- In 2019, the failure rate of startups was around 90%
- Here’s how to not become a statistic & help your startup achieve the celebrated Product-Market fit
The sobering reality of startup failure rates
- In 2019, the failure rate of startups was around 90%. Research concludes 21.5% of startups fail in the first year, 30% in the second year, 50% in the fifth year, and 70% by their 10th year.
Early-stage startup failure rates
9 out of 10 startups fail (source: Startup Genome)
7.5 out of 10 venture-backed startups fail. Harvard Business School lecturer Shikhar Ghosh says in a WSJ article that 75% of venture-backed companies never return cash to investors and in 30–40% of the cases, investors lose their whole initial investment (he works with a dataset of 2000 venture-backed startups).
Early-stage (idea stage) startups, of course, bear the highest risk and have the highest failure rates.
If a startup fund has a portfolio of 100 companies, most of its returns would come from the 1 biggest success (ideally, a unicorn), followed by the 9 successful but not huge companies. The 10 successful startups more than compensate for the 90 failures.
You aim to maximise your startup’s chances of success.
“Approximately 70% of startups fail. Of the remaining 30%, some will deliver 3–5x returns, which is considered a very good return. But the VC still needs roughly 5% of their companies to deliver 10 to 100x returns to balance out the losses, and drive significant returns.”
— Matt Murphy, Managing Director at Menlo Ventures:
Startups take 2–3 times longer to validate their market than founders expect
A startup is testing assumptions that haven’t been tested before — new technologies, products & services or markets.
According to Y Combinator Managing Director Michael Seibel, it takes early-stage startups an average of twenty-seven iterations before they reach product-market fit.
VCs aren’t interested, yet
Venture funds invest mostly in growth-stage startups, AKA scale-ups. They are true startups, but most of them have gotten past one of the biggest risks for startups: the search for product-market fit.
They have tangible proof that people want what they are offering (this proof is how they attract venture capital).
“To be in the top 30% requires picking the right market, having the right product, and building a team that can execute and improve itself along the way. A company can fail even if it hits some of those attributes.
For example, sometimes a market never develops; sometimes competition kills a market. A product might not work, or not be as differentiated as expected, or not command a high enough price.
And finally, some teams just execute better than others. Some teams continue to adjust and add the right members as they go and some don’t. All these things impact being part of the 30%.”
— Matt Murphy
Reasons for startup failure
Marketing Problems (56%): Marketing mistakes were the biggest killers, and the biggest problem by far is the lack of product-market fit.
Don’t invest a lot of time and resources before you are certain people want what you are offering. Validate your assumptions quickly and cheaply.
Team Problems (18%): Problems like lack of domain knowledge, lack of marketing knowledge (and plan), lack of technical knowledge and lack of business knowledge are the biggest killers.
Friction within the team, lack of motivation, and lack of availability are also common, but less deadly.
Finance Problems (16%): You don’t need a lot of money to test and validate concepts (you need effort). You need money to grow an already validated concept, so financial problems plague mostly exclusively later-stage startups.
Tech Problems (6%): The biggest mistake is over-investment in expensive technology (developer time) before the marketing assumptions have been validated.
Operations Problems (2%): For software startups, operational problems are rare.
Legal Problems (2%): Largely overestimated, and very rarely the reason for failure except for heavily-regulated industries like food and finance
The 80–20 principle of early-stage startup success
As you can see above, Marketing Problems (56%): marketing mistakes were the biggest killers, and the biggest problem by far is the lack of product-market fit.
Don’t invest a lot of time and resources before you are certain people want what you are offering. Validate your assumptions quickly and cheaply, and if needed — pivot.
The biggest startup-killer is a lack of product-market fit
The six phases of a successful startup are:
Of these, going from Idea > Traction is finding Product-Market Fit
This is usually the hardest hurdle to overcome & where the majority of founders fail.
The stages from Traction > Growth is all about optimising Product-Market Fit
Both these broad stages require a very different approach to User Research & UX testing.
Market Research is not going to help
- The best companies in the world create their own market. You are looking for a hidden need. If it’s obvious, lots of people will be doing it.
- What job are people hiring you to do?
Where are your customers pulling you?
- You shouldn’t be pushing your customers
- If you already have a product, look for how users are hacking your solution to do something you haven’t thought of
Steps to build a remarkable product
1. Talk to customers and develop a market thesis
2. Listen to customer problems, not solutions
3. Rapid prototyping & user testing
4. Build solution to problem
5. Test solution with customers
People don’t know what they want, that’s why market research isn’t ideal. But talking to customers is critical. No great solution was built in a vacuum.
