The 4 deadly sins that kill startups after raising seed funding (and how to avoid them)
Here's a sad fact: 70% of seed companies never make it to the next level, eventually dying or becoming "zombies" with a product for the sake of product.
Many newborn businesses are raising money just because it's freely available in the market, while in reality, an investment can create more problems than it solves. Fake product-market fit, co-founders conflict, tech product issues — this is far from being a full list of the reasons why startups can meet their doomsday.
What are the omens of the inevitable startup failure?
We'll explore the top startup mistakes every founder should consider, show you how to avert them, and help you calculate your chances to survive the first milestone.
1. Why startups fail: Wrong product-market fit
With 15 years in the market and more than 500 startup clients served, we can say that some forms of deaths are typical of post-seed companies.
One of the most common mistakes new business owners make is that they believe they have a product-market fit when they actually don't. Reasons? Startup fundraising from "celebrity" seed funds or angels, not measuring startup vitals (such as payback period), and lack of a skilled technical team in the beginning can serve as blinders constraining how entrepreneurs evaluate their standing.
Many execs envision product-market fit as the point where some categories of customers love the product's features. Wrong. A true product-market fit means having a profitable product with a strong growth potential; plus, having loving customers.
The product-market fit isn't strong in the following cases:
- Having 5-10 customers, for quite a while
- Extremely fast team scaling with more sales folks than engineers
- Ignoring and not visualizing important numbers (conversion rate, customer engagement, profit margin, etc. )
- Excessive employee perks (parties, team building events, dinners, etc.)
- Switching KPIs (monthly revenue numbers are dropping, tracking monthly usage instead)
Once you've spotted such business mistakes, you should follow these steps to address them:
- Choose the right metrics (most typically, it's revenue from new users and revenue from retained users)
- Track customer retention, since it helps eliminate churn
- Don't raise too quickly and too much; do it only at the relevant company valuation
- Spend a limited amount of money per time period unless you want to burn revenue
- Hire a strong tech co-founder
- Learn about the unsuccessful investments made by your or other well-known investors
2. Why startups fail: Hiring your own boss
Let's be realistic: we can have cake and eat it too when taking money from someone else. Raising capital might not be about hiring a boss; however, it's definitely about hiring a leadership coach whose voice must be heard. Still, investors don't run your startup, and they can't tell you what to do.
Consider some surefire signs that the investor is a bit out of line. Firstly, you feel like you're hiring faster than needed (the situation is so bad that you need a recruiter at the earliest startup stages). Secondly, you waste money while KPI graphs are flat.
Don't lock in with one investor: talk to the community and, most importantly, customers to continue to get honest insights about the product. Additionally, try to slow the cash burn rate so that you don't depend upon the investor for 100%.
Above all, don't fool yourself — the investor won't have your back even if you're lagging behind the intended results. It's essential to have experience in the domain to trust your judgment and put faith in your success.
3. Why startups fail: Fighting co-founders
For startups, co-founder fighting is another round of a Dumb Ways to Die game. Just imagine this: 65% of startups fail because of co-founders arguing with each other, not listening to each other, distancing themselves, and finally parting ways.
All arguments among founders trace back to a few things:
- Building a startup with someone "off the street," which leads to a lack of trust between team members
- No clearly defined responsibilities
- Setting expectations too high: not all startup fundraising stories are fully told, and not every startup can become a unicorn
As you can see, the above points don't merely apply to the founding team; they apply to all types of relationships. Therefore, the secrets to building a successful startup relationship are universal, for the most part.
Have dedicated time for a quality conversation between founders — part how you feel, part business (concerns, fears, how expectations are or aren't being met). Make sure all conflicts are in the open and become a step closer to their resolution.
Having explicit roles and responsibilities allows defining who's in charge of what as well as eliminating burning out, helping the company get into the remaining 35% of startups that don't have co-founder conflict problems.
4. Why startups fail: A non-productive product
Being average amongst stars surely isn't enough, as you have to be many times better than the startups around you. Copying other products won't bring the same success, either.
However, while a unique idea is a must, its execution is no less important.
Early-stage startups almost exclusively have immature processes. Missed (or no) deadlines, long release cycles, no specs, not involving engineers in decision-making, half-developed functionality...Ring a bell? We're sorry, but your product is stuck in Groundhog Day.
A few tried-and-true ways exist to break the vicious cycle of a slow development pipeline:
- Integrate the software development life cycle process to evaluate iterations and deliver on each phase
- Use project management software to aid the process
- Write technical specs to give everyone clear instructions, increase consistency, and mitigate risks in the subsequent cycles
- Motivate every member, and involve each in decision-making, sharing the results and customer stats (a sense of belonging is a magical thing)
How to atone for those startup failures
The founders that are focused on raising seed money instead of the right product-market fit or well-oiled processes and an engaged team will inevitably lose.
Today, raising early seed funding is four times easier than it was a few years ago. But wait, this means you'll have four times the number of startup companies fighting for series A or B later.
Startups should always be two steps ahead and looking to the future. Don't be carried away by the time-, energy-, and resource-consuming startup fundraising cycles. Give top priority to growing ideas, growing the business, improving the product, and leading your team to success. Track your metrics like a detective!
Special thanks to Michael Seibel of Y Combinator for the insights!