A recent article in Harvard Business Review posed a relatively straightforward question: why do startups fail? We all know that more than 2/3s of new ventures will fail. We all praise failure as a right of passage for entrepreneurs. Indeed, I've readily advised many founders that investors would rather invest in someone with prior experience founding a company--even if that means failure.
But the costs of that failure--both financial and emotional--are talked about far less often. I've worked with hundreds--if not thousands--of early stage founders as both an attorney and as a mentor, and identifying a single root cause of failure has always eluded me. Sure, I can point to examples in hindsight of a team dynamic that lead to failure, or the timing being wrong, or of a competitor gaining traction in the market more quickly, but giving founders a roadmap on avoiding failure often proves difficult. We often resort to emphasizing that the team is ultimately what makes or breaks a new venture. The real-world unfortunately is more complicated. Failures are multifaceted, complex, and messy--as we humans are.
In HBR's article Why Start-ups Fail, Tom Eisenmann examines several case studies and attempts to compile identifiable factors for failure and some suggestions for founders to avoid common mistakes. Tom Eisenmann concludes with emphasizing the policy reasons for why we should work to mitigate failure:
"Failure also takes a toll on the economy and society. A doomed venture ties up resources that could be put to better use. And it acts as a deterrent to would-be entrepreneurs who are more risk-averse, have financial obligations that make it hard to forgo a paycheck, or face barriers when raising capital—which is to say, many women and minorities. To be sure, failure will (and should) always be a reality for many entrepreneurs. Doing something new with limited resources is inherently risky. But by recognizing that many failures are avoidable and follow the same trajectory, we can reduce their number and frequency. The payoff will be a more productive, more diverse, and less bruising entrepreneurial economy. "
It’s fashionable in start-up circles to speak glibly about failure as a badge of honor or a rite of passage—just another phase of an entrepreneur’s journey. Perhaps doing so is a coping mechanism, or perhaps failure’s ubiquity inures those in the business world to its true human and economic costs. I’ve counseled dozens of entrepreneurs as they shut down their ventures. Raw emotions are always on display: anger, guilt, sadness, shame, and resentment. In some cases the founders were in denial; others just seemed depressed. Who could blame them, after having had their dreams dashed and their self-confidence shattered? In my work I try to help people come to terms with failure, but I can tell you that at ground zero, there’s no way to avoid the fact that it hurts. It also can destroy relationships.
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