Why do startups fail?

No one knows this better than the big VC firms that have invested billions of dollars, typically seeing return, in some estimations, in 25% of the investments they make.

These firms ultimately make great returns, in large part because they find alpha through smart decisions on doubling-down on those showing significant progress and success.

I believe they could do better, and one source of creating more winners overall is not terribly complicated or costly. I’ll explain, but first to highlight a few key points on contributing factors to failure:

Academics and researchers at Ivy League Universities like Harvard have researched the causes of failure (and success) in startups across the market and typically find main contributors to fail include:

• False Starts – As noted in the HBR article “Why Startups Fail“, truly understanding customer needs and the competitive landscape in advance of MVP construction. This leads not only to burning of cash, but the opportunity costs include losing time-to-market advantage and negative impacts on morale and team, not to mention potentially serving as a competitive advantage to a competitor. These false starts result in a startup watching their competitor that’s been watching closely (while doing better research and validation) fly by them with more money, better customers, and velocity at their back.
• Blind Spots – Founders are typically great with at least two things – They have great ideas, and enough energy to power a city. While these two qualities are critical, often founders lack experience and expertise in executing a successful business. Kevin O’Leary of the television show “Shark Tank” told CNBC in January of this year of founders: “They can’t get out of their own way, They won’t listen to anybody else.”
• Out of money – Unsurprisingly, failure comes when you reach the end of the runway without sufficient wings to fly. Successful capital allocation is crucial, and the more capital available, the more critical this concept is. Have a lot of money in the bank leads to looser allocation of funds, sub-optimal burn rate, which ultimately negatively affects one or all of time-to-market, gross-margin, and sustained growth and competitive advantage. As Ranjay Gulati and Vasundhara Sawhney highlight in their article “Why Your Startup Won’t Last” for HBR in 2019 – “There is a delicate balance between staying focused on what you are doing well, whilst still exploring new opportunities that might even require you to make a radical pivot.”

These three causes of failure likely seem obvious, especially to VC professionals that are living these situations every day. So, how do VC’s and founders dramatically improve their outcome?

Consultants, Fractional CPO’s or experienced Product Advisors are a better first, early step for many organizations.

By looking at the three issues highlighted above, I’ll summarize my recommended improvement as succinctly as possible:

Get Experienced Product Leadership Consulting / Advising, ASAP!

In some cases, an organization may be lucky enough to have a founder that has led product functions in VC, growth, PE, and public companies, but for most, finding someone that has extensive experience in these key areas can be difficult. Consultants however, should be able to bring the following expertise:

• Rapidly identify product/market fit, competitive advantage, and prioritize the right moves to get there in a dynamic environment where competition is also learning and advancing rapidly.
• Deliver Operational Efficiency, by ensuring highest investment ROI, optimizing resource allocation and focus, and streamlining process.
• Grow Bookings and Revenue, by being an excellent seller in their own right, guide sales and marketing, and facilitate good communication through the organization that connects sales to engineers, engineers to customers, and creates value creation in multiple directions simultaneously.

Why not just hire a CPO?

For some companies, hiring a CPO early is the right choice, but for many, especially earlier-stage companies, as highlighted by Caroline Horn, Charles Hubbard, and Jenna Zucker at A16Z in their article “Hiring a Chief Product Officer“, getting to the point of hiring a full-time CPO can be a difficult, time consuming, and emotional one, not to mention the ROI can be sub-optimal when there’s large areas of overlap with founders or existing talent, and/or an experienced CPO’s skills can’t be fully utilized at the current stage of the organization.

That brings me back to the concept of a Fractional CPO or experienced product management consultant, and why Consultants, Fractional CPO’s or experienced Product Advisors are a better first, early step for many organizations.

Reason why a Consultant / Advisor provides advantages:

1. Flexibility – First and foremost, a good product management consultant can help an organization ameliorate any of the three fail-factors above. They have experience in all, and can apply targeted expertise to help organizations overcome obstacles quickly and efficiently. They also can help in even more targeted ways, down to focusing on helping validate a PLG strategy, sensitivity analysis in pricing, or deep-dive on COGS or GTM efficiency. The consultant is a targeted resource, where and when you need them.
2. Speed & Impact – Product Management Consultants / Advisors can spin-up and spin-down quickly. Their experience provides expertise in ramping up and enabling radical focus on crucial areas fast, and by being an “outsider” they also won’t suffer from existing organizational blind-spots, so they can deliver value faster and more efficiently. Their expected results are clear and ROI can be measured. Their speed also comes from not having to open an executive search for a full-time, permanent CPO, saving time and money.
3. Harmony – In both consultative and advising roles, product management consultants are far less likely to create consternation or disruption of existing teams. Their mission is to help fill gaps and support existing resources in acquiring experience and knowledge in the areas where the consultant has expertise. They are not replacing or disrupting culture (unless that’s their task in operationalization). Fractional CPO’s also provide an advantage of being ‘part time’ and create an environment where founders and other domain experts need not feel threat of someone new.

Finally, a product management consultant provides a high ROI and lowers the overall cost of acquiring product leadership expertise. Engagements are either temporary or part-time, and eliminate additional costs of recruiting, retention, and benefits required for permanent employees.

In summary, based on my experiences in product leadership and based on discussions I’ve had over the past few months with early stage founders and VC and PC partners and operators, is that investors and founders should be looking to integrate strategic product consultants into their run-books early to decrease their likelihood of failure, accelerate their business, and realize strategic outcomes, sooner.

Its fast, efficient, and adaptable – Which are all key needs of a startup.

(article written by Rusty Carter)