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Why Your Well-Funded Startup Still Went Under

Startups today don’t fail only because they lack funding; they fail because they lack customers.

Why Your Well-Funded Startup Still Went Under
[Photo: Agnieszka via Tookapic]

If attracting heaps of venture capital is supposed to vouch for a startup’s potential, then how come so many of them wither and die a short time after they’re funded? Recent research by CB Insights shows that tech companies typically shutter within 20 months of their last financing rounds, with 70% dying before raising $5 million. What’s more, the majority of new tech startups–55%–die before raising $1 million.

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There’s no one cause for that high mortality rate, but these are a few of the more common reasons tossed around during postmortems:

  • Selling products nobody wants or needs
  • Hiring the wrong team
  • Getting outflanked by competitors
  • Bad pricing model
  • Ineffective marketing

But while it’s true these are common culprits, there’s another that rarely gets talked about enough: Too many startup founders obsess over investors at the expense of their customers.

Streets Paved With Gold

The impulse to join the gold rush is easy to understand, given the mind-numbing amounts of money VC firms are doling out these days.

In the second quarter of 2015, according to additional research by CB Insights, VC-backed companies raised $32 billion across 1,819 deals globally. Twenty-four new, billion-dollar unicorns also came onto the scene in that period, compared to just nine in the same quarter a year ago. Indeed, U.S. funding is on track for a banner $70 billion year, exceeding the $56.4 billion high of 2014, with much of that growth driven by the tech sector.

So it’s no wonder that so many CEOs spend so much time chasing investors during their companies’ earliest days and too little acquiring customers. To reverse this, founders should think about the company they want to become and not the company they are today.

They should work to understand the very first customers they acquire and start building meaningful, ongoing relationships from the get-go. More than that, startups should put world-class customer service at the heart of their business model in order to get ahead of competitors.

Customers And Culture

Why take this approach instead of chasing new rounds of funding? Forrester Research calls today the “age of the customer” because the Internet has made an unprecedented amount of information available to consumers on demand.

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Customers now know more about a company’s products, services, pricing, and reputation than ever before. This means they expect more today than they did even five or 10 years ago. The only way to win and retain customers is to become a customer-focused company.

That starts with culture. Every founder, manager, and sales rep needs to understand that everything they do revolves around serving customers’ needs. The next step is to focus on the technology it takes to do that well and at scale.

Build a technology infrastructure that lets you develop products and services rapidly–from aggregating data to enabling and measuring customer engagement. There’s no excuse today for a poor customer experience. Startups shouldn’t live in spreadsheets, but they need reliable metrics–which means customer engagement solutions that scale with them. What’s more, none of this has to cost that much, as cloud-based solutions are putting new technology within closer reach of more new and growing companies than before.

Finally, a culture of giving back should be baked into your startup’s founding. Doing good is good business, not only in terms of the positive impact on the community, but also in attracting like-minded employees, partners, and customers. (It’s also a helpful antidote to the funding rat race.) Today’s startups should consider how philanthropy fits into their mission before it becomes a bolt-on program overseen by a human resources department.

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Ultimately, it’s customers–not venture capitalists–who make or break a company. It’s their investment through purchases that fund success. It’s their positive experience, loyalty, and endorsement that will get others interested in what a startup has to offer. Startups today don’t fail only because they lack funding; they fail because they lack customers.

Ludovic Ulrich is the head of startup relations at Salesforce, where he leads the Salesforce for Startups program. Previously, he was the Global BizSpark Program Manager at Microsoft. Follow him on Twitter at @ludoulrich.

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