Pando

What do failed startups have in common?

By Erin Griffith , written on July 23, 2013

From The News Desk

Steve Hogan has seen a lot of startups struggle. His firm, Tech-Rx, aims to save as many of those as possible because, in his words, "all innovations are ultimately good for society." We published a profile of Hogan and his firm yesterday, find it here.

The top thing failed startups have in common, Hogan says, is that they're sole founders without a partner. "That is the single biggest indicator of why they got in trouble," he says, adding that it's especially common for sole first-time founders to fail.

The second biggest factor? No one looked into potential buyers before they built the product. He's not talking about exits -- he's talking about customers. Founders don't ask themselves who is going to pay money for the product. "We see lots of freemium strategies," he said. "Freemium is freemicide. Getting someone to upgrade from a service that is adequate and free never works." Which is sort of the point. "Unless you can get paying customers, you are probably going to die," he says.

The third most common factor is that the company ran out of time. "They got 90 percent of the way there building their product and they ran out of money," Hogan says. An engineer since 1968, Hogan knows the tendency of engineers to underestimate how long it will take to build something. He often sees companies in desperate situations because they didn't give themselves enough breathing room with their initial fundraising.

As an addendum to that one: Hogan believes founders often misinterpret Minimal Viable Product, a philosophy which decrees that software -- no matter how bare bones -- is shipped early and updated often. The startup philosophy is so revered by entrepreneurs that entire companies are being built around it. But it can be dangerous to young startups that have one chance to make a positive impression on users.

Often founders have a different idea of what minimum viable product is for consumers compared with what it is for them. The people building the app get into the mindset that they are the typical customer for the product, assuming that if they understand it, all customers will understand it. That's rarely the case. And focus groups aren't enough to go on either, Hogan says. "Look at the Groupon Superbowl commercials. The focus groups loved it, and they almost got burned at the stake!"

[Illustration by Hallie Bateman]