The most important thing is to quickly get in front of users. Don’t worry about making things that will scale at this point. User’s product experience is more important than money in an early-stage startup.
No matter how many times you think you will need to iterate, 10x it. You need to keep costs & cash burn low.
Build a team that can do this quickly (outsourcing might not be ideal)
How to validate your solution with Users
- Make sure you are talking to target customers (be willing to change target customer if it makes business sense)
- Run User Interviews (10 is usually enough). What this involves is talking to a customer probably for about an hour, whether it’s on the phone, going into their place of business, or going to where they are and just understanding everything about what motivates them, what their problems are, what their pain is, and getting a qualitative view of what they’re experiencing.
- Usability testing sessions (3–5 is okay). You only need three to be able to catch the most critical and important UX bugs.
The most important thing you can do is to get people to use your app in front of you & nudge them to give honest feedback
Ask users to perform a task without any input from your side. Resist the urge to help out or say anything!
- Aim for crafting a Minimum Remarkable Product, fast. We’ve heard a lot about minimum viable products over the years, but a new term I found from YC is the idea of the minimum remarkable product.
The point is not simply to be viable viz. self-sufficient, because that indicates you waited too long. What you want initially is to be remarkable. You want a single feature or thing about the product that at least one person sees real value in. Then you grow from there.
You want a single feature or thing about the product that at least one person sees real value in
- Launch your product when it’s better than your competitors
- Focus only on the thing that gets you to the next milestone. Don’t focus on anything else. Don’t go to conferences, don’t write blog posts, don’t read the news. It’s almost impossible not to, but try not to do any of the things that aren’t getting you to your next milestone viz. product-market fit.
- Optimise for learning rather than revenue. When you’re trying to make discontinuous improvement, optimize for learning. Ask yourself, ‘what is my biggest unknown right now? What’s the number one thing that I do not know about my business that I need to learn?’
Prioritize to learn that thing. When you do this, it might seem like a low-effort, low-priority task but you will end up rewriting your whole priority list.
When you’re trying to make discontinuous improvement, optimize for learning
How do you know you’ve achieved product-market fit?
This is a very common question early-stage founders have. There are three key metrics you should be tracking:
- Returning usage
- Net Promoter Score (NPS)
- Paying customer renewal rates
- Returning usage is simply tracking people who come back within a day, three days, seven days and thirty days. If you track this metric, more than anything else this is the indicator that things are working.
- Net Promoter Score (NPS). If you’ve ever answered the question, ‘Would you recommend this product or service to a friend?’ on an app or website, that’s NPS. It’s one question and you rank from zero to ten.
The percentage of people who answer nine or ten are promoters.
The percentage of people who answered zero to six are detractors.
And the people who answer seven or eight are thrown out.
If NPS is above 50, then you’ve probably achieved product-market fit. In the early days it’s a sign you’re doing pretty well. The way this metric is built, it can also get negative, and that’s where it will most likely start.
3. Paying customer renewal rates. When you have paying customers, look at their renewal rates.
Renewal rates are looking at the percentage of people who are eligible to renew, and what percentage of those people renewed, and that’s cohort-based so renewal rates are a great metric to track.
Feel the churn. A lot of people use churn because it’s easier to calculate but churn can be deceptive. Churn is just looking at the number of subscribers lost divided by total active subscribers in any given period.
The main issue is churn is not cohort-based while renewals are cohort-based.
What metrics can I safely ignore?
- Signups are not as important as Active Users. If you have good returning usage, signups translate to active users quite well. If you have bad returning usage, then signups completely drop off, and you have few active users.
- Conversion Rates aren’t super important in the beginning compared to some of the other metrics.
Eg. For SAS products, conversion rates all start low and they build over time.
When you have PMF, people are fighting to get to your product
Three Pitfalls early-stage founders need to watch out for
1. Don’t focus on growth too early
I push companies to talk to their users, build what they want, and iterate quickly. Growth is a natural result of doing these three things successfully. Yet, growth is not always the right choice. If you have not yet made something your customers want — in other words, haven’t found product-market fit, it makes little sense to grow.
Poor retention is always the result.
If you have an unprofitable product, growth drains cash from the company
Very early a startup must choose the one or two key metrics it will use to measure success, then founders should choose what to do based nearly exclusively on how the task will impact those metrics.
When your early-stage product isn’t working it’s often tempting to immediately build new features to solve every problem the customer seems to have instead of talking to the customer and focusing only on the most acute problem they have.
2. Fake work & chasing fake numbers
In general, startups get distracted by fake work. Fake work is both easier and more fun than real work for many founders. Two particularly bad cases are raising money and getting personal press; many promising founders end up spending too much time on one or (usually) both of these which nearly always ends badly, but the list of fake work is much longer.
