Three reasons startups fail


I was interviewing the CEO of a startup who was complaining about his lack of funding. My observation was that he’d probably run out of enthusiasm long before he was crushed by lack of funds.

It's rumored that most prospective Navy Seals quit on the morning of the third day of “Hell Week.” Looking out on a calm ocean, they can’t imagine surviving the remaining four days. You have to monitor your energy and enthusiasm like you do your bank account. Don’t overdraw either.

The second reason many startups fail is that they sell a product for less than the cost of making it. One of the most often overlooked economic principles is the fact that there is no relationship between the cost of making something and its value. Van Gogh used a few dollars of paint to create art worth millions.

On the other hand, just because you can sell something for $10 doesn’t mean you can make it for $10. And, you need to include all the costs: the value of your time, the overhead, the cost of sales and marketing. Too many startups seem to operate on the principle that we lose money on every sale but we will make it up on volume. Highly unlikely.

But the most common mistake I see in startups is a failure to account for the costs of marketing and sales. Too many people saw The Social Network and now believe that a product can be so popular that it won’t need any marketing dollars. That's like saying, I’ve seen people on TV drive a golf ball 350 yards, so I’m sure I can as well. Not likely!

To become a customer, people need to learn about your product, believe it fulfills a real need, trust you will deliver it ,and see the value added as greater than the price. This takes communication, and communication costs time, money, and energy. Those are all costs, usually very significant ones.