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10 Most Common Reasons Why Tech Startups Fail

This post is also available in: esEspañol (Spanish)

Contxto – 2019 represents a fresh start for most of us.

We are motivated. We are thirsty for success, especially in our business life. However, as we already know, it is no easy task to start and grow a company from scratch, there are many ways in which we could screw up and fail.

Yes, fail.

And no matter what most motivational speakers and business gurus tell you about the goodness of failing, at the end of the day it still sucks!

Today I present to you the 10 most common reasons why tech startups fail, so you are aware and you can do something about it before it’s too late.

10. Focusing On Vanity Metrics

Vanity metrics do nothing for your actual website objectives, but make your marketing efforts look good.

Jason Amunwa

Sometimes founders find themselves tracking and measuring benchmarks that are not necessarily important to the company, meaning that they’re not directly related to its success (whatever their specific definition of success is).

These are called Vanity Metrics, and even though they make you feel good about your business, they’re terrible for taking action.

For example, tracking likes, number of followers and users instead of things like downloads, purchases, churn rate and retention rates, etc., are more about feeling good rather than planning effectively.

Vanity metrics are self-sabotaging and they’re named that way because many founders feel good with the delusion of a thriving business based on these metrics, instead of facing the cold hard truth.

Here’s a quick comparative list of vanity metrics versus the truly useful engament metrics.

9. Trying To Tackle Everything At The Same Time

Focus is a matter of deciding what things you’re not going to do.

John Carmack

There was a little company called Burbn, a platform for checking in places, reviewing the spots and also uploading pictures every now and then. Long story short, their initial model did not go as planned and they decided to focus on one thing: uploading pictures.

So, Burbn grew some more and now it is a more or less known app called Instagram.

Moral of the story? Do not name your startup after a spirit.

Just joking, the moral is that focusing on one single thing and being the best at that one thing, will most likely boost you rather than detract you.

Heinz, the ketchup company, can also confirm.

8. Weak Team

In YC’s case, the number one cause of early death for startups is cofounder blowups.

Sam Altman

Team is key, people. A great product with a poor team will most likely burn down. While a great team with a poor product might find the way around. They pivot, they test, and most importantly they keep trying.

There are many things that could go wrong with a weak team. Mainly, giving up too easily, co-founder conflicts and poor leadership.

When things get ugly (and they will), co-founders usually have conflicts. If you and your team are not able to withstand those issues and push through, it will, most likely, fail.

When things get ugly, most people do not have the gut and courage to keep going and they give up too easily.

Finally, as a founder and leader you have to show your collaborators and employees that things will get better. If you display weakness and lack of confidence, they won’t feel safe either. A team that doesn’t believe in their leader always result in chaos.

7. Product Mistimed

The right thing at the wrong time is the wrong thing.

Joshua Harris

Bad timing is also a well-known startup murderer. Some real life examples include Myspace and Friendster.

Most people believe being too late in a market is the only timing issue a company can face. However, being mistimed means being either too early or too late for the market.

Here are some over-early companies:

1. Webvan: Today Conershop/Instacart
2. Pets.com: Today Petflow.com
3. Letsbuyit.com: Today Groupon
4. Beenz.com: Today Cryptocurrencies
5. Justin.tv: Today Periscope

Great timing is hard to predict, and there need to be many variables in place in order to successfully launch a startup.

The pre-existence of enabling technologies, optimal economic conditions and trends and cultural acceptance are key factors for founders to take into consideration.

In his Ted Talk, Bill Gross explains why bad timing is the single most important reason for startup failure.

I might not think it’s the number one reason, but certainly one of the most important.

6. Poor Marketing

If you build it…you may still need Google AdWords.

Jennifer Mesenbrink

Straight to the point. Poor marketing is as bad as a bad product, if not worse.

I’ve seen bad products with great marketing develop traction, but rarely gets a good product with bad marketing even noticed.

