A recent report by CB Insights surveyed startup casualties in the past few years and revealed that more than half (55 percent) of startups that failed last year had raised $1 million or less. It also calculated that they had an average life span of 20 months from the last funding round if they couldn’t secure additional funding or find a buyer. Not surprisingly, most were focused on Internet technology, though mobile startups were among the casualties.
Since most entrepreneurs can benefit from hindsight, CB Insights has aggregated the musings of CEOs, CTOs and co-founders on some of the causes behind their failed startups. There are even a couple of accounts from investors reflecting on poor investment decisions. We highlighted one by Bruce Booth of Atlas Venture.
The list of reasons behind those failures is as long as a piece of string, and many of those reasons could apply to new companies in most industries. I have whittled the list down to ones that seem most relevant to healthcare startups. Feel free to add some insights of your own in the comment section.
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Never assume, always validate: Dave Gallant of BrightCube’s point is critical for any industry but especially healthcare. It also involves taking careful measure of your customers’ experience. He wrote:
“You need to validate that your product or service solves a real problem, and whether your target market is willing to pay for your solution. In other words, test your idea before dumping a huge amount of cash on it. When we launched our startup, we did neither. Because of the market we were targeting, it was difficult to validate (at least we thought so). So we launched with the hopes of validating as we went along. Bad idea.
It’s tough to run a startup alone: Melissa Tsang’s experience launching a curated restaurant finder was a solo operation that could have benefited from a co-founder. Although the technically savvy experience that many co-founders lack wasn’t the issue, having a business partner to share the workload of research, sourcing new users, and outreach was. Otherwise, it can easily turn into a cheerless grind. You can lose your perspective and you have no one to ground you within the business. Or as Tsang puts it:
“It was overwhelming both physically, mentally and emotionally — morale wise, it was incredibly exhausting. Without anyone else to keep me accountable or really caring about Cusoy as much as I did, it was hard to deal with all my self-doubt and still persevere on when I was essentially my own cheerleader.”
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Slow to adapt to market reality: For Steven Schmidt, who served as the CTO of a knowledge management startup, the startup’s aggregation of blogs, wikis and document management in 1999 was a bit premature. Few understood the benefits of wikis and blogs. From the healthcare IT, companies see there’s an appetite for big data but even though the industry is hungry, it’s not quite sure how that should be packaged.
Too technology-heavy: Just as startups can be hampered by not having an effective technology co-founder, they can also be undone by too many technology professionals. The risk is spending too much time talking about the technology issues you might find compelling and not enough getting a sense of what your customers want and need.
Money Part 1 – Didn’t recruit the right investors: On the investment side, that can mean identifying which investors would be the best fit for a company and cultivating relationships with them long before the search for capital begins in earnest. Do they focus on early-stage companies? Are they rock stars or are they smaller investors with more time for the companies they work with?
Money Part 2 – Figure out your business model, particularly revenue, early: This came up in a few of the startup failure stories but it also has particular importance in the healthcare industry. I covered a panel discussion by digital health CEOs at the JP Morgan Healthcare Conference earlier this month and quoted one as saying “revenue is a trap.” It spurred author and investor Lisa Suennen to write a thoughtful entry on her Venture Valkyrie blog comparing starting a company without locking down how revenue will be generated with the movie Field of Dreams. She concluded:
“Companies that want to be taken seriously by investors and partners need to understand their market well enough to devise a legitimate way of extracting cash from customers early in the game. Revenue is the only TRUE proof of concept. Having broad market appeal is critical; having a product that has proven efficacy is essential. But if no one wants to pay for the product despite your having those things, you have built it and they don’t come. Just saying.”