Startup Failures: Avoiding Common Pitfalls

• Two-thirds of start-ups do not deliver a positive return to investors.
• The article explores why start-ups fail.
• The author has taught The Entrepreneurial Manager at Harvard Business School for 24 years.
• The author also consulted research as an angel investor and worked on start-up boards.
• The author wrote a book called Why Startups Fail which identifies recurring patterns that explain why a large number of start-ups come to nothing.
• Venture capitalists often attribute start-up failures to poor opportunities ("horses") or inadequate founders ("jockeys").
• Venture capitalists would likely favor an able founder over an attractive opportunity.
• Blaming founders oversimplifies a complex situation, which is also an example of what psychologists call the fundamental attribution error.

Six Patterns of Failure

• The article focuses on the two most common avoidable reasons why start-ups go wrong.
• This excludes doomed ventures and those felled by unexpected external forces like the COVID-19 pandemic.
• The article focuses on ventures that initially showed promise which implies these errors could have been avoided.
• The failures are applicable to new ventures within larger companies, government agencies, and nonprofits.

"Good Idea, Bad Bedfellows" Failure Pattern

• Stakeholders, including employees, strategic partners, and investors, can play a role in a venture's downfall.
• A capable founder may not be necessary for start-up success.
• Senior management can compensate for shortcomings and investors/advisers can provide guidance.
• A new venture attracts contributors when pursuing an amazing opportunity, so it it must become a talent magnet.

Quincy Apparel Case Study

• In May 2011, two Harvard students, Alexandra Nelson and Christina Wallace, sought feedback on their start-up concept, Quincy Apparel with its own sizing scheme to tailor women's suits.
• The students validated customer demand through a minimum viable product, holding six trunk shows.
• 25% of the 200 women made purchases, after which the cofounders quit their consulting jobs, raised $950,000 in venture capital, recruited a team, and launched Quincy Apparel.
• The company was a direct-to-consumer business, selling online rather than through brick-and-mortar stores.
• The author became an early angel investor in the company.

Why Quincy Apparel failed

• 39% of customers made repeat purchases, which indicated strong sales.
• Robust demand required heavy investment in inventory.
• Production problems caused garments to fit poorly, resulting in higher returns and rapidly depleting Quincy's cash reserves.
• A lack of sufficient funding to prove out the pivot contributed to Quincy being forced to shut down in less than a year.
• Customers in priority segments accounted for more than half of sales would each have a lifetime value of over $1,000, well in excess of the $100 average.
• Social-network-fueled word of mouth and enthusiastic media coverage kept marketing costs low.
• Wallace, responsible for marketing/fundraising, had a big vision and charisma with Nelson, who led operations being deliberate and disciplined.
• Wallace and Nelson shared decision-making authority equally which slowed their responses when action was required.
• Neither founder had experience with clothing design/manufacturing and the founders hired apparel company veterans who weren't flexible about tackling tasks outside their areas of expertise.
• Quincy outsourced manufacturing to third-party factories who were slow to meet production commitments for entrepreneurs with no industry reputation, required unusual garment sizing, and placed small orders leading to shipping delays.
• Founders aimed to raise $1.5 million but only secured $950,000 to fund operations for two seasons.
• The founders were disappointed with the guidance from the venture capitalists who pressured them to grow at full tilt, burning through cash before resolving production problems.
• A range of resource providers were culpable in collapse, for example the team members, manufacturing partners, and investors.
• The founders' lack of fashion industry experience created problems as they built their industry network and navigated the complexities of apparel design and production.
• An ideal solution would have been to have another cofounder with apparel industry experience and outsource the entire design and production process to a single factory partner or seek financial backing from a clothing factory who would expedite orders and work harder to correct production problems.

"False Starts" Failure Pattern

• Entrepreneurs often only adopt some aspects of the lean start-up canon and neglect to research customer needs.
• Entrepreneurs launch MVPs and iterate on them after getting feedback and are then supposed to avoid squandering time/money.
• By neglecting to research customer needs before commencing engineering efforts, entrepreneurs end up wasting valuable time and capital on MVPs.
• The rhetoric of the lean start-up movement encourages "ready, fire, aim" behavior.

Triangulate case study.

