Why startups fail

I saw the following explanation of why startups fail on Quora this morning:

Answer Summary

The top reasons are:
1. No one wants the product created.
2. Management teams lack flexibility to change direction when needed.
3. Resources (funding/time/labor) are managed poorly.
4. Inability or failure to obtain and/or maintain sufficient capital (for a variety of reasons), whether or not managed poorly.

One answer claims lack of luck is the main reason, leading to the conclusion success is random (as luck is random), leading to the conclusion the only way to succeed is to try a large enough number of times.
(Just flip a coin until you get "Heads").

I think the first three cover pretty much all eventualities, so this is a good list.  To put it in the positive, if you have a product people want, management execute well and the business is properly resourced then success is pretty much guaranteed.

For VC backed businesses there is an additional subtlety though, and that is market timing.  Once a company has raised money they have a decision about how aggressively to build up the cash burn and try to grow revenues.  If the market is there going after it hard is very often absolutely the best thing to do.  The common mistake is to over estimate the readiness of the market, build up the cash burn, fail to grow revenues and end up with a horribly loss making business that fails (or fails to make meaningful returns for its founders and investors). 

Having money in the bank and not spending it is a fantastically hard thing to do, but would have saved a number of businesses.  The trick is to identify the signs that the market is there (or not) and be very wary about building up cash burn until the signals are clear.

The other thing I wanted to say refers to luck – I’m a big believer in luck, we all need a bit of it.  But luck isn’t random – cliches like ‘the harder I work the luckier I get’, or ‘if you want to be lucky, go to parties’ (Taleb) have a basis in reality, there is a real skill in putting yourself about and creating the opportunities for lady fortune to smile on you.

I’ve put this on Quora as well.

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  • #1 is too much of a catch all. There are dozens of reasons when people wouldn’t want the product. At least split it into 1) no market need for product 2) product does not fill the market need

    Delivering wind turbines that continuously break down will mean that people don’t want your product, but that doesn’t imply that there is no market for wind turbines.

  • True enough

  • the real question is: WHY all VCs invest in web startups despite over 95% of them fail (and less than 1% make profits)

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  • I think the success rate is a little better than 5%!!

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