23% of startups fail because of an inadequate team
A recent study published by CB Insight indicates several common reasons that startups fail. The first and second are not surprising: 42% of startups close because they found no market for their products and 29% because they ran out of money. But the most solvable reason is the third: 23% of startups fail because of an inadequate team. Obviously, these companies didn’t put the right people in place to do the job that needed doing.
Entrepreneurs set up a company, develop a fantastic product which the market is waiting for, raise funding, and yet, one out of four startups fail because the team was not suited for the tremendous challenges entrepreneurs and startups face. So even while the 3rd most common reason startups fail can be attributed to not having the right team in place, the first two reasons can also be partially attributed to having the wrong people executing those tasks.
I’d estimate the No. 1 reason startups fail is either completely or partially attributed to not having the right people
As someone who’s been involved in high-tech startups and the recruitment business for more than 20 years, I’d estimate the No. 1 reason startups fail is either entirely or partially attributed to not having the right people. Perhaps entrepreneurs are ashamed to admit they failed, personally unable to put the right team in place. Why is this happening so often? Here is what usually happens.
The Story of Johnny and Jake
Johnny and Jake, who worked as software engineers at the same company came up with a brilliant idea. They shared the idea with Mary. Then the group brought in Tom, the only one they knew with an understanding of sales and marketing. The entrepreneurial nucleus is ready to go to battle.
The group prepares a business plan and an investor deck with the aim to raise money. The technology development is easy. After all, the team members have technological experience from previous jobs. When things start happening, they have to recruit a team to execute on their plan. They need more programmers, product managers, sales and marketing professionals and pretty soon they will need someone to head up their new office.
So far there was no problem recruiting new people. Johnny brought Susan, and she brought Andrew. A year has passed, and our startup has 20 people. It’s evolved into a small empire ready to conquer the world. But something begins to crack. Bill, who was the brilliant programmer at Jake’s previous company, finds it difficult to work with Jake’s team. His attitude is negative and getting toxic. Mary was a really good product manager, but ever since the company hired a VP of Product, she finds it difficult to cooperate with his new process. And worst of all, Tom, who is one of the company’s founders and its main sales guy, does not deliver anything close to scalable results. The company needs a much more experienced VP of Sales and a far more advanced distribution strategy.
This story repeats itself again and again in thousands of startups. In some cases, the entrepreneurs succeed to overcome these common difficulties and bear the hefty price of losing momentum and opportunity, and in many cases, this situation disintegrates the delicate human and cultural fabric that is so vital for startups to succeed.
What can be done to prevent these situations? The short answer is that any company, especially startups, must have a realistic understanding of their limitations as well as a thought-out strategy for recruiting key employees. A successful process requires the CEO’s attention and involvement as the main task of building a successful company.
The company must decide on the ideal mix of people in the company, one that will help create an ideal culture that engenders a sense of purpose and drives the team to work hard and stay, even in times of crisis.
The company needs to decide on its short and long-term hiring strategies. It needs to determine what will be developed internally and what can be outsourced. This decision will impact the number and type of people it hires. The company must decide on the ideal mix of people in the company, one that will help create an ideal culture that engenders a sense of purpose and drives the team to work hard and stay, even in times of crisis. Some employees may be capable of meeting their goals in the first year but not beyond. Others may seem overqualified (I hate this term) but can help the company as it grows. And sometimes good people just get bored and need to find another opportunity for everyone’s benefit.
These are serious challenges that not all entrepreneurs know how to cope with. As the pressure grows (and it does), personnel problems start to haunt managers, and they are more likely to make hiring mistakes like hiring the wrong people for the wrong task or not hiring anyone at all.
Even after a strategy is formulated, the plan is not done. The company must create a structured process for recruiting personnel that can be implemented and measured so that success can be determined and people involved can be held accountable. Budget and resources must be allocated to make the process work. Department managers must decide what happens when hiring is not going as planned. No business can execute on its plan without a great team in place, period.
I meet companies that are unable to recruit employees for crucial roles for months, sometimes even a year or more. Conversely, I see companies that continue to improve their hiring process relentlessly and now understand how to make fantastic hires, even in a tight talent market.
When a job goes unfilled, then something is wrong in the hiring process. Either the process is wrong, the expectations are unrealistic, or no one is being held accountable for the lack of results.
The standard argument which goes “there are no good candidates in the market” does not hold water. Good companies recruit excellent people and build winning teams because they make hiring an accountable process internally.