Why Do Most Startups Fail?

Large or small, well-funded or bootstrapped, visionary to ordinary: it is all the same. About 90% of startups fail, according to FindStack research.

If you can look around your company and say “I’m not in this alone,” you are lucky. Data show that 79.9% of small businesses in the USA employ just one person… the founder.

That can make the personal and professional impact of a startup failure all the more painful.

As someone who has been part of leadership for six early stage startups, I have my stories to share.

The good news is: the most common reasons startups fail can be anticipated.  With the help of a fractional CMO, they can be solved more easily than you might realize.

The #1 Wrong Reason Why Startups Fail

When you read the typical list of why startups fail, the #1 reason isn’t really a reason at all. 

It is just a symptom of other things.

“The money ran out”

Money doesn’t have legs and doesn’t run away on its own. 

It drains away because the stewards of that capital didn’t perform their job correctly. They were unable to build a bridge from their current island of capital to the next, bigger island of capital.

It happens a lot, and we’ll discuss those reasons below and how to solve them. 

To build a bridge to your next funding round, you need to:

  1. Know where the bridge should be built
  2. Build it successfully using the capital you have

That’s why having an expert advisor like a fractional CMO around you is so valuable. They can help you make the right moves with confidence and efficiency from the start, before it is too late. 

Having capital to expend is an honor and a privilege. There is no shame in pivots and bold changes that save a company from disaster. An expert counselor means less experimentation and less stress, and it means a faster path to the prize.

The Real Reasons Startups Fail

The good news is: the typical reasons you see for failing startups are actually solvable. 

They just need to be identified EARLIER. This is why fractional CMOs have become increasingly popular: it is no longer necessary to have a multi-million dollar budget to justify having top CMO experience in marketing on your team.

“We were in the wrong market”

The strategies you employ in the market you serve are dependent upon the maturity of the category, your own offering and size, and the size of the customer need that is involved.

But first you have to know you are aiming at a market that is large enough for your growth aspirations and definable in a way that showcases your offerings.

Startups usually fall into two categories: that of market dominators or that of market disruptors.

  • A market maker or market dominant company will try and lead a category that it may even create itself. It educates and drives wide awareness of a specific pain point that their offering is a solution for. It is usually an SEO leader and sponsor of conferences and webinars.
  • A market disruptor will enter a well-defined market and shake it up with disruptive pricing, carving out a good niche, specializing and so forth to allow it to lead in something specific. A classic example is a focused product that is introduced to serve one slice of the market only, so it costs just a fraction of the cost of a full-featured enterprise platform.

Either way, the company must carve out a beachhead of differentiation where they are a clear and definable leader, backed by authentic customer success stories and the right pricing. 

This market focus cannot wait – it must be defined early and rigorously tested with customer and marketing research. The pain points, ICP and customer personas must be closely defined and given real-world testing.

A fractional CMO can conduct this market research quickly, backed by data, competitive research, customer interviews and specialized expertise. Once in hand, this playbook becomes a useful tool for every member of your organization to come in driving growth.

“We had the wrong team”

Many startups blame a lack of marketing success on their vendors, budget or internal employees. 

  • A full time hire can become a full-time disaster that wasted time to find and ended up hurting your business.
  • Vendors can spring up quickly with a lot of hype and then disappear just as quickly. This can make them terrible partners to rely on for business or for advice about how to thrive.
  • Budget constraints can hinder efforts to find the right channels and work them correctly to grow fast.

This is similar to blaming the hammer because it didn’t hit all the nails correctly.

A fractional CMO comes in at only ¼ of the cost of a typical full-time hire, and is typically retained for about a year. That keeps companies flexible and sure that the team they have is just right and working the right strategy. Then, when they are ready to go full-time, that new employee walks into a completely-operational, well-crafted marketing system that is ready to grow even harder.

“Our marketing didn’t work”

When marketing is done right, you will know it from the very beginning. The research must be done. The analytics and attribution must be in place. The integrations and automation must work right. 

