Among the failure modes of startups, these two are the easiest to avoid.

Most startups end in failure: more than two-thirds of startups never generate positive returns for investors. Why do so many companies have such disappointing endings? The author of this article interviewed and surveyed hundreds of founders and investors and wrote more than 20 case studies on failed startups. The research results were compiled into a book titled Why Startups Fail, which describes the recurring patterns that lead to the dismal endings of many startups. This article introduces two of the most avoidable failure patterns for startups.

Great Idea, Failed Partners

Venture capitalists examine whether founders possess qualities such as resilience, passion, and experience to lead a startup team. However, even if the right talent is selected to lead a new company, the contributions of other partners are also crucial. Stakeholders, including employees, strategic partners, and investors, can all influence the success or failure of a business.

A great founder does not guarantee the success of a startup. Other members of the executive team can complement the founder's weaknesses, and senior investors and advisors can provide guidance and useful social networks. Even if the founder is not one in a million, a new business with an excellent startup idea generally attracts such participants. However, if the startup idea is just mediocre, it usually won't attract as much talent.

Take Quincy Apparel as an example. In May 2011, two of my former students, Alexandra Nelson and Christina Wallace, asked me to give them some advice on their startup idea. I admired both of them and their idea, which addressed an unmet customer need: it was difficult for young professional women to find suitable and affordable workwear. The two friends came up with a novel way of made-to-measure clothing: customers could customize the dimensions of four fabric pieces (such as waist-to-hip ratio and bust), similar to how men customize suits.

Following this lean startup approach, Nelson and Wallace used a textbook Minimum Viable Product (MVP) to validate customer demand, which is the simplest service that can bring reliable customer feedback. They held six private fashion shows where female customers could try on sample clothes and place orders. 25% of the 200 women who attended placed orders. Encouraged, the two founders quit their consulting jobs, raised $950,000 in venture capital, and recruited a team to establish Quincy Apparel. They adopted a direct-to-consumer business model, selling through e-commerce rather than physical stores.

I was also one of the early angel investors in the company. The initial orders and repeat purchases were substantial: 39% of the customers who bought the first-season clothing line made repeat purchases. However, the strong demand required a large amount of inventory. At the same time, production problems led to some customers receiving ill-fitting clothes, and the number of returns exceeded expectations. Handling returns and solving production problems affected profits and quickly depleted Quincy's cash reserves. The company tried to raise funds again but failed. The team decided to reduce the product line and simplify operations to improve efficiency, but they lacked sufficient funds to complete the transformation. The company was forced to close less than a year after its establishment.

Why Did Quincy Fail?

Quincy's founders had an excellent startup idea. Was it because Wallace and Nelson were poor founders? Their personalities were well-suited for the role of founders. They were smart and well-informed, and their strengths complemented each other. However, the founder team had deficiencies in two aspects. First, they were reluctant to damage their friendship. Wallace and Nelson had equal decision-making power in strategic, product design, and other key areas. This design delayed the response speed when decisions needed to be made. Second, neither of them had experience in garment design and manufacturing.

Garment production involves many specialized tasks, such as fabric sourcing, pattern design, and quality control. To make up for their lack of industry knowledge, they hired some senior employees from garment companies, thinking they could be multi-functional, just like the jack-of-all-trades members in many early-stage startups. However, these employees were used to the high specialization in established garment companies and were not flexible enough in handling tasks outside their expertise.

Quincy outsourced product manufacturing to a third-party factory, which is common in the clothing industry. However, the factory would not prioritize the production needs of a startup with no reputation, special fabric dimensions, and a small order volume. This also extended Quincy's delivery cycle.

The investors were also to blame. The founders originally planned to raise $1.5 million but only managed to get $950,000. This amount was only enough to launch two seasons of clothing lines. The founders accurately predicted that it would take at least three seasons to iron out the operational issues. After two seasons, Quincy had gained some reputation but not enough to attract new investors. The main investment firm was too small to invest more money. The founders were also disappointed with the guidance from the venture capital, which required them to grow at full speed like a technology startup, resulting in Quincy depleting its cash to build up inventory before solving the production problems.

In short, Quincy had a good startup idea, but the partners were not good: besides the founders, many resource providers were responsible for the company's failure, including team members, manufacturing factories, and investors.

Could this outcome have been avoided? Maybe. The founders' lack of experience in the fashion industry was the root cause of many problems. It took Wallace and Nelson a long time to master the complexities of garment design and manufacturing. They lacked industry networks, couldn't use professional relationships to recruit team members, and couldn't rely on past relationships with factory managers to ensure immediate delivery. Due to their lack of successful industry experience, it was also difficult for them to find investors willing to invest in first-time entrepreneurs.

