Contributed By

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Bob Maiden, CPA

Partner of Stony Hill Advisors LLC

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Why Startups Fail

March 14, 2016

Whether startups are bootstrapped or private equity funded, they face many of the same challenges.

Let’s face it – to start at ground zero and still be in business even five years later is a very difficult task. It’s well known that a high percentage of startups fail. The exact number is hard to pin down particularly since we all don’t agree on what constitutes “failure”. Whether startups are bootstrapped or private equity funded, they face many of the same challenges. A lot of people think the main cause of failure is lack of funding.  While that may be near the top of the list, let’s not forget that a lot of very well-funded startups have failed, just look at the dot com era.

I think the issue of success or failure is largely determined by the person in charge. And let me make this very clear – this piece is not about blame, it’s about reality. The entrepreneur who wrote the business plan, probably developed the prototype, built a small team and raised capital now has to become a savvy business person almost overnight. And ironically many of the skills and personal traits that got them this far are almost the inverse of what it takes to build a business.

Entrepreneurs are driven people – typically fixated on their specific product or service.  They are extremely knowledgeable and passionate about their subject area. These traits go a long way to attracting people to your startup, both investors and new hires.  But as the “pre-customer” startup moves toward the “post-customer” business, change need to take place. The many tasks that were largely project oriented now need to become process oriented in order to be scalable. The new CEO’s passion needs to turn to perseverance, enthusiasm to motivation, and confidence to commitment. The author of the original business plan needs to be flexible enough to know when to pivot from that plan or persevere with it. And the somewhat idealistic person needs to become more of a practical planner. In short, chaos needs to turn to structure or at least a closely controlled and monitored form of chaos. And in my opinion you stop being an entrepreneur and start being a small business owner the minute you hire your first full time employee. You still maintain all the same entrepreneurial traits but you now have a new responsibility called “making payroll”.

While many highly respected universities offer curriculum in “entrepreneurship”, it’s a very difficult topic to be taught. One of the five principles of Eric Ries' Lean Startup is “entrepreneurship is management for uncertain conditions”. Uncertain conditions are difficult to plan for. Uncertain conditions rarely come one at a time. I remember one particularly stressful day when we had a major customer service issue with our largest customer, a presentation to a potential new large customer, a meeting with our banker who didn’t like our most recent financial statements [I didn’t either] and two key employees ready to kill one another.. and that all happened before lunch. The pace at which you need to make major decisions is not for the faint of heart. If I was only able to have two traits as a small business owner, I would choose perseverance #1 and luck #2. And just like golf, it helps to have a really short memory.

Some new CEOs are successful because they can make this transformation from entrepreneur to small business owner; many more are successful because they surround themselves with the talent to fill in the gaps.  Some fail and in many cases the business fails too.  Whether you are running a startup or investing in one, the key is to recognize this inherent challenge and then map out the strategy that leads to everyone’s success.

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