Startups need to create awareness, generate interest, and acquire customers to establish a foothold fast in the market. Then they need to create multiple beachheads and defend them.

There should be a real-time data dashboard showing all stakeholders how the results are going. That makes it easy for everyone to participate in the big conversation about:

  •  Where should we go next?
  •  What is and is not working in our marketing apparatus?
  •  Where are there exciting trends we can jump on?

This is not a straight line to the prize situation. You will need to duck and weave as you go. There might even be a pivot or two.

Marketing should be flexible and efficient so it can lead the process and follow the needs of the customer as closely as possible.

“We got outcompeted”

In crowded markets, startups struggle to differentiate themselves and compete against established players with more resources.

Startups need to be adaptable. Failing to recognize when a change in strategy or direction is necessary can contribute to failure.

There are several great surveys that have been done recently about startup failures. Findstack has some data here: 

  • Only 40% of startups are profitable. Another 30% of startups are seeing declining profits, and the last 30% continue to lose money. (Small Business Trends)
  • Founders need 2 to 3x longer than they expect to validate a business model. (Forbes)

How do you outlast everyone else and avoid getting outcompeted?

  1. You need deep research to understand your market as it evolves and how to compete against all your competitors.
  2. You need time to carry out your strategy right. 
  3. You need capital to invest in the right growth strategy.
  4. You need experienced leadership to show you the way and make sure you get the marketing outcomes you need.

Early in a company’s life capital is precious, but the need for expense, experienced knowledge is extremely important.

That’s why many companies consider a fractional CMO: to give them access to the strategy and execution experience that gets growth results, and to save money that can be devoted to campaigns vs overhead.

The Best Startups Start Strong and Grow Fast

According to Statista research, the main challenge to the success of a startup is “no market need.”

This is what is known as Product Market Fit (PMF). When your product or service effectively addresses a market need or problem – and clients pay and stay.

But first, when a company starts up, its first goal is to build and offer a MVP (Minimum Viable Product) and get some customers to sign up. These early customers help build the ideal product and service offerings through their feedback. 

Fractional CMOs help at this stage by contributing heavily to the customer story and pain point codification. They are independent minded and have valuable marketing perspective to share from working for several rapidly growing companies at once. They often act as the “voice of the customer” advocating for changes to product, service and customer service to get it just right.

It can be really hard to reach product market fit, but the quickest way to the prize is truly understanding what your customers truly desire. Your company delivers on that promise continuously as it grows, and marketing connects the dots by finding more customers just like the others. 

Once you have PMF, a rapid growth cycle must begin and be sustained. According to T2D3 theory, a B2B SaaS company must grow ARR 2x in the first two years, and then 3x ARR in the following three years. If not, it will likely fail.

Achieving Product-Market Fit is an ongoing process. It requires a deep understanding of your customers and a commitment to continuous improvement. A fractional CMO can regularly reassess your product-market fit status and make adjustments to stay aligned with customer needs.

Many companies fail because the marketing and sales process doesn’t match the type and size of customer they are trying to attract: 

  • If your services result in less than a few thousands of annual dollar revenue for each customer, the offering and onboarding of new customers will have to be highly automated.
  • If the revenue per customer amounts to tens of thousands of annual dollar revenue, you have room for a sales organization that can offer more customized pricing and options to customers.

Either way, the growth has to come quickly! 

When it doesn’t, the startup fails.

My Startup Failure Stories and What I Learned

As someone who has been part of several unsuccessful startups (as well as several that never made it to operational startup stage), I have plenty of stories to tell.

Broadly, the three lessons I’ve learned from my failed startup experiences are:

  1. Stay flexible, humble and efficient.
  2. Use fractional resources to focus capital on campaigns, not people expenses.
  3. Lean in on the customer in every way. 

I promised some stories, so here they are. Along with the “20-20 hindsight” lessons I wish I knew then.

The names have been changed to protect the guilty.

