There are many reasons startups fail.
Unfortunately, we just didn’t have enough time and ran out of money.
Unfortunately, the customers just didn’t care enough about our offering.
Unfortunately, the channel just wasn’t economically efficient.
Unfortunately, I had the wrong person running engineering (or marketing, sales, finance etc.).
Unfortunately, we were screwed anyway so we just decided to throw a Hail Mary pass.
Unfortunately, I thought layoffs would ruin morale, so we just burned too much for too long.
Unfortunately, the term sheet fell through at the last minute and we ran out of money.
Unfortunately, we didn’t land the key account that would have saved the business.
Unfortunately, because we had always overcome every previous obstacle, we blindly assumed we’d always overcome the next one.
These are just a small sample of the explanations I’ve heard as an investor, usually immediately after the company runs out of money.
There are times a startup’s fate is beyond its control. Like when a platform tells you they’ve unilaterally decided to take your revenue streams, or a country bans your app. However, outside of a few rare circumstances, the life or death of a startup is mostly in the founder’s hands.
Startups don’t just “run out of money.” Instead, they wait too long to address problems while they had money. Failure doesn’t usually happen “to” startups. It happens when founders rationalize problems until it’s too late and put off dealing with their most profound challenges.
Most of the problems above are present at some point, not just in failures, but also in every successful company. The difference between success or failure is how quickly the startup engages the problem. Attack problems early and the startup will advance. Rationalize that the problems don’t exist and you’ll just be another depressing startup post-mortem.
Why we rationalize
Founders are amazing at bending the world to their will. They succeed partially because they can see what’s possible before most people and have enviable imaginations that can design the future. While this can be a strength, it also can be a great vulnerability.
A successful founder must manage the paradox that they are both inventing the future and that the future is in no way inevitable. Just because a founder wants something to be true, doesn’t mean it will be. And just because the founder has been proven right before (“30 VCs said no to us before we closed our Series A…”), doesn’t mean that founder will be right again (“…therefore we just need to persist through all this rejection to get to our Series B”).
Rationalization is a plague that stands in the way of aggressively removing the barriers that will prevent success.
Founders need to have their eyes to the sky and their feet planted firmly on the ground. They need to at once imagine a future and aggressively study the reality of how the world (customers, employees, recruits, investors) is responding to that vision. Unfortunately, being visionary can easily seduce founders to rationalize away reality.
The best way to detect rationalization is to figure out whether a founder is earnestly searching for answers to problems or is quick to explain away why the problems aren’t important.
Rationalizing founders will use the “Five Whys” to figure out why a negative piece of data doesn’t apply to their startup. The wise founder will try to figure out how to adjust to the learnings.
When introduced to someone with deep domain or functional expertise, the rationalizing founder puts off talking to the person and argues why the person’s input isn’t relevant. The earnest founder eagerly sets up the meeting. That founder may not agree with this person’s perspective, but is openly mining the expert for information. Why did another company in the space make the decision it did? Who are the three best people to talk to about problem X? Good CEOs are always on the hunt for people who may have insights that can help their company overcome barriers.
Rationalizing founders have a tendency to mock a competitor’s approach to a problem — even if that competitor is having much greater success! A truth-focused founder seeks out the competitor’s customers and tries to find out why they are doing so well.
The misaligned incentives of the venture industry also contribute to the likelihood of founder rationalizations. Companies with respectable linear growth stories that want to raise venture capital often rationalize why they need to invest aggressively in their businesses to drive an exponential curve, even when they have limited evidence to support the probability of that curve. By doing so, these founders disregard the data in front of them and start down a path of rationalization that is hard to unwind.
Attack the problems
It’s tempting to blame external factors for the failure of a startup, but success or failure almost always comes down to decisions that the founder makes, or chooses not to. Every startup faces huge challenges on the road to success. The speed with which startups address (and even anticipate) these challenges dictates the outcome. Rationalization is a plague that stands in the way of aggressively removing the barriers that will prevent success. Most founders only realize they were rationalizing when they’ve run out of time and it’s too late.