Startups Fail Because They Lack Customers, Not Funding

Thank you Diana Kandor, fellow at the Kaufman Foundation, for saying what should really be the obvious.

Startup founders, stop looking for money and go make it!

There's a misperception in the startup world that all you have to do is focus on the pitch and focus on getting investment. That couldn't be farther from the truth. Instead, companies need to focus on driving revenue as quickly as possible. 

There's a notion that if you get into an accelerator, you're 100 steps ahead of all those other companies. Accelerators offer so much in terms of mentorship and structure and tips and tricks. They are hugely beneficial. And, yes, if you get accepted, your startup can get a huge leg up on the competition. Yet, even if you're lucky enough to get into a program and you're super savvy and leverage the learning you receive, and even if you're mega lucky and actually make it past pitch day and get a check in your hand, someone (and I recommend everyone) has to focus on the bottom line. 

Let's say you hit a home run and get that round of funding, you now have a new boss and that boss wants to see a higher valuation. That boss cares little about your 17th iteration (unless the pivot really is led by consumer feedback) or how pretty your website or app is. She cares about how much traction you have, how fast you scale, how many users engage with your offering, and most importantly, she cares about the money.

The best way for startups to truly make it is to understand that everyone needs to assume the identity of rock-star salesperson and go out there and sell. 

And, for the startups that have limited resources (basically everyone), go out there and have someone else do the work for you. That's right. Find the person with the best coat tails for your offering, and ride them.

Leverage the concept of leverage. 

Here's the actual article


Carson Vaughan

Speaking before a crowd of more than 600 businessmen and women at the Lincoln Chamber of Commerce’s Economic Development Breakfast Wednesday morning,Diana Kander, senior fellow at the Kauffman Foundation, urged entrepreneurs to ditch the traditional business plan and adopt a more customer-based approach. 

Diana Kander advises the Ewing Marion Kauffman Foundation as a senior fellow. 

Diana Kander advises the Ewing Marion Kauffman Foundation as a senior fellow. 

“The entrepreneurs would like to tell you they failed because they didn’t raise money or they had management team issues or maybe they had a bad location,” she said. “But the reality is they failed because they couldn’t get customers.”

Kander is not unfamilar to Nebraska, speaking at Big Omaha in 2013.

Incorporating examples from her own entrepreneurial history, Kander, whose talk was entitled “Why capital is no longer the most important barrier to startup growth,” said customers 15 years ago held very little power over their transactions with companies. They were “taken advantage of most of the time,” she said, and they settled for “good enough.”

“You would go to the car dealership just expecting to get hosed,” she said. “You just knew they were making money on a whole bunch of different levels.”

Today, customers have more control. They expect perfection.

“If there’s a product that you want, there are thousands of stores online where you can choose what you want,” she said. “So for the first time in a long time, the supply of stuff significantly outnumbers demand. That means anything you want, you can find the perfect product. You no longer have to settle.”

But despite a changing consumer landscape, the vast majority of companies still use the same model, largely steered by a speculative business plan that buries customer priority.

“We’ve seen in studies that those companies that raise venture capital—companies that raise $500K or more—75 percent of those companies fail,” she said. “So it’s not how much money you throw at the problem, it’s the fact that you’re trying to guess at perfection, at what customers want without actually knowing.”

Instead, Kander stressed the importance of iteration, explaining that startups must be willing to flex their initial idea to meet the customer upfront. To illustrate, she described the genesis of Hudl, the Lincoln-based sports-software company. Originally, Hudl thought of its product as a “varsity tool,” she said, but later expanded its market to include JV and freshman teams after reaching out to potential customers.

“The product they thought they were building was close, but it wasn’t perfect,” she said. “And they found out upfront, before they finished building the product, the perfect solution that people would be ready to hand money out for, and that accounts for a lot of their success today.”

Kander listed a handful of reasons more entrepreneurs aren’t adopting a customer-based approach. First, she said, too many entrepreneurs think they’re smarter than the customers. It’s also a harder model to follow; it feels less natural than the plan-based approach, in which the entrepreneur moves from the idea to development to branding and finally on to the customer. Lastly, she said, many entrepreneurs ask leading questions during the test phase and rely on unreliable vanity metrics, convincing themselves of a primed customer base. 

“Making sure you have customers up front in your venture before you start implementing is the most important thing you can do to a venture or new idea,” she said, “more important than raising hundreds of thousands or even millions of dollars.”

Near the end of her presentation, Kander took several minutes to describe the “marshmallow challenge,” one of her favorite experiments. The challenge provides the participants 18 minutes to build the tallest freestanding structure from the following supplies: 20 sticks of pasta, one yard of tape, one yard of rope and one large marshmallow, which must stand on the top. All different groups have taken the challenge, she said, but in a match between MBA students and kindergartners, the kindergartners averaged a height 2.5 times taller (25 inches compared to 10).

