Why Startups Really Fail

Photo by Charles Deluvio

Why Startups Really Fail

Over my 20 years of an entrepreneurial career, I have failed far more times than I have succeeded. Investigating the failures of my own startups and entrepreneurial projects, and those taken on by my close friends, clients, and associates, I have come to realize certain underlying patterns that, when unobserved, wreak havoc and lead to catastrophes. 

If you search online “why startups fail,” you are bound to find an infinite number of books, blogs, and podcasts on this topic. In this article, I will not simply reiterate lack of funding, too much competition, poor marketing, loss of focus, bad product, wrong team, founder burn out, and 100 other obvious reasons why startups fail as touted by most startup pundits. Whereas these appear as solid reasons for startup failures, these themselves fail to help entrepreneurs in avoiding them. 

Instead, in this article, I am going to investigate the underlying causes and invisible breakdowns behind those obvious and superficial reasons attributed to failure. 

This is by no means an exhaustive and final account, as I am still experimenting, designing, launching, failing, learning, and sometimes succeeding—more recently with a greater frequency. If you think I have missed something important, make a note and comment.

Let us begin. 

Breakdown # 1 - Avoiding Considering The Possibility of Failure / Failing to Fail

A client who is a rising entrepreneur with a potentially billion-dollar company in the financial sector confronted me recently and asked me why I talk about failure and not success and positivity. I told him that positivity is bullshit, and personally, I loathe motivational gurus who sing the numbing tunes of success. All too easily, we forget the fable of the pied piper that kidnapped all the children who followed the mesmerizing sounds of piper’s flute. 

Some entrepreneurs avoid talking about failure and miss preparing for the time when the failure occurs. When failure meets the unprepared, it drains you of your energy and saps your willpower. Preparing for it, anticipating it, and masterfully encountering it, gives you room to move, and space for re-invention of yourself, and your enterprise. It is only a matter of time before one or another situation will not work in your favor. Anticipating failure allows you to learn from it and keeps you from falling into the moods of resignation and resentment. If you have no anticipation of breakdowns, you will be caught off guard when some satisfaction does not arrive as expected. 

Avoiding acknowledging and declaring breakdowns while keeping a happy front does not deliver success. You are failing to fail when you are so scared of failure that you keep participating in losing conversations without serious action to bring about a shift. Success is a consequence of courageously owning up to what’s not working and building moods that foster new learning. I no longer resent failure and rather anticipate it. I have learned to use failure to fuel the fire in my soul, and I suggest you do too. 

Breakdown # 2 - Blindness to Language

Many entrepreneurs and nearly all modern humans have blindness to language. We think of language as a tool or a medium for communicating thoughts, ideas, and information and fail to recognize that language actually invents worlds in the minds of others. We invent ourselves and our offers in language. All that is important, all progress, all inventions, all traditions, and all total sum of knowledge is invented in language for future generations to live in, to bear, and to enjoy. Commitments are made, and the present as we live it is invented in language. The future too is invented in language long before it becomes real and present. Human being is a house of language. The analytic philosopher of jurisprudence and inventor of the performative verbs theory, John L. Austin, famously said: “Ordinary language embodies the metaphysics of the Stone Age.” But with the passing of the ages, most human beings have become blind to what language really is and what role it plays in the creation of our worlds. Normally this is not an issue for those working in traditional enterprises, but for entrepreneurs, this blindness could mean blindness to opportunities right in front of them.

Entrepreneurs working in the modern technology industry, believe that much like computer languages, our language is something to be used for the delivery of information that exists in our heads to others. They believe that language is for transferring ideas from their heads to other people’s heads. 

It would serve us well to re-member the role of language in seducing, inviting, and opening new paths and relationships, and shaping new worlds. 

Breakdown # 3 - Lack of Capacity for Managing Moods

We are always working in one or another kind of mood, yet our moods are often invisible to us. The skills for dealing with moods are the most foundational skills for building a new enterprise and inventing a life of power. For example, practices for cultivating moods of ambition, passion, wonder, and awe, will open hidden doors to treasures. Whereas the reoccurring moods of resentment, mistrust, resignation, and skepticism among co-founders and early employees, are sure to run the startup into the ground. The lack of capacity, for dealing with certain moods, can corrode the founder’s capacity for listening to and dealing with breakdowns, and winning new investors, key employees, and strategic customers. 

There can be no authentic listening in the presence of hysterical moods. All failure in business could be linked to failure in listening. 

Many people work in horrible moods in larger enterprises. This generally goes unhandled as long as they get their tasks done. But in a startup and small team environment, bad moods get super highlighted. When as an entrepreneur you find yourself in fights with your co-founders, your partners, and your customers it would be highly beneficial to examine your mood, which lives in your body and mind as pre-configured neural pathways, and as your opinion about your future. These moods are not permanent and could be shifted. The success of a startup pretty much depends on entrepreneurs’ ability to learn from experiments. Learning to learn is an art of life and requires moods of curiosity, humility, openness to new ideas, and cautious optimism. 

