Thursday, September 22, 2011

Why Do Tech Start-Ups Fail?

Generally because it is very risky and hard to start a new business. Tech is very competitive and big companies or other start-ups can beat you.

Specifically, timing is off, product is not right, product is too buggy, didn't get it to market fast enough, executed the plan the wrong way, employees won't work as a team, team doesn't understand underlying market space, money runs out, etc.

Above all you need a little luck. This being said good entrepreneurs can have success after success.

It always gets down to the executive team. The right team has the right ideas, works together well, etc.

Another problem has been solely building a company to IPO or get acquired because if it takes more time you can run out of cash. Focus should be to build a company that becomes profitable. Once this happens IPO, acquisition or just running a profitable company is the end result.

When VCs overfund a space, as they often do, this tends to ruin the entire space even if you have the right tech.

An inferior tech can beat you if they are very well funded by dropping pricing too much.

An entrepreneur recently asked me why startups fail. Startups fail because they run out of money. You’re probably thinking, “Tell me something I don’t already know!” Read on and you’ll see that statement is deceptive in its simplicity

This post is based both on my experience as an investor and as entrepreneur (when I’ve boot-strapped and venture-funded).

They spend too much on sales and marketing before they’re ready. Many venture companies move to a high burn rate too quickly and it’s hard to go back. Sometimes even a frugal entrepreneur winds up spending too much either because he doesn’t manage the money or is tempted by having money in the bank. This often happens when a startup raises too much money too early.

Other times, this occurs with entrepreneurs who are accustomed to having lots of resources. They ramp up sales before the product is ready. Of course, there’s a lot of work required to get sales early on. But a product with a truly great value proposition that delivers in a measurable way will practically sell itself. Companies that ramp sales and marketing too soon waste a lot of money.

Sometimes even when the product is great, the sales process itself isn’t understood to a point where it can be scaled: who are you selling to, how much will they really spend, and what profile of sales person does the company need to hire who will succeed at selling that particular product. All of this has to be understood before sales can efficiently scale.

Spending on the sales and marketing operations means there is no return if customers don’t bite. When you spend money on the product that work can be leveraged in future versions. (In fact, the key to effective product delivery is to try a lot of things and see what sticks.) For every venture dollar invested, I estimate that more than two-thirds go into sales costs and only a third into product development. Once you up the burn rate, there’s no easy way back.