• The online dating start-up Triangulate was founded in 2010 by Sunil Nagaraj who originally intended to build a matching engine which could extract consumers' profile data from social networks and pair up users.
• Venture Capital firms would not back the plan without a licensing deal.
• To secure licensing deal, Nagaraj raised $750,000 and launched a dating site called Wings, which was a Facebook app and leveraged Facebook's data partner.
• Revenue came from paying users who sent digital gifts or messages and soon became Triangulate main event, but the licensing plan went on the back burner.
• Nagaraj's team abandoned the matching engine and the wingman less than a year after launching Wings.
• Users found recommended matches that were based on physical attractiveness, while the "wingman" role created a cumbersome site and users weren't comfortable making their dating life an open book.
• One year after launch, Wings' user base grew but user engagement was much lower than expected.
• Revenue per user fell short and the cost of acquiring a new user was much higher than his forecast.
• Nagaraj and his team had to pivot again, launching DateBuzz, as they were running low on cash, which addressed the impact of photos on messaging.
• Without confidence in a network effect, Nagaraj shut down Triangulate and returned $120,000 to investors.
• Weak founders rarely attract strong teams and smart money, so Triangulate had the opposite pattern of Quincy Apparel.
• Triangulate had three big pivots less than two years but the team also followed the principle of launching early and often - putting a real product into the hands of real customers ASAP.
• Before building a product, lean start-up guru Steve Blank insists there must be "customer discovery", which is a round of interviews with prospective customers to probe for strong, unmet customer needs.
• The team failed to conduct up-front research to validate the demand for a matching engine and did not conduct MVP tests, therefore they launched Wings as a fully functional product
• The team fell victim to a false start and the "fail fast" mantra into a self-fulfilling prophecy because they skipped customer discovery and MVPs

Three Step Product Design Process

• Before engineering work, conduct interviews with potential customers and resist the temptation to pitch solutions whilst also interviewing early adopters and “mainstream” prospects to define customers' problems.
• Perform a competitive analysis, including user testing of existing solutions to understand the strengths and shortcomings of rival products.
• Survey to help teams measure customer behaviors and attitudes when segmenting and sizing the potential market.

Solution Development

• After identifying the customer segments and unmet needs, brainstorm a range of solutions.
• Prototype several concepts and get customer feedback.
• Refine prototypes and continue to refine the versions which leads to "higher fidelity".
• Prototypes should resemble the future product in functionality and look and feel.
• Iterate and test until a dominant design emerges.

Solution Validation

• The team runs a series of MVP tests, which are actual products in real-world settings.
• Reduce waste and only provide the needed "looks like" polish and “works like” functionality.
• Assess demand by launching a Kickstarter campaign or soliciting letters of intent to purchase.
• The product design process may require a shift in mindset.
• Avoid being emotionally attached to any specific problem-solution pairing.

Maintaining a balance

• There is no way for founders to know which deadly trap they may face as they launch but the following tips include potential backfires::
• Great entrepreneurs make things happen and move fast, but a bias for action can tempt an entrepreneur to truncate exploration and leap too soon to flawed.
• True entrepreneurs dust themselves off and go back at it, but if persistence turns into stubbornness, founders may have difficulty recognizing a false start for what it is.
• Overconfidence could lead to a lack of upfront research.
• Overconfidence blinds what product isn't meeting customer needs.

Bootstrapping

• There are constraints on resources so founders may be frugal in bad ways, with skills which are crucial.
• Rapid growth attracts investors and tempts founders to curtail customer research.
• Fast growth puts heavy demands on team members and partners causing team to have bad bedfellows, growth may exacerbate quality problems.
• The author counsels dozens of entrepreneurs as they shut down their ventures, with raw emotions on display: anger, guilt, sadness, shame, and resentment leading to destruction.
• Ventures tie up resources that deter risk-averse entrepreneurs, due barriers when raising capital.
• By recognizing that many failures are avoidable, productivity, diversity, and bruising economy occurs.

Understand common reasons for startup failures, including fundamental attribution error, false positives, and bad partnerships. Learn how stakeholders and experienced advisors impact new ventures. Explore strategies to overcome founder shortcomings and focus on problem definition.