Navigating Startup Failures: Lessons Beyond the Obvious
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Understanding Startup Failures
Startups often face high odds of failure, much like the bumblebee, which according to outdated aerodynamics principles shouldn't be able to fly. Nevertheless, they do, defying expectations. This analogy serves to illustrate the spirit of ambitious startups. While statistics suggest that many will not succeed, the thrill of witnessing a remarkable company emerge—whether as a founder, team member, or investor—creates unforgettable experiences. Sharing these stories and lessons is common, but what occurs when startups do not reach their goals?
When startups do fail, they often close down, which is a natural part of the tech ecosystem. Ideally, this should be a “smart failure”—characterized by a promising idea, an intriguing product, and a dedicated team. While the process is undoubtedly painful, it provides valuable insights and connections that can enhance future ventures. For venture capitalists, experiencing failure is an integral aspect of the role, both conceptually and materially. It's understood that a portfolio will include talented individuals who didn't have the opportunity to develop their companies to their full potential. The aim is to shift the odds in favor of those backed by venture capital, as reflected in our mission at Homebrew, which serves as a force multiplier to boost success rates and speed.
Part of this effort is procedural. A few years back, we released a guide titled “Winding Down Your Company” as a resource for entrepreneurs. However, I've recently heard accounts of wind downs that overlooked several important considerations. Therefore, I want to highlight additional stakeholders beyond just founders and creditors or investors, who are frequently at the center of these discussions. This isn’t a call for perfection; I’ve been involved in processes that didn’t meet these standards.
Key Stakeholders to Consider When a Startup Fails
- The Team: Of course, the team is paramount. Beyond whatever can be done financially for severance or other benefits, a considerate wind down aims to achieve two critical outcomes: it ensures team members remain interested in future startup opportunities and helps maintain positive relations between founders and their staff. This matters greatly, as we depend on enthusiastic individuals willing to dive into early-stage startups, and I want to avoid disillusioning them. Additionally, I feel a strong responsibility to support CEOs who have shown unwavering commitment to their teams, enhancing their reputations through a thoughtful closure process.
- Small to Medium-sized Business (SMB) Accounts Payable: It’s disheartening to hear of startups that close down and leave small business owners in financial distress, unable to recover owed funds. This phenomenon represents a significant blind spot in our “software eats the world” era, where venture funding allows startups to shift risks to suppliers, often more swiftly than a cash-strapped customer might. For example, consider a meal delivery service that collapses, leaving hundreds of thousands of dollars in unpaid bills to its suppliers. Such scenarios not only create challenges for affected SMBs but also hinder future startups attempting to engage with them after a series of negative experiences. While solutions may not be straightforward, my hope is that we approach these matters with both ethical and legal considerations in mind.
- Customers, especially Patients: I have previously emphasized the need for careful consideration regarding the customers of startups in healthcare sectors, such as mental health and addiction recovery. When a startup ceases operations, clients can be abruptly left without support unless there is a well-organized transition to another service provider or adequate notice prior to service interruptions.
I hold immense respect for the founders and teams that create companies. It is both a privilege and a joy to support them in their endeavors. As I commit to this field for the long haul, I recognize that I will continue to encounter failures. However, I believe that just as we can Build Better, we can also Fail Better, which necessitates taking into account the broader impacts beyond the primary stakeholders.
Chapter 2: Learning from Failures
This video titled "90% of Startups FAIL. Only 3% of Our Portfolio Have Failed" dives into the stark realities of startup failures and shares insights on how to navigate these challenges effectively.
In "Why Startups Fail: Top 10 Mistakes to Avoid," this video outlines common pitfalls that new companies face and provides practical advice on how to avoid them.