There's a CB Insights study you've probably seen about why startups fail. His list is the classic, the greatest hits of why a startup can fail:
- They run out of money
- There is no need for a market
- They are surpassed by the competition
- Flawed business model
- Regulatory/legal challenges
I could go on and on. But I'm here to tell you that none of these reasons are the real reason why startups fail. Yes, I know, startups run out of money, fail to identify the right market need, get overtaken by competitors, have flawed business models, and succumb to regulatory and legal challenges.
However, these reasons are the effects of the real reason why most startups fail. The real reason can be traced to a reason. You are ready? Here it is:
Think about the list above. Why does a startup have any of these problems? Usually, it is poor management that causes your startup to fail. Let's review each of them.
For example, there are many startups that have raised a lot of money in recent years, and they are unicorns on paper. Many of the management teams assumed that the easy money would continue to flow.
Then reality sets in and they discover that it is difficult to get the next round of financing. And what's worse, they have bloated teams and excessive expenses.
That's a recipe for failure; bad management that caused your startup to run out of money.
Or you realize too late that there is no market for your product. A great team will recognize the problem early, conserve cash, and pivot to something better.
A weak team will recognize the problem too late and will be forced to close the company.
Now let's talk about the competition. A great team is never surpassed by the competition. Never. The great team rises to the occasion.
A weak team is not overcome by the competition. A weak team puts itself in a bad competitive position where it can't win no matter how hard it tries.
The result is that the weak management team has to close the company.
All successful companies have to modify their business model. The reason is that no one gets it 100 percent right at first.
Great management teams recognize mistakes and fix them quickly. Weak management teams stick their heads in the sand and keep hoping that everything will go well.
The result is predictable. Weak management teams have to close the company.
I have worked with some management teams that have faced lawsuits and regulatory approval. I know it can be difficult to overcome obstacles, but great teams find a way to survive each and every challenge they face.
Bad management teams get crushed.
And by team I mean you and your co-founder, the team you hire, and the investors you work with. That's your team.
This is Fox's Law, which is an adjustment of Rachleff's Law by venture capitalist Andy Rachleff.
Rachleff's law says like this:
The number one business killer is lack of market.
When a great team meets a terrible market, the market wins.
When a terrible team meets a great market, the market wins.
When a great team meets a great market, something special happens.
Rachleff's law makes sense if you are an investor because you can fix the team by firing the team. So, if you want to win in a specific market, you just have to fire the team.
Fox's Law, My Law, is written from the perspective of an entrepreneur. And for you, your team is everything.
That's why I agree with rule number 1, rule number 2, and rule number 4 of Rachleff's law, but I don't agree with rule number 3. In my experience, the correct rule number 3 for entrepreneurs is :
When a lousy team meets a great market, the lousy team will continue to fail.
It's not enough to go after a great opportunity with a great idea. There are many other entrepreneurs who probably have the same great idea as you.
But there's one more thing you're going to need to be successful. That's why I added rule number 5:
You need a great idea, a great team and you need some luck if you want to win.
So here is my adjusted version of Rachleff's law:
- The number one business killer is lack of market.
- When a great team meets a terrible market, the market wins.
- When a lousy team meets a great market, the lousy team will continue to fail.
- When a great team meets a great market, something special happens.
- You need a great idea, a great team and some luck if you want to win.
- The team. It's everything. Get it right, and everything else will fall into place.
