A major reason why companies fail is that they run into the problem of their being little or no market for the product that they have built. If no one wants your product, your company isn’t going to succeed. But many startups build things people don’t want with the irrational hope that they’ll convince them otherwise.
The most prominent modern example of this phenomenon is the mobile phone. People dismissed it as a novelty in its early days. Obviously, they are no longer a novelty. The late Apple co-founder Steve Jobs famously said, “A lot of times, people don’t know what they want until you show it to them.” The problem is that entrepreneurs have taken that to heart. For every $19 billion company like Uber, the private transportation service, there are all manner of frivolous products that never evolve past the phase.
BUSINESS MODEL FAILURE
One of the most common causes of failure in the startup world is that entrepreneurs are too optimistic about how easy it will be to acquire customers. They assume that because they will build an interesting web site, product, or service, that customers will beat a path to their door. That may happen with the first few customers, but after that, it rapidly becomes an expensive task to attract and win customers, and in many cases the cost of acquiring the customer (CAC) is actually higher than the lifetime value of that customer (LTV).
The observation that you have to be able to acquire your customers for less money than they will generate in value of the lifetime of your relationship with them is stunningly obvious. Yet despite that, there is a vast majority of entrepreneurs failing to pay adequate attention to figuring out a realistic cost of customer acquisition.
POOR MANAGEMENT TEAM
If you are going to ask your team to jump through hoops to follow you into battle, you better make sure they are properly incentivized and motivated to help you succeed. Some entrepreneurs try to keep 100% of the equity in their own hands. A management team needs to have the same incentives as the founder, and putting 15-20% of the company into the hands of your employees will be a lot more motivating and loyalty-instilling to them and materially improves your odds of success. And, nothing is more expensive or unproductive to a startup, than having a revolving door in your management team.
RUNNING OUT OF CASH
First of all, make sure you are raising enough money out of the gate. That means raising enough to build your product and to achieve your proof of concept. And, preferably, that amount is large enough to at least carry you 12-18 months. When you fund your business piecemeal over time, you will never get out of fund raising mode (vs. business building mode) and you risk burning out of money before your business has a reasonable chance for success.
Whatever capital you think you will need, double it for a cushion, as things always go wrong. Also, when you first reach out to VC’s, make sure your team and your business is ready, and is well researched and prepared to walk into that meeting with enough traction and a winning-plan that will get their attention.