Why Startups Fail Before They Run Out Of Money

How to avoid the death spiral before it sneaks up on you

image by drazen zigic

If you get a chance to talk to a startup founder who has failed (raises hand), and ask them when they saw that failure coming, they’ll probably tell you a similar story: The writing was on the wall long before the money ran out.

So why didn’t they catch it?

In all my years of experience running startups, working at them, advising them, even investing in them, I’ve never seen a failure go down because one morning everyone woke up and the money was gone.

It happens more like this.

The thing about failure is that it almost always rides the coattails of success. In other words, a startup must be in a position to succeed before it can fail.

With a new business, even a modicum of success can be difficult to achieve, thus, it’s intoxicating when it finally happens. This is fine. It’s good. Success needs to be celebrated, capitalized upon, and chased.

But almost always, as the party rages on, a bad actor can slip in, almost imperceptibly. And when it does, it’s usually disguised as something else — something potentially awesome.

The Distraction Phase

The first step on the road to failure begins with a loss of focus. Every time. It’s a self-inflicted wound, usually brought about with the best intentions.

The leadership team can get caught up in a chart that goes up and to the right — customer acquisition, revenue, profit. And in their intoxication with the exploding growth, they start to pour all the company resources into accelerating that line of growth.

Or maybe the entire team gets time-sucked into a single project or customer, even a potential customer with deep pockets that could rocket the company from atmosphere to stratosphere.

Or maybe someone — I’m looking at the CEO — brings in an exciting new idea for the company that’s going to take it to the next level.

How I’d Avoid Distraction: All of those scenarios are good, some even great. But the biggest mistake a startup leader can make is twofold: Expecting current success to last forever…