Splitting Focus Kills Startups

A split model is when leadership thinks that working on multiple potential sources of revenue at once will make your startup more valuable, even if none of those revenue sources are currently profitable.

  • One startup in my experience attempted to develop 3 related but distinct revenue- generating offerings at once. While each area was promising, the company was unable to focus enough time and resources to compete successfully in all three. By the time the company decided to focus on one core offering, it had wasted over a year and capital was too thin to compete as well as had been hoped in the remaining offering.

    IN HINDSIGHT: Focus is a powerful fuel for successful startups. Once you’ve developed a beachhead in one specific offering, you can move to related areas. But not before!

Office Lease Expenses Kill Startups

Renting office space in hot markets like LA, San Francisco, New York, Dallas can mean long leases, unfavorable terms, and big expenses for furniture, buildout and technology.

  • One startup I worked with pre-paid three years of lease payments and spent 6 months building out a high-tech office space to exacting specifications. Think special honeycomb construction materials, lighting, video screens, etc. It consumed a significant chunk of capital and the office was closed within a year of moving in.

    IN HINDSIGHT: We should have worked remotely.
  • Another startup I worked with, a production company, had spent so much money and time building out their elaborate physical production space that they were unable to properly fund the shows they intended to make.

    IN HINDSIGHT: We should have made the shows in rented facilities, then built the optimal space later around the most successful shows.

  • Another startup in my experience spent years shuffling team members around in various sizes of office configuration at WeWork, wasting tens of thousands of dollars over time when the employees clearly liked working in the open areas of WeWork best.

    IN HINDSIGHT: Never, ever rent office space unless you absolutely, positively must have it to succeed. Don’t buy the hype that employees need fancy office space to be attracted as hires. Get employees excited about your mission and have a way of meeting up physically, but don’t overdo it. In general, leasing office space should always be a matter of last resort.

Inflexible Operations / Marketing Technology Kills Startups

Software must be easy to use and integrate with everything. Beware of new, innovative tech that promises to do it better than the big guys. Most companies do well in Shopify, WordPress, Hubspot, Quickbooks. There is no need to get fancy.

  • One startup in my experience had a CTO who insisted on building the company website with a new CMS platform used by less than 0.5% of companies. It communicated poorly with Google and required the intervention of the CTO to make any changes, no matter how small. As a result, the company was unable to make the daily website tweaks and adjustments needed in any rapid iteration marketing sprint and performance suffered.

    IN HINDSIGHT: We should have rebuilt the site quickly in WordPress, just like 95% of the companies do.

  • Multiple startups in my experience have purchased software licenses that they are not qualified to use and are way over their employee’s heads. Data that ends up in silos that don’t integrate can be like driving a car with the handbrake on. Hubspot and Salesforce are remarkably complex and not easy for multiple people to use at once without creating frictions and bad data.

    IN HINDSIGHT: Fractional CMO and fractional CRO resources can set up these tools properly, train the team on using them right, and put in safety and user permissions to keep the system from drifting into problem areas.

The Founder That Won’t Let Go Kills Startups

Without the founder, there wouldn’t be a company. A good founder creates a kind of reality distortion field that is infectious and driven from an honest understanding of a real unmet need in the world.

However, founders are often high ego and high charisma people who can find it difficult to accept feedback, even with the use of data or logic.

  • Several startups in my experience have had founders or CEOs who insist on reading and editing every piece of content produced by the organization, as if each bit of text was their personal statement. This creates big bottlenecks when companies need rapid content generation and messaging experimentation. As it turned out, the ideal customer was speaking with a different voice than the CEO, and the branding needed a pivot.

    IN HINDSIGHT: It is vital to set up the correct branding and messaging foundations, persona maps and ICP details from the very beginning, based upon rigorous research. Then, every member of the company (and vendors too) is empowered to speak with one voice without needing continuous oversight by anyone. 