Competencies with language and with the characterization and management of others’ and your own moods help with resolving conflicts, disagreements, and breakdowns among people that are inevitable in dynamic work environments. 

For further help with this class of breakdowns, I recommend reading my earlier article; Moods That Get in the Way of Learning.

Breakdown # 4 - Failures in Coordination

Another place where the blindness to language shows up is in the process of working and managing work. We moderns believe work-to-be-done as a checklist of tasks that must be executed like computers execute machine instructions. Modern era pundits of productivity such as David Allen expound the theories of getting things done which say that everything falls into four clear categories; do it, defer it, delegate it, or delete it. At first, this theory sounds good, but it quickly falls apart at an engagement with real-life challenges. If we examine closely, the whole matter of working is a far more complex web of offers, requests, negotiations, promises, breakdowns in promises, re-promises, expansions, cancelations, and assertions for completions that happen before a satisfying closing of some task could be declared. And all of that takes place in the background of moods that are generally invisible to us. 

Working from the performative verbs theory articulated by John L. Austin, the computer sciences and management philosophers, Fernando Flores Labra and Terry Winograd from Stanford, have introduced Speech Act Theory and an entire framework for managing action in dynamic enterprises. Towards this, I highly recommend reading, ‘Conversations for Action and Collected Essays’ by Fernando Flores to any entrepreneur dealing with challenges in the coordination of action. 

Breakdown # 5 - Attachment to a Tunneled Vision

Some entrepreneurs get inspired by a very specific idea of how the world is and how it will be changed by the very specific solution they are envisioning. This attachment could become a fantasy with no relationship to real customers and the breakdowns in their lives. The quote from Steve Jobs, “customers don’t know what they want till they see it,” is often tossed around out of context, which is misleading.

Startup innovations must be shaped in conversations with people that are going to use them, by listening carefully to their concerns, by living in their shoes, and by joining their lives in important ways. 

Customers may not know the exact solutions they want, and yes, it would be silly to go around asking them about what product features you should build. Customers may not know how the future is going to disrupt their lives. And they may have a certain resignation that their situation could be any different than what it is. But they may be suffering in a certain situation and have a real existential concern.

We cannot invent groundbreaking startups by simply looking at the customer's present or future “needs.” Need is a distinction that indicates clarity. An entrepreneur that changes the game essentially invents a new need. Before the invention of the iPhone, for example, no teenager “needed” an iPhone. Today a hipster teenager “needs” the latest iPhone! The job of an entrepreneur is not to anticipate their customers' needs but to look at the present or future concerns of their customers and invent new needs. 

Said another way, the entrepreneurs that make a serious difference are not the ones that get attached to specific visions in their heads, but are those that address deep-seated dissatisfactions that the potential customers themselves cannot see clearly. 

These deep-seated dissatisfactions occur to customers as “business as usual” and common sense. A successful entrepreneur is the one who can see the breakdowns lurking behind this normally accepted common sense, and has the wherewithals (capacities, skills, and sensibilities) to bring forth a solution that shifts perspectives and practices in a certain area.  Such an entrepreneur, in a manner of speaking, opens a bridge to an alternative reality and takes a whole community of people through it. A real entrepreneur produces a paradigm shift. 

This new bridge must be acceptable and practical for people to walk on and shift their lives. Think Google, Uber, LinkedIn, PayPal, and Amazon, and then think about the world before these innovations. The entrepreneurs responsible for these innovations are much akin to time-travel guides that open wormholes and take the world through them for a one-way trip. Once done, it is unimaginable to go back.  

To cause shifts like these, the first job startup founders must do is to develop capacities for sensing the breakdowns before they become known as well-established problems in the marketplace. Then, while sensing these breakdowns, entrepreneurs must develop capacities for action, including conversational capacities with key people that are going to be important in developing the new solution and the enterprise. 

I want to tell you a short story. In 2006, together with two other co-founders, I sensed and spotted a massive breakdown called ‘fraudulent chargebacks’ faced by countless merchants around the globe. ‘Fraudulent chargeback’ happens when the customer who has ordered and received the ordered product calls the credit card company and reports that their credit card was misused and that they never placed the order. The merchant has no way of proving whether the customer actually ordered the product. Thus the merchant must refund upon request from Visa or Mastercard. This issue has resulted in the closure of millions of small businesses across the world. Our sense was right about the breakdown and we decided that we needed a new global payment system for the little guys, and we set about to build it. But we did a terrible job in bringing forth a coherent solution that would work well for the small merchants. With our payment system, in order for merchants to avoid a fraudulent chargeback, merchants had to store cryptographic cookies on their customer’s computers, and convince their customers’ banks to become responsible for the authentication of financial transactions. 

We asked merchants to do backflips before our new payment system could be useful to them. We loved our vision, and in spite of millions in funding, we failed and had to sell the company long before its real value could be realized. 

