5 Reasons Startups Fail

By: Tom Schryver ’93 MBA ’02
5 Reasons Startups Fail

Understanding your customers can’t be delegated

A few years ago, I invested in a promising startup run by an energetic, young entrepreneur — let’s call her Ellen. Recently, she reached out to let me know that she and her cofounder realized that they were barking up the wrong tree. They were folding the company and returning to shareholders what was left of available capital in the business.

I was dumbfounded. Most entrepreneurs I know would keep going in the face of any obstacles and only stop when they found themselves in the center of a smoking crater. Ellen impressed me both for keeping her fiduciary duty in mind through a tough time and for taking a realistic view of the trajectory of her company.

In thinking about how to maintain a successful startup, it’s best to start by looking at why startups fail. Japanese inventor and industrialist Sakichi Toyoda promoted the technique of the “5 Whys” to explore the cause-and-effect relationships underlying a particular problem, which I apply here:

Why No. 1: Why do startups fail?

Startups fail when they run out of money — they can’t invest in things required for their future success, or, more directly, they can’t make payroll.

Why No. 2: Why do startups run out of money?

There are two main sources of cash flow for startups: revenue and investor capital. If they dry out, lack of customer traction is the cause. Either not enough customers are buying the product, or there’s not enough evidence of customer interest to induce investors to keep providing capital.

Why No. 3: Why is there no customer traction?

Entrepreneurial educators spend a lot of time talking about product-market fit. Put another way, a group of customers (a “customer segment”) needs to find that a product or service either solves a problem or creates an opportunity compelling enough to transact (a “value proposition”). Ideally, the customer segment is large and growing, and the value proposition clearly addresses a compelling customer need. Evidence of this is customer traction. No product-market fit, no customer traction.

Why No. 4: Why doesn’t the company have product-market fit?

At Johnson, I’m a member of a team of practitioner instructors who teach courses and workshops in the community at our business incubator, Rev: Ithaca Startup Works, as well as through the Southern Tier Startup Alliance. Our philosophy is built on a fundamental belief in the value of having a deep, empathetic, and personal understanding of customers and their needs. Most entrepreneurs are focused on what product or service they want to bring to market. Instead, what’s critical is deeply understanding customers and the problem or opportunity they have as well as the environment in which they experience that problem or opportunity. Then the entrepreneur can understand how best to solve it — as well as how best to convince customers to buy the solution.

Why No. 5: Why doesn’t the company have enough of an empathetic understanding of the customer?

Startups, indeed all fast-growing companies, have as their most renewable resource “valuable things that can be done” and have as their scarcest resource “time available to do them.” It’s natural to divide and conquer — and, like Lucille Ball at the chocolate factory, process the inflow of tasks by any means necessary. Understanding your customers can’t be delegated. Only if everyone at the startup from the founders on down has a deep understanding of customers’ needs will you develop and offer compelling products and services that customers can’t wait to buy — clear evidence of customer traction that leads investors to invest and grows revenues ever up and to the right.

By making constant customer discovery a priority, Ellen and her team realized that while their product was technologically groundbreaking and visually compelling, it didn’t solve a big-enough problem for enough customers to yield a viable startup. That, then, led Ellen to make the right decision to fold the company and return capital — living to fight another day with investors who are impressed not just with her technical skills, but with her market understanding and her fiduciary ethics.

About the Author: Tom Schryver ’93, MBA ’02

Tom Schryver

Tom Schryver ’93, MBA ’02, visiting lecturer of management at Johnson, is an experienced entrepreneur who has served as a startup founder and senior execu­tive of high-growth companies. He has successfully structured new companies and raised capital in the form of private venture capital and venture debt as well as grants and loans from local, state, and federal agencies. At Cornell, he is an entrepreneur in residence and executive director of the Center for Regional Economic Advancement. Schryver is also a member of Fortune.com’s Entrepreneur Insiders network, an “online community where the most thoughtful and influential people in America’s startup scene contribute answers to timely questions about entrepreneurship and careers.” This article was originally published in Fortune.com on April 26, 2016.