Common Themes In Failures Of Innovative Companies

There is a strange kind of reassurance that comes from reading articles about companies that made it big and became household names, but then failed because of lag in technology. The same thing happens even with companies that once led with technology. You can shake your head and think: “If we ever got that big we’d never get so smug and short-sighted and complacent that we’d miss important cues like that.”

Not as comforting are the articles about startups that failed — companies with innovative ideas for disrupting entire industries and showed promising beginnings, but THEN failed. These stories strike so close to home as to be disturbing.

Whatever the reasons publicly assigned for this kind of failure, a closer look reveals several common themes:

1. Stated reason: “Progress toward our goals went slower than expected so our funding dried up”. Translation: Founders allowed unbridled, optimistic self-talk to devolve into exaggeration and over-promising, and investors’ confidence began to wane.
2. Stated reason: “Killed by the competition.” Translation: Failure to do hard-headed SWOT analysis before going live to see what was really out there and how to compete with it.

As much as we hear about the healthy learning that results from failure and the exhortation to “fail fast,” the fact is that failure is nothing to be proud of. Investors lose real money. Employees lose real jobs. Customers make actual purchases and don’t get what they paid for. This new cavalier attitude about failure betrays a selfishness, callousness and lack of empathy for all these victims of a business that crashes.

It’s time to stop this mindless love affair with the self-confidence of the founder. It’s really a lazy person’s substitute for doing the hard work that’s required of an investor who should be making an independent evaluation of the business model of any business seeking funding. Someone has to roll up their sleeves and look under the hood.

And startup founders are only fooling themselves when they sweet-talk prospective investors into a round of funding without helping them get a full understanding of what the company is trying to do, the risks involved and what it will take to succeed. Here’s what they should be doing:

1. Don’t stop with the first description of what it takes to win.  Re-analyze and update. Hello’s sleep tracking device was the darling of Kickstarter, but missed an important cue that differentiators would be needed to combat competitors offering similar products.
2. Engage investors early. More straight talk up front. Provide updates along the way. Sure it’s hard to get and keep investors’ attention. There’s a temptation to let optimism lead to exaggeration, causing disappointment followed by lawsuits. Getting a round of funding is no cause for celebration or euphoria. Rather, it’s a hopeful vote of confidence that should spark an obligation to go out and prove it was justified.
3. Talk with regulators. There should be no surprises about the laws and regulations affecting the business. Conversations with regulators can highlight potential pitfalls and what to do about them.
4. Get legal and accounting opinions. Bring advisors in and share “what-ifs” with them. Let them sharp-shoot your scenarios.
5. Do financial modeling using alternatives with realistic assumptions. Build best, worst and other case scenarios and invite critiques from outsiders.
6. Monitor expenses closely. Report progress to investors proactively, regularly and candidly.
7. Do SWOT analysis before and regularly thereafter. Provide investors with a running commentary of the constantly shifting market conditions, actions by competitors and the firm’s plans to respond to them.

While it’s true that it takes a certain amount of luck to really turn an innovative idea into a successful business, there are some things a founder can do to avoid costly mistakes that can cut short the life of a promising company.