As an entrepreneur, you are building a bridge to a new world. But if you want people to do backflips on your bridge to get what they want, they will likely reject it. We got way too attached to a specific vision that had gotten in our heads and wanted to build it at any cost. It would serve entrepreneurs better to focus their attention not on a tunneled vision of how the solution should look like but on the deep pain that has been accepted by the customers as business as usual. 

In hindsight, we could have built the solution on some of the existing technologies readily available without trying to convince merchants and banks to offer a new bank-backed authentication scheme. A few years later, the Bitcoin inventor that remains anonymous to date, addressed the same issue, and solved the problem by bypassing the bank-based authentication altogether, and introduced a new mechanism for contract integrity via cryptographic tokens spread over publicly distributed digital ledgers. Hindsight is 20/20. 

The shifts that happened in the global payment systems in the past (think the invention of Visa by Dee Hock), and the innovations that are currently taking place in the digital payment networks (think blockchain and the new cryptographic currencies), are examples of tidal waves. 

I learned after losing what was considered at the time by many early investors to potentially be a trillion-dollar company, that an entrepreneur cannot make a massive tidal wave. A successful entrepreneur is the one who detects tidal waves and learns to ride these waves.

Breakdown # 6 Addiction to Planning

Many entrepreneurs upon falling in love with their “great idea” begin the process of writing comprehensive business plans. They have often learned to do this either while working in larger corporations, reading the readily available literature about building startups, or from their schools. Our universities are clueless about how to teach entrepreneurship. 

Entrepreneurs that use corporate formulas for making successful entry to the market (i.e. strategy, planning, and execution) often fail. The best plans are out of the window on the first meeting with the investor and/or customer. 

Notice that almost every single article that you read online stresses the importance of coming up with a good business plan. Nothing could be more misleading than this truism. 

‘Planning’ works for known, stable, and recurring futures. For futures unknown and unstable, planning is useless. 

Breakdown # 7 Lack of Preparedness

What works for dealing with innovative and dynamic environments is preparation. Preparation. Preparation. Preparation. Entrepreneurs that get addicted to planning and undervalue the importance of preparation most certainly fail. 

It takes time to develop yourself and immerse yourself in the domain in which you want to make some innovation. Immersion is preparation. 

Preparation also requires the development of skills necessary for perception of societal breakdowns and emerging tidal waves, and navigation and orchestration for bringing forth a new solution. Many consider these skills to be divinely-attributed virtues. They are certainly not taught in our normal schools. In some entrepreneurs, these virtues are well developed by having been born in traditions that value cultivating these virtues. My own experimentation with people of all ages shows that these entrepreneurial virtues could be developed with proper mentoring at any age.  

At a later time, we will discuss these virtues in-depth, study the works of other philosophers of entrepreneurship, and make further distinctions between planning and preparation.  

Breakdown # 8 Lack of Commitment to Certain Concerns

When the entrepreneur is not committed to bringing resolution to some concerns confronted by some niche of people, a void of a sense of belonging gets created.  The entrepreneur then attempts to fill this void with a desire to only make money, whatever it takes. 

As soon as the startup begins to have problems, the entrepreneur bails, as the startup does not appear anymore to be a good way for making money. Commitment to an existential concern in some area of life opens possibilities for learning, shifting, changing, turning, and transforming original aims in many shapes. Without a commitment to some real-life concerns faced by people and their enterprises, it would be nearly impossible to land on a profound insight upon which a game-changing enterprise could be built. 

Breakdown # 9 - Lack of Emotional Capital

It is often quoted that startups fail due to running out of financial capital. This is commonly accepted as it seems obvious that it’s true. I propose that startups do not fail just because they run out of money. New investors could be seduced, new partners could be engaged, and new agreements about advanced sales could be made with customers. But it is when entrepreneurs surrender to their moods of resignation and pessimism that say that we have done everything there is to do and nothing further could be done; it is then the startup truly fails. I propose it is a kind of “Emotional Capital” that founders and entrepreneurs can run out of. However, Emotional Capital could be regained, re-imagined, and re-stocked. We have an infinite amount of untapped Emotional Capital within us. Tapping it requires an acceptance of dissatisfaction and authentic confrontation of your present view of your future. This view of the future hides as a bad mood. In conversations with your trusted advisors and partners, this could be shifted and new Emotional Capital could be gained for further investment in important missions. 

As a last thought, I want to leave you with what I believe to be the most important virtue in confronting failure in entrepreneurial adventures. To explain this, I will paraphrase a passage by Friedrich Nietzsche from his book, The Will to Power, 

“To those entrepreneurs who are of any concern to me, I wish suffering, desolation, rejection by customers, ill-treatment by investors, indignities—I wish that they should not remain unfamiliar with profound self-doubt, the torture of self-mistrust, the wretchedness of the vanquished: I have no pity for them because I wish them the only thing that can prove today whether one is worth anything or not—that one endures.”