Top 10 Reasons Why Startups Fail

Hey guys, welcome back to another episode of SaaS District. My name is Akeel Jabbar. I am the founder and general partner at Horizon Capital, and today I want to talk about the top 10 reasons why startups fail. Whether you're looking to start your own startup or buy into an existing startup, I want to make sure you guys don't fail and you have all the steps you need to make sure you succeed. in your startup. So let's get into it. Today we're going to break it down into the top 10 reasons why startups fail. And I'm going to break it into 2 different categories that I generally find why startups are failing. Number one is founder issues. And the second category is that the product market fit issues. Those are generally, I would say, captures 95% of the reasons why they would fail. Okay, so let's start with the founder issues. Number one, the founders didn't get along or they didn't vet each other long enough to actually work together. Now, I think we've all made this mistake. I've made this mistake at least once. Okay? I remember my first time in university, I started my own recruitment agency and startup, and I recruited another entrepreneur with me, or I thought he was. And it was just— that's naturally what normally happens, right? You meet somebody, you guys are both excited about an idea, and you're like, let's just get right into it. And next thing you know, a few months get in and you said, hey, like, you know, what's going on? He's not pulling his weight. I'm doing all the work here. And why am I not— why did I just give him 50% of my company? Guys, when you partner with somebody, what I recommend is work with them slowly, get to know them, their values, their work ethic, you know, all these type of traits, because you're going to be working with this person for the next 5, 6, maybe even 10 years. So look at it like a marriage, right? So make sure you vet them, make sure you get along and you feel comfortable to be working with them for the next 5 to 10 years. So that's number 1. Number 2, not enough startup experience. So what I mean here is the founders just haven't been around the block enough yet. Okay. You haven't spent enough time working at a startup. Okay. So I suggest go working at a startup, working at an early stage companies, getting experience in sales, getting experience in customer service, how to build a product. Are you a CTO? Actually go out there and build some products first, get to know the code. Building the standards out there, different how to manage people, how to hire people. These are a lot of skills you'll need to be doing on a daily basis that if you get it beforehand, your risk actually goes a lot lower before just jumping in and building a startup with zero experience. You can do it. People have done it many, many times, but they've also burned a lot of— they've either got really lucky or they've burned a lot of cash and made a lot of mistakes that they would have avoided If they got the startup experience beforehand. All right. So that's number 2, get the experience before. Number 3, they couldn't make their own luck. And what I mean there is they just couldn't figure out how to make it work. Okay. They, maybe they're grinding, but they're just not working on the right things. So equally important is, you know, having a good idea is one thing, but execution is probably even more important. And in order to make your own luck, You have to be consistent, you have to be driven, and you have to be on the right path and working on the right things. So what I find is a lot of people, a lot of founders are very focused on the product. They say, hey, I've got this killer idea, I'm just going to build it and everybody's just going to come to me. And they spend the next year or 2 years just building the product without even marketing at all, without even validating it, and without letting people know that this product is coming out and whether making sure that they actually want to pay for it. Okay, so if you want to make your own luck, make sure you have a good plan in place and you're working towards the right things when you build your startup. All right, so number 3 is that. Number 4, undisciplined, raise too much. So I've seen this quite a few times. It's nice to— same thing to tie into number 3, where now you've maybe raised some capital, you've got $100,000, $200,000, maybe even $1 million, and you just get too excited. You just don't know how to manage the money. And you feel just comfortable because you've got the money in your account, but you don't realize that as soon as you get that money, you're now on a time crunch. The investors are expecting you to return the money that you've promised them, and in 12 or 18 months you're going to hit your numbers and you're going to go out and raise the next round to make your company even more valuable. And I've seen before what happens is companies raise, say, $1 million, they don't know how to manage it, they blow all their money on fancy offices, equipment, chair, parties, you know, you've probably seen like private jets as well with some other startups. So that's just being undisciplined. It's unnecessary. It doesn't really help grow your company. So know when to raise capital at the right time. Make sure you can prove yourself with as little as possible. And when you feel comfortable that you know what you're going to spend the money on and you know it'll generate results, then go out there and raise the rest of the money that you need. Okay? So that's number 4. Number 5, founders think they know more than the customers. That's something I also hear The customer tells you something that, hey, look, this is what I'm looking for. I'm looking for a pen. I want to write, but what you're giving me is a pencil. Okay? And the ego, that's what I'm going to talk about here. That's the most important thing, is holding you back to succeed. You think you're right. You're saying, no, you need this. This is what I'm going to sell you. This is what you're going to buy. But the customer, you're not listening, and you think you just have to go find the next person. And maybe you will find some sucker who will buy it. For you at that moment, but it's not a sustainable business because the actual market demand is actually for the other product which you didn't decide to pivot and move towards what the customer wants. So be flexible, okay? Be open-minded, and even though you start off with one idea, be flexible to pivot and change your business model as quickly as possible if your market is asking for something else. Okay? Don't let your ego get in the way. That's not going to help anybody and will lead you to fail. All right, so that's number 5. Issue we find is product-market fit. Starting with number 6, tech is hard, too hard to build. Okay, it was just too hard. So you're thinking, oh, we need to add AI in this, we need to add machine learning, we need to add blockchain onto this, uh, we need to have 100 different features. But what happens is, uh, you just overcomplicate the solution, and maybe the solution is just that, a simple platform you initially