One reason why up to 42% of startups fail

Building and growing a startup or innovative venture is a bold feat. The odds are stacked against you from day one. Despite this, we have the privilege of working with entrepreneurial leaders at Engenesis Ventures who choose to press on inside the commitment to build a product that people genuinely enjoy and perhaps can’t live without, and build a team that serves thousands – even millions – of customers every day. But with failure rates so high among startups, it is important to understand the common pitfalls. This article examines the research that identifies the number one reason for startup business failure, and practical ways to avoid that for yourself.

CB Insights completed a study that reviewed the post-mortem reports of more than 100 failed startups. They found that up to 42% of these post-mortems revealed that the founding team built something with no market need. While the percentage does vary across multiple studies, this one reason continually comes up as a common critical factor. Many may read this simple statistic and quickly gloss over it. Some may be intrigued, but then move on to business as usual. Others may think, “Okay, I’d better watch out and ensure I build something that has a need! But how do I do that?” Let’s delve deeper for those interested in taking a moment to take this seriously. This one aspect of building your startup or innovative product could be responsible for millions of dollars of wasted effort and energy.

The three common pitfalls that lead to an unsuccessful product launch

The first thing to acknowledge is that no one consciously builds something with no market need and thinks it will succeed. Many entrepreneurial teams believe they are building something genuinely needed by their target market. The issue is that there is a gap in their awareness. In our observation and study of over 1800 startups and innovation projects, the following three aspects are common pitfalls at this stage.

1. Most startups and innovative businesses place significant emphasis on the technical question, “Can this be built, and how can we build it?” However, at this stage, this can draw focus away from the more critical question of, “Is there a true market need?” In the Genesis Framework™ – the venture-building framework that we educate entrepreneurial leaders globally to use to grow their businesses – we invite people to be aware of their progress and synchronise their progress along three lines: their capacity as an entrepreneurial team, the development of their product, and their ability to generate market demand.
2. The lure of what you can see and touch. Building a product and releasing it is exciting. You get a kick out of it because you can see the product and show it to your family, friends, colleagues and managers. You have a tangible result. However, quantifying your market need is less tangible and therefore gets little applause and often fails to receive the attention it deserves. 
3. Overestimating the validation you received. In some cases, entrepreneurial teams conduct surveys and receive feedback that their product is excellent. However, they neglect to consider that there is a gap between the self-report of their interviewees and whether or not those people would actually purchase their product. Consequently, despite their positive validation data, they don’t get much take-up when they launch their product.

Validate, validate, validate!

The key to avoiding the common pitfalls highlighted above is validation. By creating smaller steps that involve less risk and being sensitive to every small piece of data you receive, you will be able to assess whether or not what you plan to build genuinely serves a need in the market. Validation can range from taking customer interviews and surveys, to launching trials or creating prototypes and more.

One of our portfolio companies at Engenesis Ventures is the FRANK Food Safety System. It began as an idea with Engenesis Ventures and has since grown to support and optimise safety in the delivery of over a million meals per year in commercial kitchens. Like many others, its founder James Shepherd came to us after thinking carefully about an app he wanted to build and launch that he believed would significantly impact the food industry. Rather than encourage James to start building his product, we advised him to slow down and start with a visual (UI/UX) prototype. It was a fraction of the cost of building the app, and it meant he could demonstrate what he was thinking to potential customers.

After showing his potential customers the app prototype, James called us and said, “My potential clients did not say they liked the app; they asked when they could start using it in their kitchens!” James’ excitement was palpable. His potential clients already wanted to buy and use his product before he had even created it. Now that’s what we call market validation! 

This real-life case study is a classic example of a startup almost falling into the trap of the three pitfalls highlighted earlier. James started by focusing on the technical question – can I technically build the app I want? However, with our support, he also managed to address the burning issue of market need. He did not ignore this critical aspect of his business. At the same time, James could satisfy his desire for the tangibility factor, having something to see and touch while not over-investing and taking on too much risk. He sought the response of real people and gauged their willingness to buy rather than merely wait for a polite response. The result is that he successfully launched his product into the market, and it now supports the safe production of over one million meals each year.

If you’re an entrepreneur, I invite you to reflect on what my team and I observed highly effective entrepreneurial teams do in this situation:

1. They demonstrate ‘epistemic humility’, defined in the Being Framework™ as being humble with your assumptions and expectations about knowing and understanding. It is recognising that you may not know something or struggle to grasp something quickly and that this is perfectly natural and okay. Highly effective entrepreneurs pay attention to reality; they are sensitive to what is actually going on. They put aside their preconceptions and are receptive to data and input that may show them a more accurate picture of how their customers are likely to respond.
2. They seek authentic, not cosmetic, validation. Highly effective entrepreneurs look beneath positive sentiments like ‘it’s a good idea’; they are open and willing to dig deeper to validate or invalidate their assumptions.
3. They take a wider and broader view than most. We call this ‘being of higher purpose’ in the Being Framework™. As such, they don’t only look at building a product and its technical challenge; they also look at their progress in gaining customer traction and other facets of building their business.

There are still many more factors to consider to reduce the overall failure rates of startups and innovative projects. However, with up to 42% of startups reporting no market need as their number one reason for failure, this is a good place to start. By carefully considering how you’re assessing the market need behind your product, you’ll give your company or product a far better chance of success.