Why do so many startups fail?
The numbers are staggering. On average, 75% of venture-backed startups don’t make it, and most of them fall apart because of internal factors.
But what are those factors, and what actions can startup founders take to mitigate their risks as much as possible?
While most people look to the obvious points of failure – the inability to solve a market need, spreading themselves too thin and not focusing on core competencies, or scaling too early – there is another common point of failure. People problems.
That’s not to say that failure is because of the decisions or actions of the people within a startup. More than that, it’s a lack of structure, unhealthy work-life balance, and the wrong hires that can bring down even a strong startup with good funding.
Let’s take a closer look at what those people problems look like, why they are so pervasive in early stage startups, and how you can address them.
Hiring the Wrong People for the Job
Another huge issue faced by a lot of those 75% of startups that fail is the people hired for the job. In fact, CBInsights listed “not the right team” as their third most common reason for failure after studying the post-mortems of more than 100 failed startups.
This could be someone with the wrong skillset for their position, conflict between decision makers, lack of HR resources to build a cohesive team, or any number of challenges that can make a team less efficient and less effective.
The irony of this situation is that it’s not always the “people” at fault. Sure, there may be conflicts or poor skill fits, but just as often, founders are focused on engineering and sales above and beyond their team. They neglect to focus on organizational design and how it can impact the individuals who actually have to do the work.
Some of the most common issues here include:
- Friends and Family – Young co-founders flush with cash are often tempted to bring in friends and family to fill those 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.
- Hiring the Wrong People – 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 even more work in the future. The value of impartial human resources to hire new staff cannot be overstated.
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 ready to lead them.
There are two paths here, and both can result in unpleasant outcomes if not addressed.
- 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.
- You promote your top individual contributors to management and hope that their talents translate to leadership skills.
The key here is to prepare for these situations as much as possible and provide the resources these individuals need to succeed. Companies grow fast, so start thinking about how best to manage change as you grow now rather than learning the hard way.
For instances when you do promote someone you worry may not be ready, provide them with as many resources as possible to help them succeed. Find them a mentor internally or hire a 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.
The research suggests that solo founders are less successful and take longer to grow their businesses. And yet there are still a large number solo founders each year who insist on going it alone.
According to the Startup Genome Project, co-founder teams are significantly more successful on average and achieve that success much faster. A balanced team that features both sales and technology expertise, for example, sees 2.9 times more user growth than an unbalanced team or a solo founder.
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, and there is no co-founder to cover or complement weak spots.
In short, it rarely works.
The Lone Wolf 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. And it can manifest in a lot of ways, many of which should be discussed as early as possible in the life of the company. We recently presented a webinar on this topic with Justin Kan, founder of Twitch and current CEO of Atrium, available as a replay here.
Managing People Problems Is a Core Requirement in Your Business
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.
These are the most common benchmarks against which success is measured, but even when all three of these things fall into place, startups can fail due to people problems. 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.