Why Startups Fail (Hint: It's not because of money)

August 12, 2009   

It is commonly believed that startups fail when they run out of money. People wonder, “How much runway do you have?” as if that will determine if and when you will succeed. In fact, startups fail and succeed for every other issue besides money in the bank; and money in the bank is merely a byproduct of success or failure.

As I wrote about in my BricaBox postmortem, we failed because we failed to gain traction. We failed to gain traction because we didn’t have the right product and, even if we did, we didn’t execute well enough against the vision of that product. All of those factors, and factors of those factors, are the reasons we didn’t have money in the bank at the end of the day.

Image representing Roger Ehrenberg as depicted...In fact, the presence of too much money can also be a reason for downfall. Go read one of the best postmortems I’ve ever read, where Roger Ehrenberg’s chronicles the downfall of Monitor110. In the post, Roger lists 7 reasons the company failed:

  1. The lack of a single, “the buck stops here” leader until too late in the game
  2. No separation between the technology organization and the product organization
  3. Too much PR, too early
  4. Too much money
  5. Not close enough to the customer
  6. Slow to adapt to market reality
  7. Disagreement on strategy both within the Company and with the Board

Nowhere does Roger say “We ran out of money.” Instead, and aside from several other errors and issues, they had too much, which caused them to spend the money improperly. As I talked about in my own postmortem, how you spend money can be a huge source of problems for the company (my error was in spending the little money we had over too long a period of time, instead of going further in a shorter period of time). But again, not the lack of it.

Meanwhile, take success stories. I love the story of Blogger, where Ev Williams and team were dangerously close to running out money before Google bought them. Here was a company which started up with one vision and then had to make big cuts and even bigger product changes before they got traction. But they stayed afloat because they saved enough and moved quickly enough – and most importantly, learned enough from their first iteration – to come out with Blogspot and gain the massive traction which resulted in Google buying the company. (To hear more, listen to Greg Galant’s excellent interview of Ev on Venture Voice).

For me, the moral of the story is that it’s almost never about money. If you’re doing great things, you’ll find a way to stay alive. If you’re not doing well – which is totally okay, by the way – your company won’t be around much longer and you’ll have the opportunity to move on to new ventures. There are exceptions to this (massive, money-draining externalities like lawsuits come to mind), but from everything I’ve experienced and observed in the startup world, you’re best thinking less about money in the bank and more about what to do or not do to make sure your company deserves to have more of it tomorrow.

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