Why So Many Startups Fail Miserably After Raising Money

Roughly 90% of startups fail. This statistic isn’t surprising, but the way many founders lunge into business, you would think that the failure rate is more like 2%.

Having been following the industry for over a decade, I have noticed some patterns — ideas that sound enticing, plausible, or even brilliant. Ideas shiny enough to attract massive investments before crashing into the ground like they were skydiving without a parachute.

Here are some interesting ways to convince yourself and others that a subpar idea is worth pursuing.

The “X for Y” pitch

Do you want to make your startup idea sound like it will make a trillion dollars? Attach it to a super-successful idea that someone else has already built.

“You know how Uber is really good at getting people from point A to point B? Now imagine Uber but for cats and instead of cars we use zeppelins to hack traffic. Can’t fail.”

— some startup founder somewhere

The reason these usually fail is that there are too many assumptions built into the idea. The main assumption is that people use Airbnb to rent apartments means that they will use your “Airbnb for treehouses”.

Not only does this connection to successful startups seduce founders, but it also skews their market research. Many people love Uber or Airbnb, and many are happy to sign onto a new knock-off service, but soon many of them realize that this actually makes no sense at all. So you get 1000 beta users, and 20 of them end up actually using the product.

The chain of delusion doesn’t stop there. Investors are dazzled by the idea of being on the ground floor of the next big thing. Throw in your beta signup statistics, and you’ve got them hooked. In the end, everybody loses either money, or time, or both.

There’s a fun product that satirizes this approach by randomly generating “X for Y” startup ideas.

The rockstar co-founder

Another great way to get funding and then fail is to start a company with a self-styled celebrity. You know, the guy with 100,000 followers on Instagram talking about dog care products. He must be the perfect co-founder for your startup that aims to connect dog breeders with dog owners, right?

Yeah, he might help you get funding. He will show up at the pitch and flaunt his marketing talents. He will promise to use his audience as the backbone of the customer base for your venture. He will post on Instagram about the new startup and get 20,000 likes. Then 2,000 of those people will get on the waitlist while you work diligently to build your software.

Then he will lose interest the moment he’s approached with the next shiny idea, or your bigger competitors sign him on as a brand ambassador, or it turns out that the 2,000 people from your waitlist actually have no intention of spending money on a personalized dog breeding experience.

If the only way to get people to sign up for your product is to have an influencer push it to their followers, you likely don’t have a viable product.

Advertise as privacy-focused, then realize you don’t have a business model that maintains privacy

Another great way to attract investors and then take them down with you is to market yourself as the champion of privacy in a data-intensive market.

While a laudable goal and a magnet for socially responsible investors, you better make sure that it will allow you to actually earn money in the long run. Usually, the reason big corporations resell user data is not that they’re evil incarnate, but because it makes a big chunk of their profits.

Consider Yik Yak, an anonymous messaging service for local communities (this business model is otherwise known as “what could go wrong?”). At one point, they boasted a $400-million valuation and millions of users.

Unfortunately, the only way they could monetize those users was by breaking the main promise the company made. It sold for about $1 million soon after.

Rely on Google, Facebook, and Apple to play nice

“I’ve got a killer idea. Hear me out. Let’s compete with Facebook…ON FACEBOOK.” — Founder #1

“That’s so crazy it just might work!” — Founder #2

Nope. It’s shocking how many companies decide to take on the giant dragons of tech in their own lair and then cry foul when the fires predictably consume them.

One such Don Quixote was Videology, a video ad company that received over $200 million in investments to revolutionize advertising on video platforms. The trouble is, Google was in a position to squash Videology’s game plan with one single solitary document preventing them from using YouTube videos. There were other factors involved in the downfall, but even if there weren’t, playing away games against companies 100 times your size isn’t likely to end well.

If you’re going to battle giants, you better lure them to your own fortress.

Guilt-trip your target customers

What do you think would happen if you asked a group of friends if they would like to do some activity with other people from that group? They will say yes out of politeness, to avoid conflict, and simply because it sounds like the expected answer.

Unfortunately, startups regularly take this sort of “user research” straight to investors. And boy, do investors love to spend money on the social version of something.

“We made this app for people who love hiking that puts them together with their friends who love hiking and you can connect it to every social media platform so everyone would know when you’re going hiking and join you. Who would not want that?”

— extrovert startup founder who loves hiking in groups, speaking in front of investors who never go hiking.

Many people love hiking. Not many people love hiking in big groups of acquaintances. But, when prompted by highly enthusiastic founders, many will just nod along as they are asked whether they would like to spend quality time with friends. The same applies to many activities that are best enjoyed alone or with family and have no need for a social component.

Last but not least…

If you want to fail the old-fashioned way, promise a lot and don’t deliver. There’s no need for poor market research, ill-advised business plans, or unrealistic advertising when you can just build a bad product.

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