Building a company from zero to millions in revenue is incredibly tough; and creating a product people want is rare. However, in the earliest stages of a startup there are some tactical errors that often lead to failure. Here are the most common ways startups fail and how to avoid them:
What: Founders can disagree on everything from office location to product. But if issues aren’t resolved, they tend to fester and can ultimately lead to the team breaking up; killing the company.
Why Issues Arise: The high pressure environment of an early stage startup is fertile ground for interpersonal friction. Many founders have minimal management experience, so it’s easy for genuine problems to be ignored and escalate.
How to Avoid: Hold regular 1-on-1s at least twice per month and focus on your interpersonal issues in these meetings, rather than project status. Clarify ownership of various business facets between the founders such as who owns product vs. sales. When there are disagreements, be sure to have those difficult conversations early; don’t delay. If you can’t resolve a problem, ask for suggestions from advisors and investors.
Building Two Products at Once
What: Your startup is building more than one product or is building the same product for different types of customers. Both practices divert your team’s attention and leave you more susceptible to competition.
Why Issues Arise: If you’re trying to build two products at once, it’s very hard for both to have a high standard when built by a small team. At a startup, it’s much better to have one product your customers absolutely love, rather than two that are just average. If your product is not excellent, it will be difficult to entice customers who ordinarily prefer to work with their existing vendors or a more established companies, as opposed to your new startup.
How to Avoid: Stick to one product with a narrow feature set and one customer profile until you have hit at least $1M/year in revenue. Invest in the usability of existing features rather than adding new ones, for example: build API integrations so customers can use your product in their existing workflows on other platforms such as Salesforce, Shopify or Chrome.
Spending before Fundraising
What: Your startup is spending so much money on staff or distribution (e.g. ads) that you must fundraise in order to survive.
Why Issues Arise: In search of growth, many founders will increase their team size or distribution spend instead of focusing on the product. This type of overspending quickly depletes your cash reserves, leading to failure as few investors are fooled by “paid” growth.
How to Avoid: Stay lean and get to a state where you can cut costs and remain in business, sometimes called: “Default Alive”. Only expand your team and other expenses if you’re able to hit your goals. A good rule of thumb for your first ten hires: require $10k/month of revenue for each hire, thus $36k/month revenue gives a maximum team size of three.
What: Founders often seek perfection in their first version of a product, not leaving enough financial runway for if/when a customer needs capabilities elsewhere.
Why Issues Arise: The longer you wait to launch your product, the less time you have to improve from feedback. Almost every product starts off bad and will need many iterations before it satisfies customers.
How to Avoid: Ship new versions of your product early and often. Release more often than feels comfortable — if a “typical” pace is once per week, then do it daily. Since products tend to break in unexpected ways, the earlier you discover these oddities, the more time you have to fix them. As Jack Dorsey (CEO of Square & Twitter) said “if you’re happy with a release, you waited too long”. For example, you may want a beautiful website, but most existing customers only need a simple login screen. This approach will encourage you to focus on actual customer needs, improving customer satisfaction and your chances of survival.
Building a startup is incredibly challenging but make sure your journey isn’t cut short by one of the common pitfalls. Being deliberate when addressing the most dangerous issues will drastically increase your chances of survival.
This article is part of a series on Startup Management.
Sterling Road invests in pre-seed B2B startups based in North America. Full process here: sterlingroad.com/process.
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Thanks to Kaego Rust, Ethan Prater & Mike Wilsey for their help on this article.
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