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6 Reasons Why Startups Fail
Takeaways from HBS entrepreneurship professor Tom Eisenmann's research
Most startups fail.
It’s a commonly known and accepted fact in the entrepreneurial ecosystem.
But why exactly do all these startups fail?
That’s the question that Harvard Business School professor Tom Eisenmann seeks to answer in his book “Why Startups Fail.”
Today, I’m breaking down the 6 core reasons he presents in the book.
The Observer Express
Don’t have time to read the entire post right now? No worries, here are the main points:
The book “Why Startups Fail” summarizes a multiyear research study involving responses from 470 entrepreneurs.
Early-stage failure patterns: 1) Good Idea, Bad Bedfellows; 2) False Starts; and 3) False Positives.
Late-stage failure patterns: 4) Speed Trap; 5) Help Wanted; and 6) Cascading Miracles.
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Background
When I first picked this book up back in 2021, I had very limited context for the early-stage investing ecosystem. I’ve been recently re-reading it (I’m a big fan of revisiting great work), and it’s even better now that I’ve got a few years of experience under my belt.
Professor Eisenmann joined the HBS faculty in 1997 and has been deeply involved in entrepreneurial education throughout his tenure. More detail is available in his Harvard bio. But despite all that experience, a few years ago he realized he was unable to confidently and concisely answer the question “Why do startups fail?” Thus, this book.
The book is based on findings from a multiyear research study that combined his experience educating entrepreneurs, 1-1 “post-mortem” interviews, and survey responses from 470 entrepreneurs who raised between $500K - $3M between 1/1/15 - 4/30/18. It’s written with the entrepreneur as the core audience, but there’s huge value here for early-stage investors as well.
Without further ado, let’s dive into the 6 failure patterns identified in the book.
6 Reasons Startups Fail
Professor Eisenmann’s findings highlighted 6 failure patterns split between early-stage startups and late-stage, resource-rich startups. I’ve loosely contextualized the takeaways specifically for angel investors.
Early Stage Failure Patterns:
Good Idea, Bad BedfellowsThis failure pattern is all about relationships. But not just between founders - relationships with any resource provider. That includes employees, strategic partners, investors, and more (and, yes, founding teams too). It’s essential to consider the entire relational portfolio, not just the strength of the lead founder.
False StartsFailing to adequately research customer needs before kicking off engineering leads many entrepreneurs to waste precious time and capital building MVPs that are destined to fail from the start. This failure pattern is often fueled by misapplication of the Lean Startup methodology, where entrepreneurs fail to perform sufficient customer discovery and instead jump straight into build mode.
False PositivesA strong response from a startup’s first customers can lead to unwarranted optimism about actual demand. Entrepreneurs tend to be optimists, and initial demand for a product/service can lead a founder to double down on a strategy that will not ultimately appeal to the mainstream market.
Late Stage Failure Patterns:
Speed TrapA startup is growing fast, but ultimately saturates its target market, which requires expansion into adjacent markets to maintain rapid growth. These adjacent markets are less receptive to the product, product-market fit erodes, and growth slows. Competitors enter the market in the wake of the venture’s initial success, CAC increases, and investors become reluctant to commit more capital.
Help WantedIndustries or sectors may fall out of favor with startup financiers, leaving late-stage high-growth startups at significant financing risk if their particular space happens to fall prey to this shift in market preferences. Additionally, key gaps in senior management can (and often do) break a rapidly scaling venture.
Cascading MiraclesSome ventures pursued an insanely ambitious “change-the-world” vision that could only ever be successful if a series of miracles took place. Eisenmann lists the following “do or die” miracles that many of these ventures rely on: “1) persuading a critical mass of customers to fundamentally change their behavior; 2) mastering new technologies; 3) partnering with powerful corporations who’d prospered from the status quo; 4) securing regulatory relief or other government support; and 5) raising vast amounts of capital.”
Final Thoughts
Next time you’re looking at a deal, consider which of these failure patterns might be of the highest concern to that particular venture. I’m processing how these takeaways should shape the diligence products we offer and may share a deeper dive into each one in the months ahead.
What Do You Think?
What failure patterns have you seen that aren’t mentioned here?
*I include this section in every post because I’m genuinely curious to hear what you think. I answer every response, so please, don’t be shy!
Weekly Observations: 3 Lessons Learned
Feedback is only useful if contextualized.📝We’ve produced 150+ reports over the last 18ish months, and 98% of them were between 1-5 pages in length. But two were much more in-depth: a holistic 37-page analysis of a company developing a new battery technology, and a 12-page analysis of the charity management market. Most of the feedback we received was that these long reports included “too much detail.” Contrast that to this week, when I met with a family office that prefers to lead funding rounds and go deep in their analysis. Guess what feedback they gave me? They want the 37-page analysis, and the 1-5 pagers aren’t nearly detailed enough. Context matters.
Show me your rocks.🪨Our team recently set new “rocks” (from the EOS model, things that must get done during a given period) for Q3. Historically, I’ve made a point to share company-level rocks with our staff, who then set their own personal rocks for each period. But since reading Measure What Matters by legendary VC John Doerr, I’ve learned that not only should I be sharing executive-level rocks, but each individual should also make their own rocks public. This enables horizontal support and accountability. This quarter we’re giving it a try.
People want to share their expertise.🗣️Over the next few weeks, I’ll launch the “Expert Perspective” series as part of The Diligent Observer. This content will be focused on helping angels make better bets by interviewing individuals with relevant expertise. I’ve already got a half-dozen interviews lined up, and so far everyone I’ve asked has been willing to participate. It seems like most people want to share their expertise with the world, even if it costs them a bit of time. I’m pretty excited about this. Know someone I should interview? Send me a note, I’d love to chat.
Weekly Links: 3 Things I Found Interesting
Thanks for reading, have a great week.
-Andrew
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About Me
I cultivate flourishing.
I'm also the CEO of PitchFact, where our mission is to cultivate flourishing specifically through efficient and collaborative early-stage diligence. I'm a proud husband, grateful father, and honest friend. My love languages include brisket, bourbon, and espresso.