Why Do Startups Fail?

Why Startups Fail
Why Startups Fail

We are the most active first-money investor in the US, and so experience the joys and sufferings of startup existence with an intensity far beyond most VCs. As the wise old insurance prof in the commercials says, we know a thing or two because we’ve seen a thing or two.

Based on more gut punches than we would hope for, here is what we have learned about the root causes beneath startups that fail:

Wrong Time. This is easily the most common reason why startups we back don’t make it. As Bill Gross from IdeaLab has noted, in his deep study of startup failures: “The number one thing was…timing.” From our experience, that is entirely the case. We let ourselves become convinced a tech is ready for prime time, and then it turns out it isn’t. Even more frequently, we’ll think a market is ready to buy, when in truth it is only ready to test or even just to kibitz. The entrepreneurs in these cases, of course, are sure the time is now. As a result, they will often raise money—and more importantly spend it—on the presumption that pennies are ready to fall from heaven. When that doesn’t happen, they can get caught short—low on cash, bereft of market proofs, un-financeable—and slowly begin drift down from the heights toward the hard cold ground. The best outcomes when this happens is an acqui-hire, which is marginally acceptable for the team, but deeply disappointing for investors like us. The worst case scenario is watching the small plane, full of hopes, dreams and destinies steadily and inevitably spiraling toward doom.

What we have learned and what we teach our companies about timing is to always operate as though revenue is rare, sales cycles are interminable, customers pay poorly, and software cooks forever before it is ready to serve. Teams, in our view, should only change from those conservative projections based on real proofs: signed sales, renewals, return visits, strengthening unit economics. Often, the difference between crashing and soaring is a startup’s ability to conserve fuel until the right time finally, lumberingly, arrives.

Wrong Team. Or perhaps the more accurate way to state this is "Absence of the Right Team." We were the first investors in Pinterest and we have said often in public that handing Ben Silberman’s full plan to a hundred other teams wouldn’t have created a hundred other Pinterests; it would have created 99 flawed or failed Pinterestial projects. Ben and those he chose at the moment of creation were key to Pinterest’s success. If the right time matters most for startup success, the right team isn’t far behind. Almost every group of humans is not capable of achieving greatness in any given area. There were a lot of bands in 1960’s England. But only one Beatles. Only one Rolling Stones. Same for startups; it is all about the boys (and girls) in the band. They need to have the right skills, but even more so, they need to love what they are doing and love doing it with one another. That combination is rare.

Wrong Tech. Tech is hard. Great tech is as rare as, well, unicorns. One of the most substantial risks first-money VCs like us take is on the ultimate marketability, extensibility, practicality of the tech we are backing. The smallest error can set an entire tech architecture tumbling down. And, once tech has wobbled, the cyclonic forces whipping around new markets makes it fundamentally impossible to right the stack and claw back to the front end of change.

Sadly, there is no magic bullet for identifying great tech. That’s because truly great tech rarely jumps full blown from the brow of the entrepreneur, but is more a symbiotic creation between the startup and the market. They each influence the other and, together, craft something of deep value to both. In this way, achieving Right Tech is closely tied to Right Time and Right Team. If the first two are wrong, the chance of getting the tech right becomes infinitesimally small. The one thing we can say is that, if we don’t see an extraordinary technologist at the table, completely dedicated, on Day One, it is hard for us to imagine great tech can emerge.

Wrong Temperament. It may sound corny, but to us, startup success is largely about love. A small group, properly skilled, that loves what they are doing together and loves one another can achieve, in essence, anything. That’s what propels Navy Seals. That is what makes the Golden State Warriors so hard to beat. Talent is impressive. Talent + Joy is unstoppable.

If we sense any uncertainty in the founder, any tensions among the founding team, any motivations derived from fear….we’ll pass on a company. We believe that building a company of value is so hard, takes so long, is so wrought with unexpected travails, that only love is strong enough to hold a team together through the crucible. If all the other factors—timing, team and tech—line up, but the love isn’t present among the founders, that lack of passionate intensity can trump them all.

It may not be true in startup investing that all you need is love, but it is certainly the hand that rocks the cradle.