A Wrong Start

I've always been a believer in the lean startup method. However, as I delved deeper into failure case studies, I found that practicing the lean startup method is easier said than done. Many entrepreneurs who claim to use the lean startup method actually only apply part of it. Specifically, entrepreneurs launch a Minimum Viable Product (MVP), get feedback, and then iterate. This way, they test customer reactions to avoid wasting time and money on promoting a product that no one needs.

However, if founders neglect to research customer needs before starting the design, they are likely to waste valuable time and money on a failed MVP. This is a wrong start. Entrepreneurs are like sprinters who start before the starting gun: they are too eager to launch the product into the market. For example, the lean startup's advocacy of "launching products multiple times and as early as possible" and "failing fast" actually encourages the behavior of "shooting first and aiming later."

The online dating site Triangulate experienced this in 2010. The details of its failure are hidden in three major pivots within less than two years. On the one hand, pivoting is the cornerstone of a lean startup. In each iteration, the team led by founder Nagaraj adhered to the mantra of "failing fast." The team followed the principle of launching products early and frequently, getting the real product into the hands of real consumers as soon as possible.

But the lean startup method involves more than that. Lean startup guru Steve Blank believes that before entrepreneurs build a product, they must conduct "customer discovery," which is a comprehensive interview and understanding of potential customers. These interviews can help companies understand the unmet and strong needs of customers and the problems worth pursuing. In Nagaraj's post-mortem analysis of the company's failure, he admitted that he skipped this crucial step. He and his team failed to conduct prior research to confirm the demand for the product concept. They also didn't conduct an MVP test like Quincy's private fashion shows. Instead, they rushed to launch the product and assumed it would be accepted by the market.

Triangulate's team made a mistake at the beginning by not conducting customer discovery and MVP testing, turning the "failing fast" mantra into a self-fulfilling prophecy. If the team had communicated with customers or tested a real MVP at the beginning, their initial product design might have been closer to market demand. The failure of the first product wasted the feedback loop, and for early-stage startups, the most valuable resource is time. As time became more and more limited, wasting one loop meant having one less opportunity to pivot before running out of cash.

Maintaining Balance

Entrepreneurs need to learn to maintain balance. Traditional wisdom is generally good advice, but don't follow it blindly. Let's see how the following advice for first-time entrepreneurs can have the opposite effect:

Just do it! Excellent entrepreneurs are doers who can act quickly to seize opportunities. However, an obsession with action may tempt entrepreneurs to skip the exploration phase and start building and selling products too early, as I explained earlier. In such cases, founders may find themselves jumping to conclusions too soon, and the solution may still have many problems.

Persevere! Entrepreneurs always encounter setbacks. Real entrepreneurs will dust themselves off and get back into the battle immediately. They must have determination and resilience. However, if perseverance turns into stubbornness, entrepreneurs may fail to recognize a wrong start and insist on not pivoting when their solution is not working. Delaying a pivot will consume scarce funds and shorten the company's runway.

Be passionate! Entrepreneurs' strong desire to change the world can help them overcome the most daunting challenges and attract employees, investors, and partners who can help them achieve their dreams. However, in extreme cases, passion can turn into overconfidence, leading to skipping the pre-research. Similarly, passion can blind entrepreneurs to the fact that their products cannot meet customer needs.

Save money! Due to limited resources, entrepreneurs must be thrifty and find ways to do more with less. However, if a startup cannot continuously deliver on its value proposition due to a lack of employees with key skills, the founder must decide whether to hire employees with these skills. If these people demand high salaries, a combative and frugal founder may say, "We'll have to make do without them," which may lead to the problem of having bad partners as mentioned earlier.

Grow! Rapid growth can attract investors and talent and boost team morale. This may tempt founders to cut short customer research and launch products too early. Rapid growth will face huge demand, putting pressure on team members and partners. If the team has bad partners, growth may exacerbate quality problems and reduce profit margins.

It's popular in the startup circle to talk casually about failure, as if failure is a badge of honor or a rite of passage, just another stage on the entrepreneurial journey. Failure also causes economic and social losses. Failed businesses waste resources that could have been used elsewhere. Failure also discourages many potential entrepreneurs, including those who are more risk-averse, those with financial burdens who cannot quit their jobs, and entrepreneurs from groups such as women and minorities who face significant obstacles in raising capital.

Failure will (and should) always be a reality for many entrepreneurs. There are risks in using limited resources to do something innovative. However, if we recognize that many failures follow the same patterns and can be avoided, we can reduce the number and frequency of failures and create a more productive, diverse, and less painful entrepreneurial economy.

This article is from the WeChat official account “Harvard Business Review” (ID: hbrchinese). Author: HBR-China. Republished by 36Kr with permission.