t make the same mistakes as them.” But other business owners aren’t the only resource available to you. Advice from accountants, lawyers, and even industry mentors can go a long way towards setting you on the right track, and digital marketing agencies keep your company on-brand and visible. They have years of experience and expertise to help you navigate the startup landscape.
Don’t fear failure
Advice articles for entrepreneurs blast the same sentiment again and again: “Failure is inevitable. Embrace it.” While that’s true, it should come with an addendum. Failure is only useful if you learn from it. Keeping a startup afloat is not a yes or no thing. It’s a process that requires frequent adjustments and tweaks. The startup world is full of failures, and your willingness to become one of them could be the key to your eventual success.