3 Ways to Avoid the Agony of Startup Failure
Originally posted on Entrepreneur.
The easiest question to answer in high-growth entrepreneurship is: Why do so many startups fail?
After more than 20 years of investing in startups and working with entrepreneurs, I can say with conviction that most startups fail because they didn’t solve a market problem with a scalable solution that customers wanted to buy.
That begets the next question: Why is it that so many bright, determined entrepreneurs — innovators, who are willing to risk time, reputation and money to build a technology-based business — fail to solve market problems that produce sales?
The reasons are many — blunt and nuanced. It can be a matter of execution — the company burns through its cash before achieving the critical milestones that lead to breakeven and additional funding or revenue. Sometimes the competition gets there first, or recession or a black swan event (think pandemic) hits.
Or just maybe, the startup founders didn’t do the right job of customer and market validation before they built their business plan.
Since 2014, CB Insights has gathered first-person startup failure post-mortems from hundreds of founders and investors. The data is anecdotal but very telling. The No. 1 reported reason for company failure: no market need. All types and sizes of startups acknowledge making this mistake, from pre-seed ventures with less than $50,000 from family and friends to unicorns (private companies worth $1 billion or more). The No. 2 reported reason for failure? The startup ran out of cash. Reason No. 1 is the reason for No. 2.
Achieving product-market fit is not easy, but our industry can do better than we are. Here are three ideas to help entrepreneurs make tough-minded and practical market and customer validation the starting point of their new businesses.
1. Change your mindset and your mind
Stop thinking about your product and relentlessly focus on your customer’s pain. Drop preconceptions about what the market “really needs” and look for problems that the market has. The goal is to uncover evidence of an issue that is so common, so well-understood and so pervasive that everyone in your target industry recognizes it and calls it out.
You are not looking for problems that are interesting to solve. Look for problems that won’t go away. Don’t ask friends and family for validation. Your spouse, partner, college roommate or attorney all want to tell you how right you are. There will be plenty of opportunities later to trust your gut. Instead of trying to prove your assumptions, set out to find proof of where your assumptions are wrong. Ideas fail, and if none of yours have, you didn’t dig deep enough — plan to pivot more than once. Keep exploring until you find a product-market fit or exhaust the options. Failure of one business concept frees entrepreneurs to think up new ideas.
2. Make customers part of your validation team
Learn everything possible about your target customers — down to the way they tie their shoes. Customers will tell an interested listener what their problems are. Talk to people who are using competitive or alternative solutions. Ask them what they like and what they don’t. Explore the barriers to change. Inertia is a powerful competitor. Customers don’t buy technology. They buy products that save time, save money or drive up revenue. Those benefits have value. Customers will be happy to give an entrepreneur in learning mode their perspective on the value proposition of solving those problems.
Gaining honest customer feedback is the only way to create a solution that people will buy. Make evidence of direct engagement with customers the heart of your business plan. Nothing gains an investor’s attention like proof that a business has continuously met with and listened to customers. Early validation helps make concept-stage companies fundable.
3. Amp up your credibility with additional external data
It doesn’t cost much in funds or resources to buy a list or two and survey potential companies and customers. Roundtable with mentors and advisors who understand the market your company is trying to serve. Use local business associations, civic organizations and community forums to reach out to leaders in Fortune 1000 companies in your region. Network to gain introductions to vice presidents and general managers in business areas you hope to serve. Request an information-gathering telephone call. You may be surprised how willing business leaders are to talk to entrepreneurs who want to learn.
Search the internet for the websites of critical speakers at industry events — download presentations and proceedings from industry conferences. Tap into surveys and free reports from trade groups. Expand your sources with strategic relationships — from crucial businesses in the supply chain to information from competitors. Subscribe to their marketing and email lists. They are serving the same markets and customers you are.
From day one of your company, create an easy way to collect and organize the information you gain about customers, markets and competitors. You build good habits and validation muscle memory that will become second nature — a part of your competitive advantage and a secret sauce as your business grows. Early contacts can be excellent potential early adopters for prototypes, especially when you can show them how their ideas influenced your design.
Along with these tips, here’s one more thing to think about: Building a product and building a business are not the same thing. No matter the strength of your assets — from talent to technology, from karma to capital, nothing matters as much to a startup’s success as a rigorously validated product-market fit.
