If you only watch Netflix or follow the mainstream media, you’d think startups are romantic, sexy, and regularly mint billionaires. Sure, startups and new ventures can be exciting, but in many cases, they’re a grind and can be very stressful. The entrepreneurs who know this reality going into a new venture often come out the other end with a higher success ratio than those with stars in their eyes.
When you think about the failures in the startup world, especially some of the more significant ones that were highly touted early on, you might assume there were dozens of reasons they came up short and that it probably happened over a sequence of unfortunate events. But that’s rarely the case. Outside of being a terrible concept/idea in the first place, there are essentially just two reasons startups fail…
What are they?
Execution and Egos.
Execution is everything for startup entrepreneurs working in nascent industries, and yet it’s the hardest thing to deliver on because nothing in a new and rapidly evolving space is predictable. Startup entrepreneurs receive a smorgasbord of challenges and ideas thrown at them daily and can’t afford to be side-tracked.
Unlike their established/blue-chip counterparts with multiple revenue streams and pension fund investors, startups are on borrowed time and have limited financial resources. They are almost entirely funded through equity issuances. The more capital needed, the more dilution required. And the more dilution, the more distractions for the startup as investor relations must be enthusiastically managed.
One of the most common execution failures with startups comes from taking on too much too soon. They get too focused on strategies (even though they’re nowhere near scaling), corporate culture, or branding tactics when all they need to do is develop and mature their offering as quickly as possible.
It’s important to remember that startups are not expected to be these polished organizations with a bureaucratic chain of command. They’re messy at times, but the successful ones remain singularly focused on the offering that makes (or will make) them different and able to capture market share.
One startup I was involved with (pre-revenue) enacted a benefits program for their dozen or so employees… this is a nice idea, but it should not be on the agenda for a pre-revenue startup. Firstly, it’s an added expense (not on the critical path) for a company that hadn’t commercialized. They were funding their entire company from equity issuances, and that money should be going almost exclusively to business development. If they wanted to incentivize employees or new hires, they should be giving equity! Employees join startups for the equity — the upside — not for dental coverage. Merely setting up this benefits program, which was the CEO’s idea, took his eye squarely off the prize — even if it was just for a few days. Startups are on borrowed time and require an obsessive focus on one or two objectives from everyone involved, especially the CEO.
The more distractions a startup has, the higher the execution risk.
Egos kill collaboration and may as well be kryptonite for startups. Unfortunately, as an investor, they’re very difficult to spot in the early days of a venture.
Egos often pop up for the first time after a startup experiences its first or second big success. A friend who was involved in the same startup as I astutely told me that when the company was going through significant growth and somehow simultaneously internal clashes of personalities, “failure is an orphan and success has many fathers.”
An early success for a startup, be it their first joint venture with a major, a massive up-round financing, or the inaugural commercialization of a product, is a celebratory moment that can have consequences. Because startups are often small, tight-knit groups where everyone involved views the product or developing offering as their baby, they all want credit for its success, as they should. But frequently, one or two people get all the public notoriety and that programmer who busted their ass daily ’til 2AM for a month straight receives a pat on the back.
At our core, we want to be appreciated more than anything. And when critical players in a startup feel under-appreciated, negativity brews. In such an environment, it’s challenging for a startup to continue to execute.
CEOs of startups need to realize the unintended consequences of early success if appreciation is not shown for everyone involved. And they should jubilantly pass on the credit to their team at every chance they get. As Ronald Reagan said, “There is no limit to what a man can do or where he can go if he does not mind who gets the credit.”