For as long as technology startups have been spectacularly on the rise, many more have been spectacularly in decline. Failure is a near certainty when starting a company. Even founders with the right credentials, cash, and customer interest regularly see their businesses crash and burn; the luckier ones manage to pivot their way out of sudden death. The startups that we consider successes are, in many cases, born out of defeat: Slack, for example, started as a gaming company, making a multiplayer game that few people wanted to play.
There are boobytraps everywhere for the would-be entrepreneur, from choosing the wrong cofounder to raising too much money to raising too little. People problems. Product problems. Plain bad timing. How should startup founders avoid these many threats? The venture capitalist Lak Ananth offers unconventional advice: Don’t avoid failure. Anticipate it.
Ananth is a managing partner of the venture capital firm Next47. He also is a veteran of the first dotcom boom. His new book, Anticipate Failure, suggests that startups fall short for seven common reasons: problems with the product, with the technology, with the team, timing, business model, customers, or execution. Ananth uses these frameworks to analyze some of the more salient startup flops in recent years, including Quibi, the Essential Phone, and Bird scooters. Bird, for example, captured the right market interest with simple technology. But its business model faced some fundamental problems: Its founders had failed to account for the cost of maintaining the scooters. Many stopped working within a month on the streets or had to have parts swapped almost immediately. What originally looked like a profit of $2 a day on each scooter, Ananth writes, turned out to be a loss of $6 a day on each. (Ananth says nothing of startups like Uber, which continue to bleed money.)
Andreessen Horowitz partner Andrew Chen argues that the line between success and failure often comes down to getting “all the right users and content on the same network at the same time.” Launch too early, or target the wrong people, and failure is likely. His new book, The Cold Start Problem, explores how these network effects could be the difference between your startup being the next Instagram or the next Hipstamatic.
Like Ananth, Chen is a venture capitalist. He also worked on the growth team at Uber, a startup he studies at length in the book. On its face, the concept of network effects is simple: The more users who join an app like Uber, the more money there is to lure drivers. The more drivers, the better for people looking for a ride. But in reality, most new networks fail. Quibi, for example, didn’t have the kind of content to keep users sticking around. Marketplaces without enough supply will cause churn too. Chen offers a few remedies for how startups can navigate around this “cold start problem”—chiefly, by focusing on building “the smallest possible network that is stable and can grow on its own.”
Still, overcoming the cold start problem is deceptively difficult. Chen offers the example of Tiny Speck, the gaming company that would go on to become Slack. Tiny Speck had everything going for it: a star team, an exciting launch, and $17 million from respected investors (including Andreessen Horowitz, where Chen works). It also got plenty of people to try out the game, called Glitch. The problem was it couldn't get people to stay.
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What was the difference between Glitch and Slack? For one thing, Slack’s timing worked: It had anticipated distributed workforces and a need for text logs. But it also benefited from tiny, atomic networks. People joined in teams, and as those teams familiarized themselves with the product, they were likely to continue using it. (The magic number, according to Slack, is when a team has exchanged about 2,000 messages.) Later, the company grew by encouraging companies to adopt Slack across the entire workforce, knitting together many teams on one unified workplace tool.
Of course, network effects alone cannot explain a startup’s success or failure. Slack was just one of many workplace communication apps with a similar idea; not all of them had the same success. “For every successful launch like Slack, there are many more that are failures,” Chen acknowledges, “and they usually stumble right at the start.”
Both The Cold Start Problem and Anticipate Failure offer autopsies of several failed companies, but that can still leave a reader scratching their head. Chen points out that some startups achieve network effects because they provide services that are free, convenient, and easy to use. Other startups succeed for exactly the opposite reason: Their products are exclusive, invite-only, and hard to get. Ananth, in his case studies, locates the problems in various startups without offering a useful prediction to avoid those pitfalls in the future.
Another book from 2021 tries to provide a more comprehensive account of startup failure. Tom Eisenmann, who has taught entrepreneurship at Harvard Business School for the past 20 years, surveyed 470 failed startup founders about why their ventures went south. Their responses make up his book, Why Startups Fail.
Eisenmann rejects the idea that most failures come down to the founders, and even criticizes venture capitalists for focusing too much on finding the “right people” who have grit, determination, and industry acumen. Instead, he suggests that failures more often come down to a misjudgment of market need, growing too fast, and overly idealistic visions (all things, notably, that VCs encourage). Like any good business school professor, Eisenmann comes prepared with an armload of case studies. He pays particular attention to startups founded by his students—cases where the postmortem seems almost personal.
Why Startups Fail provides six reasons things go wrong, including neglecting customer research, finding the wrong stakeholders, and falling into a “speed trap” of growth at all costs. Eisenmann emphasizes that these mistakes are avoidable. But more important, like Ananth he advises founders to understand that failure is often part of the package. Toward the end of his book, he offers advice on how to handle failure when it inevitably happens.
In today’s startup environment, raising money might be easy—it’s what comes after that’s hard. Will these books help startup founders or investors avoid disappointments? Perhaps, but in the same way that millions of health books have helped humans avoid disease. Diagnosing the common reasons for death is one thing. Learning to live more healthfully is another.
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