  • Most of the startups I’ve been involved with have had one or more charismatic founders who have bold visions and very persuasive personalities. This can lead to issues over time, if the founder insists on too much control, makes poor life and lifestyle choices, and doesn’t treat team members with the mutual peer respect they deserve. Morale can sink, growth can be impeded, and companies will fail.

    IN HINDSIGHT: It is a good idea to test your founder’s patience for feedback and well-delivered criticism early in your relationship. It is a great sign when a founder continuously seeks feedback and pushback on their ideas, before making a conclusive strategic decision.

Partner Acrimony Kills Startups

Sadly, it is true what they say: a business partner is harder to get rid of than a marriage partner. A good partner in business needs to be excellent in both building businesses and in building relationships. Choose wisely!

  • Several startups I have worked with have had deep partner divisions open over strategy, operations and especially culture. When the team gets larger, who gives the internal speeches or does the big interview with the national newspaper? Startups, especially with remote workers, can easily fall into political siloes that hurt growth and team cohesiveness.

    IN HINDSIGHT: Prepare ahead for how you will react to large changes and stay humble in the face of data and evidence about how the business is performing.

  • One startup in my experience was founded by two people who were of like mind in business but had no personal overlap. This worked well in earlier stages, but cultural rifts began to open later as the two learned they had very different views of the culture and employee development they wanted for the larger organization. This rift negatively impacted hiring and growth at a critical time.

    IN HINDSIGHT: Think of potential business partners as people you have to be able to befriend as well. Do they have the personal maturity and balance in their personal lives to sustain them through the inevitable stress and insecurity of building a startup and dealing with life? Is there true communication about any personal issues that could affect the business later?  

Improperly Run Sales Departments Kill Startups

A great sales department offers good ideas to good quality leads, preaches from the company hymnal, closes a perfect sale and sets the stage for a long term loyal relationship. If sales is not run with the customer at the center, problems can develop that annoy customers and destroy growth momentum.

  • Several startups I have observed have developed high-pressure sales organizations with contests and culture that prioritized sales success over customer success. Ultimately, this led to missteps by salespeople who, in the heat of the sale, make promises that lead to unhappy customers down the road.

    IN HINDSIGHT: Sales acceleration is about arming the sales team with every bit of information and automation that helps them help the customer, healthily.

The Anti-Fail Vaccine: the Fractional CMO

Entrepreneurs have to be resilient, continuously learn, and be humble and willing to adjust their strategies based on an ever-evolving business landscape.

A fractional CMO sets the proper foundations in place based upon data, research and long experience. And the cost of that work is only ¼ of the cost of a full-time CMO. 

With the right framework, the marketing process supports future rapid growth just like a steel framework supports a tall building:

  1. Conducting deep research into customers, the industry, competitors, opportunities and challenges for the company to properly set the stage for strategy
  2. Ensuring all marketing systems, tools and apps can talk to each other though integrations and APIs. Google Analytics, Google Search Console, and more must communicate directly with Hubspot and other tools
  3. Setting up stakeholder dashboards with real-time marketing data showing where marketing efforts are winning and where there is need for fixing
  4. Creating persona and ICP maps for customer segments that clearly represent the voice of the customer and their unique pain points, and how your business best serves them
  5. Considering budgetary needs for campaign and how they will be deployed to maximize testing, machine learning, AI and revenue generation
  6. Designing weekly, monthly and quarterly sprints that engage the team and lead to specific growth outcomes
  7. Hiring, training and managing all people and vendor resources needed to carry out the plan, overseeing their effectiveness and reporting on their progress to the board and investors
  8. At the end of the day, this apparatus has to be foundational and flexible. 

A fractional CMO acts as the owner of this whole process, so the leadership team can forget distracting details and focus on keeping the strategy on course at a high level. 

The fractional CMO also allows for pivots and changes by acting as the operational leader for those changes. The leadership team no longer has to fear the opportunity cost of changing course when that change is needed to drive more growth.

https://snohat.com

Founder, Fractional CMO