It’s quite easy for a low-value work to unnoticeably creep into your schedule and it takes a lot of work and effort to not let this happen
Real startup progress is when you’re focused on things that move the needle for your startup and in the beginning, the best way to show this is through growth, in particular growth of your primary KPI.
The best way to show real startup progress is through growth of your primary KPI
Your primary KPI almost always is either revenue or active users and you should always be setting weekly goals for this. To move the needle on the KPI is the highest leverage thing you can be doing. It always comes in the form of tasks that involve talking to users and building, and iterating your product, nothing else.
3. Ignoring Unit Economics
If you have an unprofitable product, growth drains cash from the company.
As Paul Buchheit of Gmail fame likes to say, it never makes sense to take 80 cents from a customer and then hand them a dollar back. The fact that unit economics matter a lot shouldn’t come as a surprise, but too many startups seem to forget this basic fact.
If you hold yourself to the standard of making a product that is so good people spontaneously recommend it to their friends, and you have an easy-to-understand business model where you make more than you spend on each user, and it gets better not worse as you get bigger, you may not look like some of hottest companies of today, but you’ll look a lot like Google and Facebook.
— Sam Altman (OpenAI, Y Combinator)
Understanding your users is critical for early-stage startups
Talking to users helps you with three things.
- It helps you convert them into customers and revenue,
- it helps you understand if you’re on the right track or not, and
- it helps you figure out your product’s roadmap and that you’re building a product that solves users’ burning pains
How to talk to users at the Idea Stage
- Find first users with problem
User 1: Yourself (founders)
Test your user interview strategy on yourself. Try to walk through a situation where you’ve encountered that problem.
Users 2–10: Friends, coworkers, intros
You don’t have to talk to thousands of people. Every good user research strategy begins with just one or two people.
The critical feature here is executing an unbiased and detailed customer or user interview strategy rather than just trying to pitch your idea to them.
Good user research strategy begins with just one or two people
- Drop by in person
- If you truly think that you’re solving a problem that your target customer base is facing, you’ll be doing them a favour and helping them out by taking 15 minutes and learning more about their problem.
- Industry events
Pay attention to individual users.
User need often change in response to what you build for them.
Between users that will sign up quickest vs those who’ll pay most, go for users that’ll sign up faster. They’ll be your early adopters & will require expending less effort to reach a sale.
If you have an idea where there’s no way to reach users to recruit manually, that is a bad idea.
Launch before you think you’re ready
The first thing Y Com always tells founders is to launch their product right away; for the simple reason that this is the only way to fully understand customers’ problems and whether the product meets their needs.
Counterintuitively, launching a mediocre product as soon as possible, and then talking to customers and iterating, is much better than waiting to build the “perfect” product.
This is true as long as the product contains a “quantum of utility” for customers whose value overwhelms any warts that might present.
The only way to fully understand customers’ problems and whether the product meets their needs is to launch your product right away & iterate in response to user feedback
Find ways to talk to your target market
At this stage, founders are still trying to figure out what needs to be built and the best way to do that is to talk directly to customers.
For example, the Airbnb founders originally offered to “professionally” photograph the homes and apartments of their earliest customers to make their listings more attractive to renters. Then, they went and took the photographs themselves.
The listings on their site improved, conversions improved, and they had amazing conversations with their customers.
Prioritise core features for users
Talking to users usually yields a long, complicated list of features to build. One piece of advice that YC partner Paul Buchheit (PB) always gives, in this case, is to look for the “90/10 solution”.
Look for a way in which you can accomplish 90% of what you want with only 10% of the work/effort/time. If you search hard for it, there is almost always a 90/10 solution available.
Most importantly, a 90% solution to a real customer problem that is available right away, is much better than a 100% solution that takes ages to build.
Fail fast & iterate
The most important tasks for an early-stage company are to write code and talk to users.
For any company, software or otherwise, this means that to make something people want: you must launch something, talk to your users to see if it serves their needs, and then take their feedback and iterate.
Focus on a niche group of users who have a burning pain
In other words, recruiting 10 customers who have a burning problem is much better than 1000 customers who have a passing annoyance.
One counter-intuitive idea the monopoly question always leads me to is that you want to start with a small market. Then, take over that market and somehow grow over time. The most common mistake that is made by businesses is to go after markets that are too big. This, in my experience, is especially acute on the consumer side of things. Everyone seems to be trying to go after enormously big markets.
