“Why do companies fail?”
On the list of questions that provoke useless answers, this one ranks high. Even the best responders paint in broad strokes, with names, faces, and circumstances redacted to protect the pride--and reputation--of those who faced death and lost. When asked, its easy to grossly oversimplify the situational nuances that trigger startup failure. I know. I do it all the time.
My answer to “why companies fail” has evolved. The world has changed, and so have I. Where technological failure was once the biggest risk early stage companies faced, we learned through experience (and this incredible TED talk from Bill Gross) that timing may be more important to final outcomes. As our point of view changes (and sometimes as we acquire more data) our take on why a company died changes too.
So, why do (I think) companies fail?
1. Capacity Calamity
I was on panel in February when the “failure” question again came up. One speaker noted that “inability to build a team” causes startup death. It does. But, I think the more complete answer might be this: “Companies fail when they can’t build capacity to meet the demands being put on the company.”
Building capacity isn’t just about hiring. It’s about balancing needs with resources at a pace that is usually a bit uncomfortable. To hire, fire, outsource and cost efficiently build capacity, you must first build an honest self assessment of where your team is weak and where it is strong. Easier said than done. In tandem, a team must then create and manage a dynamic network of contributors, from founders and employees and interns and advisors to contractors and vendors and strategic partners. This. Is. Hard. Work. Especially if you’ve never done it before. Long story short, team building is just the beginning of a high wire walk between where you are and where you are going.
2. Underestimating Time to Close
Everything takes longer than it should. It’s the Cardinal Rule on which all operational realities hinge. Yet, somehow we forget it when building out pipeline projections. In part, I blame our startup storytelling habits for this. Our obsession with superstardom has made rapid and highly predictable growth seem like the norm, not the anomaly it is. I get it. “Company Grows 10X in 12 Months, Closes Giant Round” is a better headline than “Company with Modest, Episodic Growth Stays Alive.” But growth is messy, and usually is not as predictable as we (and our investor prospects) hope for.
Underestimating time to close isn’t just a cash flow issue. Worse, it’s a capacity and resource issue. The extra time and energy spent closing a deal is time and energy not applied elsewhere. In planning mode, it will surely impact how you apportion resources, making it hard to “bounce back” quickly from a faulty timeline. This creates a cascading effect on productivity, resulting in missed milestones, lost revenue, and other momentum-crushing complications. I’ve seen good teams die waiting on pipeline to convert, and it’s always one of the most frustrating causes of startup failure.
3. Insufficient Grasp on Company Math
Math matters. The slide where you show you how *huge* you’ll be in 18 months doesn’t count. Neither does the quickbooks summary you exported last month to show your investors. Company math is the story of your company in numbers. It starts by knowing which numbers matter most and how to use them to cast the best light on your progress, needs, and opportunities. Bad math, like miscalculating your cost of customer acquisition or ignoring the hidden effects of discounting, can lurch a company into a death spiral.
Companies also underestimate how important company math is to outsiders. Great math is the bedrock of a killer company story, one that can be used to capitalize the business, attract quality partners and thrive in growth mode. Good math makes it easier for people to help you. Bad math? A trip to the startup graveyard.
Navigating these three pitfalls comes back to capacity building: no one expects a founding team to get it all right all the time. This is why staving off death so often comes back to how well, and sometimes how rapidly, a company can build a capacity-boosting network. If you're into this subject, here's a piece I wrote a while back about the importance of extra "gray matter" in company building.
Despite the inevitable oversimplification, discussing why and how companies fail remains a worthy exercise, even more so if we do these things: 1) Talk about failure in the context of a specific company stage or inflection point; 2) Acknowledge that most failures are not single-cause events and; 3) Take into account the bias of the storyteller (investor versus founder versus employee versus observer, etc.) And like any story told through the rearview mirror, how we remember and interpret what happened will (and should) change over time. That’s why my take on the question of failure doesn’t apply to all companies. It reflects my interest in, experience with, and focus on young-ish companies moving fast up a revenue driven growth curve. So keep that in mind if you’re wondering what perils lurk ahead.