The one reason why most startups fail
Most startups fail. No entrepreneur wants to think that it’s his or her startup that’s going to fail. But the reality is, as Chris Dixon of Andreessen Horowitz wrote in his essay, “the default state of startup is failure.”
Lately, founders of failed startups have publicly shared their hard-earned lessons to world. These essays of startup postmortems have been read, analyzed, and shared by entrepreneurs from around the world. As an example, CB Insight’s recent blog post about 51 startup postmortems has over 1,500 social shares in a matter of few days.
People have sliced and diced these startup postmortems in hopes of gleaming lessons from the failure of others.
Let me share with you the one reason why most startups fail. Read over some of these excerpts from startup failure postmortems and see if you can figure it out:
- Cusoy: “Ultimately it was difficult for me to generate money from [Cusoy].”
- Everpix: “The bills were starting to come due, and there was no money to pay them.”
- Sonar: “Enterprise companies should validate demand by asking customers to put their money where their mouths are.”
- Outbox: “We would lose money for each additional customer we gained.”
- Teamometer: “If they are willing to buy, do take their money and invest that money into building the product.”
For some, it was because of a problem with their product, the market or the competitive landscape. For others, it was poor investment management or lack of team cohesiveness. But, at the end of the day, the one reason why most startups fail is that they weren’t able to profitably monetize their product.
The "Jerry McGuire" business principle
No customer. No money. No business. It’s business 101. For some reason, this core business principle seems to elude startup founders. They sacrifice monetization for virality and give Twitter, Facebook and Google as examples of giant companies that took years to monetize.
But the truth is that tech giants like Twitter, Facebook, and Google are the exception and not the rule.
Building a great product that goes viral is extremely hard. Not only that, you have to convince investors that you can amass millions or even billions of active users in a short period of time. You need funding to float you financially. If you can’t do that, then you might as well start digging your own startup’s grave.
That’s why I’m a firm believer of the Jerry McGuire business principle. In the classic 1996 movie, Rod (a big-shot NFL player played by Cuba Gooding Jr.) tests the resolve of Jerry (a sports agent played by Tom Cruise) by telling him to, “show me the money!”
That’s what you need to tell your customers as soon as you deliver value to them through your product or service.
“Show me the money!”
Startups don’t die. They commit suicide
Startups need to have the same kind of urgency to get paid as soon as possible like Rod from the movie Jerry McGuire.
The money of your customers is the life-blood of your business. Not the money of investors. Not the money of your family or friends. The money of your customers.
Without paying customers, your startup starves, suffocates and eventually dies by suicide.
In this essay, Justin gave an example of AirBnB founders Brian Chesky and Joe Gebbia, who tried to make AirBnB work for years. They racked up thousands of dollars of personal credit card debt. It wasn’t until they got into Y-Combinator and really focused on generating revenue and hitting profitability that they really started seeing product traction.
Don’t be afraid to ask for money
Focusing on revenue and profitability like what Brian and Joe of AirBnB did is not very trendy these days, especially with the popularity of the "freemium" business model. Early stage startups typically focus their resources on the "free" part of the "freemium" mode.
But I tell a different story to startups that I’ve advised: I tell them not to be afraid to ask for money from their customers.
People forget that you earn money by asking. It’s so obvious that a lot of people often overlook it. Noah Kagan, founder and Chief Sumo at AppSumo, shared a story of how he got $2,000 simply by asking.
When you’re starting a business, you are asking people to use your service or product. Ask them what they think your product or service is worth. You never know what you can get unless you ask.
Think about it for a second. The worst that can get by asking is nothing. Zero dollars. That’s the downside. But, on the other hand, the upside is money.
Is your startup a hobby or a business?
One of my mentors once told me, “you’re not a real business until you get paid.”
Pre-revenue, your "startup" is just a hobby. If your startup is venture-backed and a registered business but has no paying customer, then it’s just a glorified, well-funded and registered hobby.
Find paying customers as soon as possible. As Henry Ford once said: “It is not the employer who pays the wages. Employers only handle the money. It is the customer who pays the wages.”
No customer. No money. No business.