Why startups fail – Part 2

A while ago I wrote a post called ‘Why Start-Ups fail ” and kept it to Part 1 for two reasons. Frist, for the sake of keeping it short, but secondly, I was keen to see how the craze that we are seeing in the startup world evolves. Are we in a bubble again? What’s driving it and when will it burst? And what will drive failure and success this time around? These are questions that every VC and entrepreneur are – or should be – asking themselves.

So here’s my ‘Part 2’ with what i think are reasons to failure/success that are – in times like these – especially more relevant.

Picking the right partner

Successful startups are almost always built by a small number of people who are there from the start. Even in companies where there is one emerging hero like Apple’s Steve Job, Microsoft’s Bill Gates or Facebook’s Mark Zuckerberg, the reality is there were other instrumental people at the start who who got the magic going. In Apple it was Steve Wosniak, in Microsofts Paul Allen and Facebook it was a bunch of people as many of us know from the controversial movie ‘The Social Network’.

The chemistry of these early co-founders is what initially lights the fire and is forever built into the DNA of the company. So it’s damn important!

A common issue – and indeed why in many cases there is one emerging hero – is that partnerships are incredibly difficult to sustain once a businesses grows to new levels. It’s the same reason why a marriage where one or other rises to fame and fortune are statistically doomed to failure. It is really tough for people to keep that bond tight when you are travelling at 200 miles per hour.

My view is that the best partnerships are the ones that are tested before they even begin. Where the partners have gone through some sort of hardship together or experienced a journey where both had to evolve and adapt. School years, the lab, a failing venture or the military in fact are all places where great future partnerships are born.

In my case at PeoplePerHour.com my business partner Simos Kitiris and I a first met in the Army in Cyprus where in fact he was my cadet officer. Even though we went to the same school in Cyprus the first real encounter we had was in fact when he inflicted a punishment on me for falling asleep in one of his training classes (i keep reminding these days to keep it short or i’ll fall asleep again!) Of course ever the non-conformist I refused to do it and he relentlessly followed up until I did (I now know why that is a sign of a great leader. To this day he is as relentless and unforgiving in his daily pursuit to exert the necessary discipline in the company and – more importantly – on me when I’m led astray.And that’s what makes it a great partnership). We later went to the same university and were randomly assigned to be lab partners where I drove him utterly insane every other day (of course he doesn’t know that it was just a test of his tolerance toward me which sadly for him he passed ;)). Those experiences laid the foundation of what was to become a great partnership in years to come.

Too many people take partnership too lightly and that’s where it goes wrong. One should go about it in the same way as finding a spouse. Is it someone who will stay with you in the tough times or just someone who wants to ride the glory? Does he/she stand up to you and challenge you when you are talking shit or is it a yes person who wants to ride along? Does he prove you wrong with passion and zeal? All these are signs of a great partnership which is set to stand solid in a rocky and fast paced journey. And if anything startups are that.

Learning to say ‘no’

Founders are intrinsically enthusiastic, passionate about their product and ambitious. A recipe that often leads to a desire to do it all and do it now. This becomes a common recipe for disaster in even some of the greatest businesses.

Take Apple: what almost destroyed Apple bringing it to the brink of bankruptcy in the early 90s is how they got carried away and started producing all sorts of things from cameras to printers. They lost their focus and forgot who they were. When Steve Jobs returned one of the first thing he did was to discontinue all these product lines (with the famous expression “[what’s wrong with Apple is that] our products suck”) and reinstated a focus on where Apple’s core competence was: computing. They went back to their origins and focussed on creating a few products and doing it damn well – which was what raised them to fame in the first place. And only then did they expand to other markets like music and now tablets.

Learning to say no is crucial especially at the start or when you still haven’t created a market winner. You have limited resources and you need to pick your battles. Go for quick wins rather than big ones, start gaining ground and building the teams morale. Many founders focus on too many game changers far too early and end up having many war fronts that drain them and spread the company too thin.

At PeoplePerHour.com we always went for quick wins… largely as a function of having very limited resources for quite some time. We built the product from the ground up by focusing on the smaller things that we could get out fast and once tested we went back and built more. This was a crucial part of our success

As we grow we are now facing the challenge of instilling the ‘less is more’ culture into our growing team and that’s a big part of my job. Teams grow and responsibility gets delegated so naturally more things are getting done. We are always conscious of how important it its to get our people aligned in the ethos of doing fewer things, doing them well and getting them out fast. And only once successful go back and recreate.

Raising too much money

I’m always surprised to know how very few entrepreneurs are aware of a distinct inverse correlation between how much money a start-up raises early on and how well it does.

And here – for me – lies the answer to whether we are in a bubble or not. To me valuations are secondary. When startups in the Valley are now raising millions on paper with little or no proof of concept, due diligence or any sweat put into them, to me it’s a sign of a bubble.

Most successful companies have had some hardship in their early life. It gets them disciplined, focused and instills tenacity and grit into the founders which stays with them. Entrepreneurship is a game of survival. Knowing how to survive on very little is probably the number 1 rule of the game, the most important skill and the ultimate test for the founders. And yet investors again seem to have forgotten that.

Conversely having too much cash inevitably leads to a lot of bad decisions. As best revealed in the bestseller ‘Boo Hoo: a dot com story’ where before even launching the founders had raised tens of millions of dollars and forgot they were a startup, acting instead like a large corporations flying people across the Atlantic first class to interview. Needless to say the company failed (albeit thanks to the book it failed graciously).

The problem with being in times like these of course is that even those who would naturally do it the hard way may be swayed when investors are overly eager to throw money at them at. Again- having the discipline to say ‘no’ – is and will be the defining point for those entrepreneurs.

History is once again repeating itself. Too much money chasing a few deals. When the bubble bursts again those that stay standing (the equivalent of the Amazons and eBays of the first dot come crash) will be those who – amongst other things – picked their battles carefully, had the discipline to say ‘no’ and who have an iron clad bond with their partner, strong enough to whether the storm.

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