Single Biggest Reason why Startups Fail

After having interacted with thousands of startups and hundreds of investors and venture capitalists in the startup ecosystem across the globe, I think I know the biggest problem a startup faces, that leads to its failure.

"It's the Effect, where's the Cause?"

There are many startups that give any of the following reasons as the biggest reason why they have failed- 'ran out of funds', 'could not find product-market fit', 'could not find the right price', 'competitors had deep pockets', and so on. None of these reasons even get near to being a real reason, since all of these reasons are actually "effects" of something deeper. If a company has run out of funds, it's because there was some flaw in its business model or business execution. Hence, it does not qualify as a "reason".

"Don't ask the patient to diagnose"

That's when I realised that asking startups may not be the best way to find out the biggest reason why they fail. After all, they are stuck in evaluating the superficial failures while not understanding the cause. Sometimes, investors and advisors give some good analysis. So when I talked to hundreds of investors, some of these reasons came on top; immature founders, ego clashes within team, lack of genuine passion and perseverance, inability to take advice and not listening to the market. Now, these reasons seemed nearer to "cause", but they were not structured enough to come to the single biggest category.

"The curse of the daily struggle"

While building a team, a startup focuses on achieving its daily (or micro) business objectives, failing to focus on creating something more sustainable. I could see a very clear pattern in the various failed companies that I analysed. All these companies were performing superbly in its initial stages (with only 3-4 member team) and started failing post investment when their teams started to grow. While the founders were building strong domain skills in the team, they were failing to focus on "People Management".

I tested this hypothesis by talking to a number of founders in growing funded startups. When asked if "people relationship" (and that includes team, vendors, investors, co-founders and the relationship of each of these stakeholders with each other) is in one of their focus areas, some of them did put it on their top agenda item and a vast majority ignored the same considering their need to focus on "hard" skills and not "soft" things like relationship. After a few months, I could see the companies with people in their focus growing to bigger heights, while most of the ones without such focus struggling to survive (there were exceptions though).

PEOPLE MANAGEMENT/LEADERSHIP STYLE

When we conclude team relationships, communication gap, founders' immaturity, etc. as reasons of failure of a company, we are effectively talking about the ability to manage and build trusting relationships in a professional environment. And, the lack of this ability (in founders and every other team member) is the single biggest reason why startups fail.

Yes, People Management Style is the biggest problem startups face!

Dear Entrepreneurs, give as much time to building your style of managing relationships as you give to understanding the market or building the business, otherwise you will remain stuck in solving your daily problems and not be able to create something sustainable.

Disclaimer: Views are personal