How Startups Die

I’ve been thinking a lot about failure in business recently. A few companies that I invested in have shut down in the past 6 months, a smart friend of mine also recently shut down his company after grinding away for 3 years, and these things have left me reflecting on why startups ultimately fail. You know, 90% of startups go to zero, so why is that?

The most widely applicable answer is product-market fit (PMF) issues. When a company can’t create something that other people want to pay money for, they eventually run out of cash to operate. I think you could trace most startup failure to not finding PMF in one way or another, but there are a lot of other factors that can kill a company as well, and I want to riff on 10 of them that I’ve seen while working in and around startups, both on the operator side and as an investor. See below (and feel free to skim).

Founder conflict. In scenarios where a company has multiple founders, any serious rift between cofounders can destroy it. This could come from disagreement about the company’s vision and direction. It can revolve around temperament where people just start to hate each other. There can be issues with incentive alignment where one founder is compensated more than another. It can be political where people crash out because one founder doesn’t like their place in the hierarchy of the company, and on and on. 

Timing. This is relevant in three ways.

First, a company can die if someone else comes to market with a similar product/service before they’re able to launch, so they miss their window of opportunity and it’s over before it even started.

Second, a company can die by being too early to a market before it’s viable. The famous example is pets.com from the original internet bubble where their idea of selling pet food on the internet was actually good (most pet owners buy food online today), but at the time there wasn’t enough demand for it.

Third, a company can die because they’re not able to handle market cycles. The best example is construction businesses going under during recessions because people don’t have money to pay for new buildings or renovations.

Pivoting too much. Some startups change their mind too often. They never deliver anything because they’re always changing the direction of the business. Scope creeps. Everything is cluttered. They’re often building multiple things at once. People talk a lot about the idea of “ephemeral apps” these days i.e. products or experiences that only last for a short season. More people should talk about “ephemeral founders” whose focus is so scattered they pivot their companies into the grave.

Not pivoting enough. Some startups don’t change their mind enough. They find a small amount of traction or early success doing something, then ossify around that version of their product/service. They become risk averse and stop adapting to new things (in hopes of guarding their nest egg), which makes them complacent, both to competition in their vertical and to new opportunities that would be bigger. Over time they get outcompeted because of this sunk cost bias.

Platform risk. If a startup builds on top of another platform and that platform shuts down (or changes their terms of service) that startup can have the rug pulled out from under them. One example is Zynga (makers of Farmville) building social games on top of Facebook. When Facebook eventually decided they didn’t want to share data with Zynga… they banned them from the platform in 2013. Zynga then had to pivot. In crypto terms this usually comes down to a team deploying an app on a blockchain that fails or loses all its mindshare, so they’re left with no userbase (and a dead token on a ghost chain).

Lack of a moat. I’ve seen several companies build something, find some traction, then ultimately die because their product/service wasn’t defensible. Either other startups come along and execute more effectively in the same niche, or a large company in an adjacent vertical builds a version of the same product/service in-house, which makes the original startup obsolete. An example here is Clubhouse, which is a social audio app that was big during the COVID pandemic. Ultimately, Twitter built Twitter Spaces, which offered the same set of features, but as part of an app with hundreds of millions of existing users. This made Clubhouse obsolete. Its userbase is down ~95% since. No moat.

Overdependence on outsourcing. Startups that outsource everything to a studio, consultancy, or a venture builder tend to struggle. When teams don’t have core competencies like design, engineering, and marketing in-house there are alignment issues, and it takes forever to execute anything. I’ve seen some companies shut down because they wasted too much of their time and runway playing this game while trying to ship a large release.

Ego. Some founders think too highly of themselves and so they don’t hire strong people to offset their weaknesses, either because they aren’t aware of those weaknesses in the first place, or they downplay them. I’ve seen some insanely talented CEO/creative founders fail because they didn’t have a strong COO or CTO to keep pushing the right things forward. Modern culture obsesses over the lone wolf solo founder with magical vision and taste, but for the most part, business is a team sport, and it doesn’t end well for people who ignore that.

Brand damage. A company, or sometimes individuals at a specific company, can do something that irreparably damages their brand to the point where consumers don’t want to buy their stuff (and partners don’t want to work with them). In crypto, the most common version of this is when a protocol gets hacked. If this happens once, it’s hard to recover trust, interest, mindshare etc. If it gets hacked twice, all credibility is gone and it’s basically over for that team.

Fame. If someone achieves any even moderate level of success in business, they’ll start getting schmoozed. It’s events and dinners. There are media and travel opportunities. It’s this award or that list. And while there’s nothing wrong with having fun or being celebrated for accomplishments, some people fall off when this starts to happen. They prefer the identity of being a founder versus building their company for real, and over time this leads to complacency and collapse.

In closing here, I want to say that it’s wild how many ways a business can fail. I’ve only touched on a few examples that I’ve seen personally, but the management literature is probably full of endless variations of these themes and more. Often multiple things are happening at once as well, which makes these challenges that much pricklier. I’ve made a bunch of these mistakes myself and had to scrap multiple business I’ve sunk money and time into as a result. Ultimately, I think startups are one of the hardest games that anyone can play. I have huge respect for anyone trying to create something out of nothing, and I hope people who do this sort of work find some of these points useful to chew on.