For most of my adult life I have been obsessed with finding the answer to one question: What causes some startups to fly while others fail?
Today’s founders often leave parting notes to shareholders, or blog posts to users, detailing the cause of their demise and what can be learned. PitchBook compiled data on the most valuable startups that failed in 2018. From that data, let’s lay out the lessons that can be learned:
1. The highest valuation doesn’t mean it’s the best valuation.
Airware, a drone analytics startup with more than $ 100 million in VC money, desperately sought cash for 18 months before running out of money and shutting down. Multiple reports about the company’s demise note that the cause of this startup’s death is the company’s failure to get market share before competition flooded in. After losing their market leadership position, the company’s value dropped and the startup’s original high valuation was deemed unjustified by new potential investors.
The red flag to watch out for here is a valuation that is outside of the norm. If the original founding rounds of Airware weren’t so high, attracting follow on capital would have been easier. So if you are getting offers with valuations much higher than market, make sure to both understand why one investor is overpricing and understand the future impact that too high of a valuation can have.
2. Keep your investors’ goals in mind from day one.
Apprenda, a developer of a cloud-based enterprise platform, had more than $ 50 Million raised. This company failed, as observed by of one of its lead investors Brian Sisko, CEO of Safegaurd, because it wasn’t built to exit and the investors didn’t want to continue funding until an exit appeared.
The lesson here is to always align with your investors’ long term goals before taking their money. Remember venture capital is a business and the business model is: select, invest, grow and exit. Founders don’t want to be pushing to grow, while your investors are pushing to sell.
3. Focus on perfecting what makes you unique.
Lytro, founded in 2006, focused on virtual reality. In a blog post, Lytro’s founders said: “We’ve uncovered challenges we never dreamed of and made breakthroughs at a seemingly impossible pace. We’ve had some spectacular successes, and built entire systems that no one thought possible.”
But their so called successes weren’t reflected in early reviews of Lytro’s products. Reviewers claimed Lytro’s hardware yielded poor quality images and deemed it little more than an “overpriced toy” far from the professional tool Lytro was hoping for. These reviews continued to reflect Lytro’s failure to focus on their unique value proposition. After all, isn’t the point of a camera, even a VR camera, to capture great images?
4. Consider if people even want your product or service.
One of the main reasons for startup failure is lack of demand. Navdy failed for that very reason. Navdy was a hot tech startup producing aftermarket head-up displays for cars which could be connected to a phone. However, many users claimed that Navdy’s solution hadn’t been designed to meet customer needs.
By failing to adopt customer discovery techniques, Navdy’s founders built an innovative solution that no one wanted. The lesson here is to adopt the 21st century method of building a venture, use the Lean Startup method, and then get out of the building and in front of early adopters much earlier in the lifecycle.
5. Focus on sustainability.
Shyp was a startup focused on the on-demand shipping domain, and it raised more than $ 60 million since being started in 2013. Shyp sought to remove the hassle of shipping small items. Founder Kevin Gibbon claims that Shyp’s demise was due to his failure to focus on sustainability.
In his post-mortem diagnosis Gibbon stated: “Consumers loved it. Small businesses loved it. But what we didn’t do is focus on having a sustainable business from day one.” To be sustainable, a business model must eventually make more money than it costs but Shyp’s model didn’t. So as Shyp scaled, it simply lost more and more money. Founders should learn from Shyp and remember it is a harbinger of doom if the more you sell, the worse your profit gets.
Remember the fundamental goal of any startup is to find a repeatable, sustainable, scalable business model before running out of resources. There is no point to raising millions to scale up before avoiding these mistakes, as no amount of venture capital is going to save you.