The MBAs spent 30 percent of their time planning the structure and 60 percent building it, she said, only to watch the structure topple after placing the marshmallow on top. With what little time they had left, they cobbled together a short and poorly built structure ten inches tall.

“This is the traditional plan-based approach,” she said. “You come up with an idea and spend all your time building something and then you hope at the end that it will work, only to find that it doesn’t.”

The kindergartners, on the other hand, started with the marshmallow already on top. It’s a small structure, but it’s stable. They’ve spent very little time building it, so with extra time to kill, they start experimenting with it, adding pieces, playing.

“If you spend time upfront testing an idea before you dedicate resources to it, I guarantee you’re going to find huge opportunities. “

7 Reasons Most People Should Build Lifestyle Businesses, Not Startups

I could go one of two routes. I could take one of my crazy ideas and go the startup path, try and chase down funding, spend 80 hours a week to found a company, and take years off my life while trying to make it happen. Or I could build a lifestyle business, where I was the only employee and made just enough to support myself while having more freedom to do the things I  really  wanted to. A few years back, I wasn’t stoked about my position as a financial analyst, and knew I wanted to run my own business. The problem was, I had no idea what I wanted that business to look like. 

I took off to Thailand and decided to give the latter a shot. Three years later, I’m absolutely convinced that for the majority of the people with entrepreneurial aspirations, you’re better off starting a lifestyle business than pursuing a startup. Here are 7 reasons why:

  1. You are not Instagram. For every startup that sells and makes millions, there are hundreds — if not thousands — that fail or, even worse, continue to just barely make it, sucking the life out of you in the process.
  2. Building a startup is building a 9-to-5. While it’s fun to start up running on nothing but adrenaline and Red Bull, the excitement wanes and the monotony sets in after a few months. Many startup companies turn into really bad 9-to-5 jobs for the founders. They get mired in day-to-day details and work harder than anyone else, but they don’t get the benefits they signed on for as an entrepreneur in the first place. For example, Jun Loayza who, after getting over a million in funding and successfully selling two companies, left his current startup to pursue a lifestyle business.
  3. You won’t wait years to turn a profit. So someone gave you a bunch of money and told you to go build your business — cool, but that doesn’t mean you’re profitable. When you work for yourself, your overhead is limited. Salaries, office space, benefits? That’s all on you. I started my most recent business with less than $500 and it took me three sales to become profitable. Most startups are lucky to be profitable after three years!
  4. You can work from a beach with a Mai Tai. You know that dream everyone had after reading the 4-Hour Workweek where they’re chillin’ on a beach with a cocktail, working from a laptop? That’s really possible. Sure, those haven’t been the most productive days of my life, but a lifestyle business lets you choose when and where you work — generally, all you need is an Internet connection. This year I’ve already worked from places like Vail, Playa del Carmen, Cuba, New York, China and Jordan among others — all without skipping a beat in my business.
  5. You’ll have more flexibility than Gabby Douglas. You say you wanted to become an entrepreneur for increased flexibility and control in your life? Fat chance in a startup, especially when you’re playing with someone else’s money. As a lifestyle entrepreneur, you truly have the flexibility to set your own schedule. Take Laura Roeder, for instance — she moved from Southern California to spend a few months in London, where she got to attend this year’s Olympic games. A lifestyle business is one that promotes the lifestyle you want to live. For many, that’s more time with friends and family; for others, it’s travel and adventure. You get to decide.
  6. Stress is minimized. As an entrepreneur, stress will never go away — it comes with the territory. But you’d better believe that while starting up, it has the potential to be much worse. Thoughts like “How am I going to make payroll this month?” and “Revenues were 30 percent less than projections, what will the investors think?” or “My partners and I have drastically different opinions of where the business should go, what do I do?” are all common issues in a startup. A lifestyle entrepreneur has no one to answer to but themselves, thus reducing the stress that comes with common business problems. Stress of getting started can be minimized even further by running your business from abroad, where it’s cheaper to live.
  7. You can become a modern-day Renaissance person. I can’t focus on just one thing; I’m always all over the place. Being a solopreneur has forced me to learn how to handle all aspects of business — marketing, accounting, sales…you name it, I do it. In this position, you grow your expertise and become a more well-rounded business person, and that will undoubtedly help you in any future endeavors. The phrase “Jack of all trades, master of none” isn’t always a bad thing.
Boracay Office. 

Boracay Office. 

Are all startups bad? Of course not. Are all lifestyle businesses beaches and daiquiris? Not a chance. However, if you’re looking to maximize your enjoyment while have the freedom and security that comes with knowing you have full control of your life, then a lifestyle business may be exactly what you need.

Courtesy of YEC

Sean Ogle is an expert at helping people turn their passions and skill-sets into sustainable businesses that can be run from anywhere on Earth. As the founder of Location 180, LLC he uses the power of his blog to get the message out on the benefits of location independent entrepreneurship.