— Peter Thiel (Zero to One)
5 useful questions to ask your users
1. What’s the hardest part about [doing this thing]?
The best startups are looking for problems that people either face regularly or are painful enough to warrant solving.
This question can help confirm for you whether the problem that you’re working on is actually one that real users feel is a pain point and actively want to solve in their life.
2. Tell me about the last time you encountered that problem…
The goal of this question is to extract context around the circumstances in which the user encountered that problem.
Try to extract as much information as you can about the context in which they began solving this problem so that as you develop your product, you’ll be able to reference real-life examples of past problems that potential users have had, and you can overlay your solution on top of that to see if it would have helped in that particular circumstance.
The question on “Tell me…” is huge. I love this for so many reasons. It’s open-ended enough that you’ll get many nuggets from your users.
3. Why was that hard?
The reason why you want to ask this question is because you’ll hear many different things from different people.
The benefit from asking this question is not just to identify the exact problem that you may begin to solve with your solution to this problem, but you’ll also begin to understand how you market your product, how you explain to new potential users the value or the benefits of your solution.
Customers don’t buy the ‘what’. They buy the ‘why’
Answers that you get from customers to this question of why will inform your marketing & your sales copy as you build out the rest of your product.
4. What, if anything, have you done to try to solve the problems?
If potential customers are not already exploring potential solutions to their problem, it’s possible that the problem that you’re trying to solve is not a burning enough problem for customers, for them to be even interested in your better solution to this product. So this question tries to get at the root of that issue. Is the person who encounters this problem already trying to solve this?
You want to ask this question for two reasons:
- to figure out whether the problem that you’re solving or you’re working to solve is even something that people are already looking for solutions to.
- what is the competition out there? What will your product be compared against as you end up rolling out your solution and offering it to end customers?
5. What don’t you love about the solutions you’ve tried?
This is the beginning of your potential feature set.
This is how you begin understanding what the features are that you’ll build-out for your better solution to the problem.
This question specifically targets the existing solutions that they’ve already tried. These are specifics and you can begin to figure out what the differences between your new solution and the existing solutions already in the market will be.
Developing a strategy for user research is an essential component for success. This will give you a clear path to start the process.
3 Common Errors in conducting user interviews (adapted from the book ‘The Mom Test’)
- Do not pitch your idea. Instead, extract data that will help improve your product or positioning.
- Do not talk about hypotheticals— what the product could be. Instead, talk about specifics that has occurred in the user life.
e.g don’t ask questions such as: if we built this feature, would you be interested in using it or would you be interested in paying for it?
Instead, we should ask them questions about their life in broader ways to extract context around how they arrived at this problem. Learn about their motivations.
This is not just about how to talk to users, but also a framework to decide who are the best first customers:
$ Cost of Problem — Frequency — Budget.
3. Instead of talking, really listen to users. Take notes.
Ready to go deeper?
Developing a strategy for user research is an essential component for success. The above suggestions will give you a clear path to start the process.
As a rule of thumb, everyone in the core team should be talking to users, watching user sessions & validating assumptions against actual user feedback.
If you’re the CEO, talking to users is an essential part of your job description and you need to carve out time to do so regularly, not only till you achieve PMF but also afterwards.
All of these suggestions stem from applied research toolkits. These are good tips, and they’re good enough for founders with limited resources, but high-quality, strategic research that research professionals can provide maturing companies can often lead to faster development, increase revenues & maximise user retention & growth.
You should consider onboarding a UX Researcher on your team if as a founder you:
1. Are getting overwhelmed with managing all the different sources of user data (Interviews, customer feedback, ongoing listening, secondary research, assumptions & brainstorming sessions, app & web analytics etc), organising it & extracting actionable insights from it
2. Need to create a research repository so that user research & product insights are documented & available to future employees
3. Need help planning a user research strategy & roadmap that aligns with your product roadmap
4. Are growing rapidly & unable to talk to users along with all your other tasks
5. Need to validate your existing prototypes & MVP with actual users
6. Need to validate market & analytics insights by conducting deep qualitative user interviews & getting inside their heads
7. You have achieved MVP & need to sniff out leaks and optimise your user journeys to maximise growth aka. scale
8. Don’t yet have an onboarding flow to onboard new users to your product that maximises user retention & growth
Who Am I?
Hi there, I’m Yash.
I’m a User Experience Researcher based out of Mumbai, India.
I use insights gleaned from deep user research, accessibility best practices & inclusive design to create massive impact on user experience, with a focus on maximising user conversion, retention & growth as well as product usability.
If you are an early-stage organization dealing with unique, challenging & complex problems at the bleeding-edge of users, business & tech, please connect with me to see how I might be able to help solve your most pressing problems.