No Market Need, Didn't Use Network, Poor Marketing and 17 Other Reasons Startups Fail

As stated in the previous post, a comprehensive business plan is essential to providing investors, advisors, and employees with the opportunity to comprehend the company's mission, vision, goals and financial targets as well as its product, sales and marketing strategy, management team, risk factors, key performance indicators and financial data. A business plan that looks good on paper, however, does not mean the founders have a guarantee to build a successful (profitable) business. There are a myriad of reasons why a startup fails despite the best-laid plans.

CB Insights, a New York-based firm that develops software predicting new technology trends, breaks down the top 20 reasons for startup failure by analyzing 101 startup failure post-mortems. "After we compiled our list of startup failure post-mortems, one of the most frequent requests we got was to use these posts to figure out the main reasons why startups failed."

Here are the top 20 reasons startups fail:

20. Failure to pivot
19. Burnout
18. Didn't use network
17. Legal challenges
16. No financing / investor interest
15. Failed geographical expansion
14. Lack passion
13. Pivot gone bad
12. Disharmony among team / investors
11. Lose focus
10. Product mistimed
9. Ignore customers
8. Poor marketing
7. Product without a business model
6. User un-friendly product
5. Pricing / cost issues
4. Get outcompeted
3. Not the right team
2. Ran out of cash
1. No market needed

Ideas have little value without having the ability to create an execution plan. Building the right team is essential to effective execution. Not doing so will cause the startup to fail quickly. The article correctly notes: "A diverse team with different skill sets was often cited as being critical to the success of a company. Failure post-mortems often lamented that 'I wish we had a CTO from the start,' or wished that the startup had 'a founder that loved the business aspect of things.'"

Every business should have at least three goals: (1) build a product and service of the highest quality, (2) understand their customer and provide an exceptional service to each and every customer with a brand that represents integrity, quality, and innovation, and (3) build shareholder value. While founders, particularly those of whom are starting tech companies, tend to focus on developing their product or service, many businesses fail because they either built a solution without understanding the problem their customer is experiencing (no market need) or ignored their customer. I concur that "Ignoring users is a tried and true way to fail. Tunnel vision and not gathering user feedback are fatal flaws for most tech startups."

With respect to building a product without a business model, CB Insights says "Most failed founders agree that a business model is important – staying wedded to a single channel or failing to find ways to make money at scale left investors hesitant and founders unable to capitalize on any traction gained." And regarding pricing or cost issues, "Pricing is a dark art when it comes to startup success, and startup post-mortems highlight the difficulty in pricing a product high enough to eventually cover costs but low enough to bring in customers."

Despite building an amazing product, I have witnessed many startups fail because of poor marketing. Founders, particular of tech companies, mistakenly believe customers will naturally pay for their product without putting much effort into a marketing strategy. Taking a line from the movie Field of Dreams, "If you build it, he will come," too many founders place their misguided belief that "if they build it (the product), they (customers) will come." CB Insights correctly explains that "Knowing your target audience and knowing how to get their attention and convert them to leads and ultimately customers is one of the most important skills of a successful business. But an inability to market was a common failure especially among founders who liked to code or build product but who didn't relish the idea of promoting the product."

A comprehensive marketing plan should incorporate two elements, strategic marketing and operational marketing. The former is determining how your company competes against its competitors in a market place. In particular, it generates a competitive advantage relative to its customers. Operating Marketing is executing marketing functions to attract and keep customers to maximize the value derived for them as well as to satisfy the customer with prompt services and meeting the customer expectations. The marketing mix should include product, pricing, promotion, and placement.

A business also needs to understand the risks and rewards of pivoting. "Not pivoting away or quickly enough from a bad product, a bad hire, or a bad decision was cited as a reason for failure in 7% of the post mortems. Dwelling or being married to a bad idea can sap resources and money as well as leave employees frustrated by a lack of progress." However, founders should pivot without losing focus: "Getting sidetracked by distracting projects, personal issues, and/or general loss of focus was mentioned in 13% of stories as a contributor to failure." I often warn entrepreneurs the risks of being "opportunistic" — just because you can does not mean you should.

Among the 20 reasons listed above, "didn't use network" is one of the easiest to avoid. Most locations host a number of opportunities to meet new connections. And building (trusted) relationships requires time and effort. As a mentor said to me early in my career, "Surround yourself with people smarter than you." Utilizing this network may be the most effective way to avoid or mitigate many of reasons why startups fail.

Lastly, as an entrepreneur myself, I occasionally experience moments of burnout. While entrepreneurs thrive on working long hours dealing with the stresses of business management and relishing in the rewards these efforts will yield, it is important to maintain a healthy mind and body. Taking a 30-45 minute walk (even in bad weather), running the stairs in my office building or going to the gym on a regular basis provides me with the opportunity to decompress from the stresses of leading a business.

Which of the 20 reasons of why startups fail resonate with you?

Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.