Most start-ups don’t succeed. A foremost expert on entrepreneurship realized he didn’t understand why.
An examination of start-up failures revealed two common mistakes by founders: failing to engage the right stakeholders, and rushing into an opportunity without testing the waters first.
Founders should take conventional entrepreneurial advice with a grain of salt, because it often backfires. They also should find the right investors and management team and avoid giving short shrift to customer interviews and research.
Most start-ups don’t succeed: More than two-thirds of them never deliver a positive return to investors. But why do so many end disappointingly? That question hit me with full force several years ago when I realized I couldn’t answer it.
That was unnerving. For the past 24 years, I’ve been a professor at Harvard Business School, where I’ve led the team teaching The Entrepreneurial Manager, a required course for all our MBAs. At HBS I’ve also drawn on my research, my experiences as an angel investor, and my work on start-up boards to help create 14 electives on every aspect of launching a new venture. But could I truly teach students how to build winning start-ups if I wasn’t sure why so many were failing?
I became determined to get to the bottom of the question. I interviewed or surveyed hundreds of founders and investors, read scores of first- and third-person published accounts of entrepreneurial setbacks, and wrote and taught more than 20 case studies about unsuccessful ventures. The result of my research is a book, Why Startups Fail, in which I identify recurring patterns that explain why a large number of start-ups come to nothing.
My findings go against the pat assumptions of many venture capital investors. If you ask them why start-ups fall short, you will most likely hear about “horses” (that is, the opportunities start-ups are targeting) and “jockeys” (the founders). Both are important, but if forced to choose, most VCs would favor an able founder over an attractive opportunity. Consequently, when asked to explain why a promising new venture eventually stumbled, most are inclined to cite the inadequacies of its founders—in particular, their lack of grit, industry acumen, or leadership ability.
Putting the blame on the founders oversimplifies a complex situation. It’s also an example of what psychologists call the fundamental attribution error—the tendency for observers, when explaining outcomes, to emphasize the main actors’ disposition and for the main actors to cite situational factors not under their control—for example, in the case of a failed start-up, a rival’s irrational moves.
Putting scapegoating aside, I identified six patterns of failure, which I describe fully in my book. In this article I’ve chosen to focus on two of them in greater detail, for two reasons: First, they’re the most common avoidable reasons why start-ups go wrong. I’m not interested in clearly doomed ventures with no chance of success or even promising start-ups that were felled by unexpected external forces such as the Covid-19 pandemic. Rather, I’ve focused on ventures that initially showed promise but subsequently crashed to earth because of errors that could have been averted. Second, the two patterns are the most applicable to people launching new ventures within larger companies, government agencies, and nonprofits, which makes them especially relevant to HBR readers. I’ll explain each pattern more fully, illustrate it with a case study, explain when it’s most likely to occur, and suggest ways to steer clear of it. (To learn more about the other common reasons for failure, see the following sidebar.)
Early-stage entrepreneurs often misinterpret signals about market demand. Beguiled by an enthusiastic response from initial adopters, they expand rapidly. But if mainstream customers have needs that differ from those of the first customers, the start-up may have to reengineer its product and reeducate the market. Those efforts can be costly and consume scarce capital, boosting the odds of failure.
In this pattern a venture discovers an attractive opportunity and initially grows rapidly. That lures investors who pay a high price for equity and push for more expansion. The start-up eventually saturates its original target market, so growth then requires broadening its customer base to new segments. Its next wave of customers, however, don’t find its value proposition nearly as compelling as the first adopters did. To keep growing, the firm must spend heavily on customer acquisition. Meanwhile, the start-up’s rapid growth attracts rivals that cut prices and pour money into promotions. At some point new customers begin to cost more to acquire than they’re worth. As the venture burns through cash, investors become reluctant to commit more capital.
Start-ups that experience this pattern manage to sustain product-market fit while adding legions of new customers, but they stumble because of shortfalls in funding or their senior management team or both. Sometimes an entire industry suddenly falls out of favor with venture capitalists, as cleantech did in the late 2000s. If a funding dry spell begins just as a fast-growing start-up is trying to raise a new round, the venture may not survive. Start-ups that are scaling up also need senior executives with deep functional expertise who can manage bigger pools of employees in engineering, marketing, finance, and operations. Delays in hiring those executives or the recruitment of the wrong people can lead to strategic drift, spiraling costs, and a dysfunctional culture.
Entrepreneurs who pursue an incredibly ambitious vision face multiple challenges, such as persuading a critical mass of customers to fundamentally change their behavior; mastering new technologies; partnering with powerful corporations that have prospered from the status quo; securing regulatory relief or other government support; and raising vast amounts of capital. Each challenge is a “do or die” proposition: Missing the mark on any will doom the venture. Assuming there’s a 50% chance of a good outcome for any given challenge, the probability of getting five out of five good outcomes is the same as the odds of picking the winning number in roulette: 3%.
Good Idea, Bad Bedfellows
As I’ve noted, VCs look for founders with the right stuff: resilience, passion, experience leading start-up teams, and so forth. But even when such rare talent captains a new venture, there are other parties whose contributions are crucial to it. A broad set of stakeholders, including employees, strategic partners, and investors, all can play a role in a venture’s downfall.
Indeed, a great jockey isn’t even necessary for start-up success. Other members of the senior management team can compensate for a founder’s shortcomings, and seasoned investors and advisers can likewise provide guidance and useful connections. A new venture pursuing an amazing opportunity will typically attract such contributors—even if its founder doesn’t walk on water. But if its idea is merely good, a start-up may not become a talent magnet.
Consider the case of Quincy Apparel. In May 2011 two former students of mine, Alexandra Nelson and Christina Wallace, came to me for feedback on their start-up concept. I admired both of them and was impressed with their idea, which identified an unmet customer need: Young professional women had a hard time finding affordable and stylish work apparel that fit them well. Nelson and Wallace, who were close friends, devised a novel solution: a sizing scheme that allowed customers to specify four separate garment measurements (such as waist-to-hip ratio and bra size)—akin to the approach used for tailoring men’s suits.
Following the lean start-up method, Nelson and Wallace then validated customer demand using a textbook-perfect minimum viable product, or MVP—that is, the simplest possible offering that yields reliable customer feedback. They held six trunk shows at which women could try on sample outfits and place orders. Of the 200 women who attended, 25% made purchases. Buoyed by these results, the cofounders quit their consulting jobs, raised $950,000 in venture capital, recruited a team, and launched Quincy Apparel. They employed a direct-to-consumer business model, selling online rather than through brick-and-mortar stores. At this point I became an early angel investor in the company.
Kalle Gustafsson/Trunk Archive
Initial orders were strong, as were reorders: An impressive 39% of customers who bought items from Quincy’s first seasonal collection made repeat purchases. However, robust demand required heavy investment in inventory. Meanwhile, production problems caused garments to fit poorly on some customers, resulting in higher-than-expected returns. Processing returns and correcting production problems put pressure on margins, rapidly depleting Quincy’s cash reserves. After Quincy tried and failed to raise more capital, the team trimmed the product line, aiming to simplify operations and realize efficiencies. However, the business lacked enough funding to prove out the pivot, and Quincy was forced to shut down less than a year after its launch.
So why did Quincy fail?
Quincy’s founders had a good idea. The venture’s value proposition was appealing to target customers, and the business had a sound formula for earning a profit—at least over the long t