built. You know, so I will suggest start with building an MVP, very, very simple, minimum viable product. And I'm not talking about just a simple product, but enough to get out there and sell your product. People actually pay for, and they can actually use the whole function of the product. Okay? So don't overcomplicate it at first. You can always add those on top in the future and only if your, your market is asking for it. Okay? Don't overcomplicate it. You're just going to waste time. And by the time you get out there and launch, it's probably already too late and you've lost your chance. Number 7, you built a nice-to-have, not a need-to-have. So I find this a lot as well. So this is tied to your ego or just thinking, you know, your idea is going to be great. You build something that's— that we call like a vitamin, or is it a painkiller? That's another way to look at it. Vitamins are nice. People take it sometimes. Sometimes they don't. But when you're in pain, when you really have a pain in your head, you have a headache that's throbbing, you want that painkiller, you want that Tylenol right away to solve your solution, and that's what you're going to go out and pay for. So make sure the product you're building is actually needed by your customers and speak to them, interview them, research it, talk to them specifically and say, hey, I just want to jump on and ask you a couple of questions. If I built this product, is this a problem you're actually having right now? How much time is it wasting for you? How much money does it cost you at the moment? Okay. And if I was to build a solution, does this cost justify replacing your existing solution? Okay. And if it does, and if I'm going to save you at least maybe 5, 10 times the amount of money you're spending now, or 10 hours a week, then you know it's a real solution. Okay. And then if it's just an add-on, it's like, yeah, you know, I can add another little piece here, or, you know, another, you know, little lighting here. Okay. It's nice to have, but I can still do the job of right here. Without having that. Poor pricing model, not enough profit margin. So I want to talk about with startups, the big thing you want to look at is your cost per acquisition cost, which we call the CAC, to your LTV. Okay, LTV is your lifetime value. Okay, so many of you probably already know these terms, but what happens is you build a product, you're going to say, I'm going to sell it for as cheap as possible. $20 a month, subscription model. And what happens is maybe your customer only pays you for 3 months. They only stick around, they only like your solution for, let's say, 6 months. Okay, so 6 months, okay, times $20 a month. So what does that give you? Do quick math. We got $120— sorry— for an LTV. Okay? So now the actual value of your product is gonna be $120, because some people think, I'm gonna spend $20, they're gonna pay me $20 a month, and they're gonna keep paying forever, and all I have to do is keep growing. But you forget that customers churn, maybe they don't need it for as long as you hope, unless you're building a super complex integrated product. But let's use the example of $120. The cost per acquisition, maybe you run some Facebook ads, or you have a sales member, an account executive who's going out, and selling the product and you're paying him $200 per, per new sale. So you pay him $200, say, hey, you go out, uh, I'm going to pay $200, give me 10, maybe 20 new sales a month. And then after you're going to get in 6 months, you're going to realize you actually lost $8,000. Okay? So you priced it wrong. So maybe you need to increase this to actually say $50. Right? So now it's now your LTV is up to 300. Okay, now you have a profit. Your 300 is higher than your 200. It's still okay. It's not the best. You're only making now what, a 1.5 times your return? So that's what we call the the LTV to CAC ratio. And what you want to aim for typically is your minimum of a three. To 1. Okay, so you want to get at least 3 times the money you put in on your cost per acquisition. So if I'm spending $100 on Facebook ads, I want to get at least $300 in revenue and sales, even though it's not in the first month. Over time, you want to get at least 3 times back your money on your investment. Okay, so make sure you price out your, your, your model very well. Know your LTV, know how long your customers stick for. And make sure it's actually profitable. Otherwise, you're going to burn your cash and lose your business. Number 9, false signals from early customers who are friends of the founders. Okay, and what I mean is you didn't get real customers. Okay, you talk to your friends, you talk to your family, people in your network and say, hey, come try my product. And they're like, yeah, yeah, good job. This is great. I like it. And maybe they'll pay you for a little bit just to kind of give you some confidence. And now you feel you have a real business. But what I find is that's just a false signal. You're not actually having real customers. You want at least, what I, what I'd say, 10 unaffiliated customers, unaffiliated customers, people you've never met, strangers on the street, people you've met online who are actually going to pay you. So as soon as you get 10 real customers, you know you're onto something. Now you can repeat it and you can find the next 10, the next 100, the next 1,000. And lastly, number 10 with the product, high churn. This ties back to your pricing model, to the value you bring. High churn will kill your business. Okay? At Horizon Capital, at our firm, we look at businesses that are doing less than 5% per month. So that means if I onboard 100 customers in a month, only 5 of them are going to decide, you know what, this isn't a good fit for me. I'd like to cancel on the next month. Okay? And that's okay. I've worked with other businesses where Churn was over 15% per month. Okay. And, you know, you add 100 customers, you're burning them as quickly as you're adding them. Okay. So over time, you'll, you'll think you're growing because you're adding new customers every month. But over time, you'll find you're just burning through them as quickly as possible. So you want to get your churn down as quickly as possible. There's a lot of stuff we can talk about just on churn and how to reduce it. And maybe that will be the next video we create on how to reduce churn on your startup. All right. So that's it, guys. That's the top 10 reasons. I hope that was helpful. Make sure, you know, you get your founder product issues taken care of. Number 2 is your product market fit issues taken care of. Good product, good team, execute. That is the— that is the recipe to success. So hope that was helpful, guys. If you like this video, Like it. Comment below. I want to hear from you guys. What are other reasons you've seen companies fail? Did I miss anything here? Or what experiences you've had from any of these 10 reasons that I mentioned here? What kind of experiences have you had? I want to hear from you guys below. And make sure you subscribe and like the page. And we'll see you guys on the next episode. Thank you. Thank you.