Why Start-ups Fail: False Starts.
We learned in the previous post that the founder of Triangulate, Sunil Nagaraj identified that the root causes of the company’s downfall were his choice of initial market, online dating, and not talking to the right people.
In his book Why Start-Ups Fail? Professor Tom Eisenmann provides more granularity to explain why these mistakes led to other failings which contributed to the business having to make several pivots.
We learned in the previous post that Eric Ries, in his book “The Lean Start Up” does not define runway as it is commonly used, that is how long a start-up can keep going until it runs out of cash. He defines runway as the number of pivots, or changes in business direction, a start-up can complete before the cash runs out. Each pivot costs time and money, and with time running out, each unsuccessful pivot eats into the company’s cash reserve.
The failure to develop a strong Customer Value Proposition.
Triangulate never identified a superior solution to a strong unmet need. The concept of a Wingman who would provide social proof for their fellow user had limited appeal. When Wings pivoted to matching based on user attractiveness this did not improve differentiation, many well-established dating sites used this approach to matching. And these sites had a critical mass of people to increase the potential that a user would find a suitable match. Wings was a “me too”. The pivot to DateBuzz was built on stronger ground. It allowed voting on aspects of a user’s profile before showing photographs. This solved a real consumer pain point. But cash reserves were already running low and there were not enough funds to pivot again to capitalize on this opportunity.
Unfortunate Timing.
When Triangulate launched Zoosk had a dominant share of Facebook’s online dating community. When a market segment is highly dependent on network effects, that is having enough customers to make the network useful, latecomers are always going to have a difficult time.
Offering Services for Free
Finding a differentiated value proposition was made more difficult because the service provided by Wings and DateBuzz were initially free to the user. When a business needs to rapidly build its network removing any barrier to signing up is a good idea. But in his book “Predictably Irrational” Dan Ariely points out the power of free. People will take or use something for free even if they do not need the product or service. Being free, Wings and DateBuzz attracted many casual users who were just curious. Contrast this with fees charged by giant dating sites such as e-Harmony. If someone is going to pay $60 per month for membership they are likely a serious user looking for a match.
A conundrum of all dating services is that when they are successful, and users find a long-term match, the customer goes away. When a customer is paying a subscription they have a strong incentive to cancel their monthly payment and their profile is removed from the website. But when a site is free, there is little motivation for a user, who is no longer interested, to take the time to remove their profile. It remains on the site, disappointing active customers who message these inactive profiles. You can easily see how this can lead to user dissatisfaction.
Underestimating the need for marketing.
Triangulate had assumed that site-based referrals would drive viral growth; especially when referrals were incentivized with coins that could be spent on the network. This a common belief of entrepreneurs, build it and they will come. In fact, 60% of Wing’s users were acquired via ads. 30% came from word of mouth, press coverage, and Facebook’s dashboard. Only 10% came from site-based viral actions. $750,000 of seed money was not enough to pay for the marketing needed to grab users’ attention and launch a new brand into a crowded marketplace.
Lack of a profit formula.
In an earlier post we learned that Triangulate had predicted an income of $15.00 per month per user, in reality, the income per user averaged $1.77. With Triangulate spending more than anticipated on advertising and promotion, the lack of revenue did not cover their costs. A subscription model might have helped. But how much could they charge? Again referring to Dan Aierly’s research there is a huge difference between free and a nominal charge when it comes to gaining customers. And when you need to scale quickly any barrier to sign-ups is troublesome.
Lack of a minimum viable product
Before launching Wings Sunil did an online survey asking 150 customers if they would prefer a site that matched using self-reported questionnaires or one that used objective computer-generated data. However, this was not a minimum viable product. Triangulate could have tested several concepts by developing a landing page test. One website could have presented a compelling and authentic-looking marketing pitch for a dating service that was based on objective behavioral data. Including a sign-up button would have shown what would be the level of interest in such a site. A similar page could have tested the wingman concept. It is likely that this would have demonstrated the feature held little attraction. Triangulate could have avoided the cost and time required to include this feature.
These mistakes put together amounted to a number of false starts. A false start occurs when a founder does not test their assumptions thoroughly enough to verify whether they are correct or not. The founder proceeds on the basis that their gut feeling is right. When gut feeling has led the founder astray you get a false start and a return to the drawing board.
How to avoid false starts.
Entrepreneurs can avoid false starts by conducting a thorough and thoughtful design process. In their haste to start building, there is a strong temptation to jump straight to the Minimum Viable Product stage. This skips some of the early steps which are important to ensure that the MVP is testing the right features, and capabilities and is delivering a usable if a basic product that customers can react to and provide feedback.
Basic research is not costly. Time-consuming? Yes. Tedious? Done correctly, yes it is. Expensive? No. Time spent now is not going to eat rapidly into your cash reserves. But once you hire programmers, engineers, and designers their salaries will be a major drain on your cash, reducing the length of your business’s runway and putting pressure on you to launch something, anything, just to get a product out there.
There is an old adage in the English-speaking world, “measure twice cut once”. The Russian version is “measure seven times cut once”. Care in preparation ahead of your launch, will pay dividends.
In his book “Why Start Ups Fail?” Professor Eisenmann describes the Double Diamond Design framework developed by the British Design Council. It would be a breach of copyright to show it here; to learn more about this aspect I highly recommend that you buy Professor Eisenmann’s book. I have just checked, the Amazon Kindle version is available for $12.99.
Customer Interviews
Sunil admits he did not speak to the right people before launching his venture. Lean Startup guru Steve Blank tells entrepreneurs to “get out of the building” and conduct customer discovery interviews before they start building.
Let’s take a look at some of the common mistakes people make when conducting customer interviews.
Assuming you know the customer because you are the customer. You may well be a customer for your product but are all your potential customers like you? Probably not. This is especially so when it comes to areas where personal preferences are concerned.
Convenience sampling. Entrepreneurs often interview family friends and co-workers who are easy to contact. This is a very poor sampling technique because we tend to surround ourselves with people who are like us. And unfortunately, they are likely to tell us what they think we want to hear. It is difficult to conduct truly random surveys as any call for folks to participate in a survey will result in a self-selected group. For a guide on how to conduct research, I recommend this article from HBS.
And if you want a highly amusing of what can happen if you only ask family and friends if you have the talent to succeed Ctrl&Click here.
Another mistake is not interviewing all the concerned parties. You must interview everyone who will have input on the buying decision. Parents will have a say in what their children eat. Talk to users and decision-makers.
Focusing on early adopters. Naturally, there is a tendency to talk to folks who will be the first to buy your product. But early adopters and mainstream users often have different needs. The early adopters of Dropbox were folks who had sophisticated needs for synchronizing and sharing files across devices. Now even technical dullards such as myself are Dropbox’s largest customer group.
Finally – do not ask leading questions where you prompt the interviewee to give the answer you want. Do not ask about the user’s future intentions you may get wishful thinking. Ask me how often I will study Vietnamese and I will tell once or twice a day. Ask me how often I have studied Vietnamese in the past and you will get a litany of excuses for why I cannot find the time. The summary is simple – measure seven times before you cut once. Based on solid data you will avoid costly false starts.
Why Start-Ups fail 