Why Startups Fail

Startups fail because we lack a theory of entrepreneurship to manage them to success



We found a nugget in this 2011 Google Talks by Eric Ries, the force behind the Lean Startup movement (see video).


Ries describes three kinds of startup failures:

  1. Those that are acquired by large firms and are not adequately integrated;

  2. Those that start within a big corporation (intrapreneurship);

  3. Venture-backed companies.

Mortality rates for all of these are very high and have been for decades.


Can't we do anything about it?


"We lack a theory of entrepreneurship to guide our behavior" - Eric Ries

Ries proposes that all these startups have the same problem: we use the wrong set of tools and methods to manage them.


The legacy of almost a century of management theory is that we have become experts at forecasting sales figures in a predictable environment.


Source: The Economist

Companies like General Electric wore the accuracy of their earnings forecasts as a badge of honor.


It took a lot of management rigor, financial discipline, and the occasional massaging of numbers, but it worked wonders for the share price - see graph above.


Investors like predictability.


" [GE] meets its expectations year in, year out—it has missed its quarterly earnings target only twice in the past ten years." - The Economist, May 2002

However, that world, like the old GE, is long gone. The only thing that is predictable these days is that nothing is predictable anymore.


It is especially true for startups, which are still looking for a business model. How can anyone predict anything when it's not clear yet who the customers are, and how much they are willing to pay for the product?


Yet, startup founders spend days crafting financial projections that systematically prove wrong.


As most entrepreneurs will confide, they make financial projections mainly because venture capitalists ask them to.


Accurate earnings forecasts: in vogue with financial markets (and the occasional VC)

Good VCs know that the famous hockey stick will never materialize, but they want to test the founders' practical realism, as well as use the set of projections as a basis for discussion.


Isn't there another way to operate?


The dominant question of our time is not "Can it be built?" but "SHOULD it be built?" - Eric Ries

Unsurprisingly, Ries suggests that the new theory of entrepreneurship we should use instead is the Lean Startup.


He's got a couple of good points though.


Like all successful theories, the Lean Startup has been reduced to a few buzzwords like MVP (for minimum viable product) and the famous pivot.


There is much more to it, however: at its heart, the Lean Startup methodology champions the customer. Since startups generally don't have one, the idea is to run a series of successive tests to validate a set of assumptions, then adapt, then run another test, and so on.


In Lean Startup lingo: the Build-Measure-Learn loop must be iterated as quickly as possible to find out if the team needs to persevere or pivot.


In this system, the only forecast entrepreneurs make is that they will meet in future to take that decision.


Bad ideas: getting axed

It becomes quite clear why startups have a hard time blossoming within large firms, where the culture is often one of following a preset plan that is set in stone at the beginning of the year.


Likewise, independent startups who don't wholeheartedly put the customer first and apply a scientific approach to learning, fail.


Conclusion


Why do startups fail? Because they build products or services that nobody wants.


Most entrepreneurs create companies because they believe their product is so good it will sell like hot cakes without efforts.


Ries's book The Lean Startup was published over seven years ago, but we still routinely meet startup founders who not only fail to apply the customer-first principle, but they get funded too!


Many actors of the entrepreneurial circles focus on the relevance of making plans. They should spend time devising tests to learn which customers they are targeting and whether the product or service they are building suits them.


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