Also, spending huge amounts of money in marketing just for the sake of doing so, with no real specific strategy and measurable goals can kill the company itself. This is closely related to point 2 (below).

5. No Business Model

Get rich or die tryin’.

50 Cent

Okay, I didn’t find any ad-hoc quote, but I like 50.

Many times, the product is good, the marketing is great and the team is amazing. But many times, the product itself isn’t able to find a proper way to monetize its services.

This is the problem many freemium services and media companies face. People use their products, but they’re not willing to pay for them.

Also, there are companies whose monetization strategy started way too late and failed to implement it later on.

Napster is a clear example. Even though there were 80 million users using the music sharing platform at the top of their game. They failed to implement a SaaS business model later on, after copyrights lawsuits started flooding the company.

4.  Unit Economics and Unitary Price/Cost Issues

The winners of a unit economics contest would be more likely to build successful companies.

Brad Hargreaves

Just like burn rates, this could be very much improved if only founders were a little bit self-aware.

If your business does not make sense in unit terms, it will not be scalable in the long run.

You need to know your margins, your cost structure, your LTV/CAC ratio and your revenue streams.

If you do your calculations on a “per unit” basis, and it still doesn’t make sense, they do not seem realistic, or the outcome isn’t profitable, then no matter how many customers you reach and how many downloads you get, it will not be a business but a very costly hobby.

Read more about Unit Economics here!

3. Competition

All failed companies are the same: they failed to escape competition.

Peter Thiel

Peter Thiel has a very fatalistic perspective on competition. He believes than only companies that make it to “monopoly” status will be successful in the long run.

I do not agree. Entirely.

For me, competition is healthy, but it is also responsible for the death of millions of companies.

Capitalism is a wild animal, and it doesn’t really care about anything other than supply and demand. Only the fittest will survive, and at the end of the day, consumers are the ones who decide that.

Be clear about your vision and make sure to display that as an unhidden competitive advantage.

Ask yourself honestly and consciously: Why would someone buy my product instead of the other options?

2. Running Out Of Cash

Money is like gasoline during a road trip. You don’t want to run out of gas on your trip, but you’re not doing a tour of gas stations.

Tim O’Reilly

Yes, money is not the ultimate goal. It should not be.

But that doesn’t mean you don’t need money. It is a means to an end, and it is not just helpful, but necessary. Most founders are very aware of this, but it is worth reassuring.

Companies with suboptimal burn rates, and not enough sales to bootstrap their operations often find themselves sinking after their initial investment gets consumed.

That is why it is crucial to always be aware of what your monthly expenditure is and to start planning the fundraising before running out of cash in the bank.

Source: Self-elaboration with Ryan D. Hatch Inspiration

Read more about how to improve burn rates here!

1. No Market Need

The life of any startup can be divided into two parts – before product/market fit and after product/market fit.

Marc Andreessen

Painful. Painful stuff. What is worse than falling in love with a girl, buying her gifts and flowers, setting up dates and trying to make that person love you, just to find out she is not interested in you? Yeah, it sucks.

But it is not nearly as bad as falling in love with an idea, developing the product, investing in marketing and ultimately finding out, people don’t care about it. Ouch!

Many times, people let themselves go based on the sexiness of an idea, instead of actually realizing people have a need. Interestingly enough, sometimes the least sexy startups are the ones that have the biggest market opportunities. Perhaps because few people are willing to venture into that market?

On the bright side, I can almost guarantee that no entrepreneur that has gone through this issue is going to make the same mistake again.

Identify whether the market has a need and find a solution for it. Not the other way around.

Failure is overrated. Do not aim for failure, rather try succeeding the first time and if you happen to fail, learn from it.

Anyways, these 10 reasons will surely make you meditate on your new years plans.

Go for it!

You can read more in CB Insights article!

– VC

Victor Cortéshttps://www.contxto.com/
CEO & Co-Founder of Contxto. Passionate about tech, startups and venture capital. I eat sushi five times a week.

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