The unfortunate reality is that most startups fail. The good news is that in many cases, these common causes of failure are avoidable. As long as founders are aware of the most common startup pitfalls, they can take steps to mitigate situations before they worsen.
Bear in mind that your startup failing doesn’t need to spell the end of your entrepreneurial career! Failing can be a great opportunity to learn what customers really want. Moreover, if the failure happens quickly and cheaply, you can pick yourself up and move onto another idea, applying the lessons you learned from your first attempt.
In this unit, you learn about the most common causes of startup failure, and some of the relatively simple actions you can take (or avoid taking) in the early days to maximize the chances of your startup being successful.
At the end of this unit, you can work through a checklist to score your startup against the indicators of startup failure. This list helps you identify any issues that you might need to address.
Building a product that nobody wants
By far the most common reason that startups fail is they build products that nobody wants. In reality, nearly every startup can find someone who will use their product. However, it’s essential that you find not only a common problem that people are having, but also that the problem is sufficiently intense or frequent for them. Such people will actively seek out a solution and pay for it.
Without proven demand from customers, it’s likely that you’ll build either entirely the wrong product or a product that’s not exactly what your target customer needs. This prevents you from creating a viable, scalable business.
In another module, we discuss methods for validating your idea with customers before you spend significant amounts of time or money building your product. This is a vital step in confirming that customers want your product and that it solves a real problem for them.
A derivative idea
Chances are you’ve encountered startups that are based on a derivative idea. These companies are modeled on successful existing products, but tweaked slightly to create something that’s more useful to a narrower set of users or a narrower geography, or that has a slightly different feature set. In some cases, the startup is essentially an alternatively branded version of the original product with no substantive changes.
For example, derivative startups might include, say, a social network just for pet owners, a rideshare company that operates in one specific city, or a voice-chat product that’s invite-only instead of open to anyone.
Often founders with derivative ideas believe that the market is big enough to accommodate multiple, similar competitors. It’s true that startups based on derivative ideas can be successful, especially if the original idea has overlooked a certain segment of users by trying to cater to a very broad audience.
However, in most cases, startups based on derivative ideas have a tough time achieving real scale. It’s usually not difficult to acquire some users and generate some revenue, but it’s much more difficult to take significant market share from existing companies that already have product-market fit and a recognized brand.
A good example of derivative brands is the recent surge in “mattress-in-a-box” e-commerce companies. These companies produce mattresses, sell them via online stores, and ship them in space-saving, rolled-up packaging to customers. They don’t have a physical retail presence. This is a fundamentally sound business model, because it enables the company to have lower overheads and lower prices than traditional retailers. This business model also provides a more convenient shopping experience for customers.
Casper was one of the first mattress-in-a-box startups. It launched in 2014 and rapidly gained traction in this $28 billion a year market. Over the following few years, more than a dozen mattress-in-a-box companies appeared, with varying degrees of differentiation against the original Casper business model.
The mattress market is large enough to accommodate multiple competitors, and it’s true that a number of the mattress startups that followed Casper have been successful due to new product innovations.
However, with derivative ideas, there’s a problem with diminishing returns. Being one of the first few entrants in a new business category can be great, but being the tenth or twentieth of these companies is pretty tough.
The previous unit of this module touched on the importance of technology tailwinds. It turns out that mattress-in-a-box startups all leveraged one crucial technology tailwind: the recent development of “roll-pack” machines. These machines enable mattresses to be produced and packed down into a small, easily transportable package. Without this new capability, none of these mattress-in-a-box startups would’ve been viable.
Competing with free
Let’s say you’re going to create a product that allows people to do a certain task, and they’re currently able to do that task by using something that’s free and readily available. Examples of this particular scenario might include a spreadsheet or a Facebook group.
In these instances, you’ll need to give potential users a compelling reason to use your product, because:
- You’re asking them to stop using something that they’re familiar with and that currently works for them, even if it’s imperfect.
- You’re asking them to try something new and learn how to use it.
- You’re asking them to pay money for something that was previously free.
If you’re competing with free, a good rule of thumb is that your product needs to be 10 times better than the free alternative. It’s only by providing a massively improved experience that people will change their behavior.
Tip
Ask yourself: How imperfect is the free solution that my target users are currently using? Can I greatly improve the way in which they complete the task? How can I make my product as simple as possible to learn and use? Are users more likely to use my product if I offer a free trial?
Attempting to scale before achieving problem-solution fit
It can be extremely tempting for startup founders to double down on a product as soon as it acquires its first few customers, or generates the first few dollars of revenue.
However, attempting to scale a company based on a relatively weak signal from a small number of users is a risky strategy. These users might be exceptional, and might not represent the larger cohort of future users. Other, closely related products might serve a much larger adjacent market, but you just haven’t identified that adjacent opportunity yet.
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