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Why Most Startups Fail Because of People Problems

January 29, 2019 Supporting Founders

On average, 75% of venture-backed startups don’t make it. Why do so many startups fail?

While it’s tempting to look at the more outward-facing points of failure – like the inability to solve a market need or scaling too early – there is a common point of failure: people problems. 

Hiring the wrong people for the job, promoting people who aren’t ready, or ignoring the interpersonal challenges faced by founders, can bring down even a well-funded startup.

Let’s take a closer look at these common people problems for early stage startups and how you can address them to lead your startup to success. 

1. Hiring the Wrong People for the Job

After studying the post-mortems of more than 100 failed startups, CBInsights identified “not the right team” as the third most common reason for failure. Having a team with diverse skill sets gives you a broader perspective when it comes to making decisions. In fact, a 2017 study from online decision-making platform Cloverpop found that diverse teams made better decisions 60% of the time.  

Hiring the wrong person can be as simple as bringing on someone with the wrong skill set for their position. Vetting, recruiting, and hiring is a complex process that requires a lot of attention. Founders are often eager to fill positions quickly, but there’s a real risk of speeding through the vetting process. New hires might be a wrong fit culturally or in terms of skill set, creating more work in the future. 

Many startup co-founders can be tempted to bring in friends and family to fill early roles. Whether these people are qualified or not, concerns over nepotism, how to discuss performance problems, and the inevitable stress of having to fire those who they have personal relationships with can create unnecessary tension in the company.

Mitigation strategy: Invest in HR and recruiting support

The value for startup CEOs and co-founders in bringing on human resources leadership early cannot be overstated. They can take the lead in creating role descriptions, interviewing best practices, and managing the recruiting process end-to-end. 

2. Promoting People Who Aren’t Ready

Startups can grow fast. When you’re onboarding dozens of new staff in just a few months, you need leaders you can trust and a robust employee onboarding processes.

There are two paths here, and both can result in unpleasant outcomes if not addressed.

  1. You upgrade existing positions being held by people who aren’t ready for the next level. Your marketing manager may not be ready for the responsibilities of CMO and your accountant doesn’t have experience with the strategic decisions of a CFO.
  2. You promote your top individual contributors to management and hope that their talents translate to leadership skills.

Mitigation strategy: Foster employee growth and development early on 

The key to promoting people who are ready is to provide the resources people need to succeed early on, so you’re always building your leadership bench. Particularly for high potential employees, connect them with a mentor internally or hire a leadership coach who can guide them through the process of learning to manage others. The more you invest in people at this stage, the more likely they are to succeed as they grow into their new role.

3. Solo and Co-Founder Challenges

According to the Startup Genome Project, co-founder teams are significantly more successful on average and achieve that success faster than single founder-led companies. Their research found that, “Balanced teams with one technical founder and one business founder raise 30% more money, have 2.9x more user growth and are 19% less likely to scale prematurely than technical or business-heavy founding teams.” 

A one-person team has to work harder, fight through adversity alone, and frequently lacks the perspective and self-awareness to know when things aren’t going in the right direction. Ego is more likely to get in the way of smart business decisions when there is no co-founder to cover or complement weak spots.

Mitigation strategy: Get coaching, get a co-founder

A solo founder may struggle to succeed, but that doesn’t mean any old co-founder will increase the likelihood of success. Plenty of startups have been torpedoed when the relationship between co-founders starts to sour. That said, finding the right co-founder can provide balance and a diversity that helps the company reach new heights. 

Whether with one founder, two, or a small group, leadership coaching is essential to building understanding, learning healthy conflict resolution, and uncovering one’s own blind spots to become a better leader. 

Invest in Your People to Achieve Business Growth

Startup founders have a lot on their plates. Building a product that solves the problems of their target market. Wooing investors to back and help build the company. Growing the company through new user acquisition. Just to name a few.

Even when all of these things fall into place, startups can fail due to people problems. 

With HR support, invest in your culture early, spend time evaluating your organizational growth plan, and work on your relationships consistently to ensure you have a strong foundation on which your company can grow and thrive.

Strong leadership is the key to successful startups. Get our guide, Building Leaders At Scale, to learn how leadership coaching and mentoring program can benefit your organization.