Why Great Startups Fail: Real Lessons from Real Founders?

Worldwide, there are over 150 million startups, and 137,000 of them launch every day, according to DemandSage. Today’s cultural approach to launching a startup is ‘launch early, launch often, fail fast, iterate fast.’ In terms of entrepreneurs’ qualities, the ability to act, make quick decisions, and grit are often praised. However, at the same time, they create a bias for action. In number 2 of our startup case studies, you’ll also see a startup founder who is an engineer. According to Harvard Business Review, this even intensifies the bias for action:

“So entrepreneurs who are engineers—like Nagaraj and his teammates—often jump into creating the first version of their product as fast as they can.”

The majority of startups today follow lean MVP development methodology. This is the best there is in terms of mitigating risks and a cost-effective approach. However, 10% of these 137,000 will fail in the first year, while 70%-80% will fail through the following 2 to 5 years. Overall, 9 out of 10 startups will end up as a learning experience. So let’s examine why startups fail.

The top 1 reason is producing a product that no one needs. In principle, the MVP methodology ensures during the discovery stage that the product has its market niche. In addition, the lean startup methodology has a nice selection of idea validation methods that cost next to nothing. However, as you’ll see, the selection of validation methods is often the weakest link in startups that end up failing. We’ll examine several failed startup case studies and draw lessons to learn from each. 

MVP Methodology for Lean Startup and Idea Validation

If you are only thinking about launching your first startup, here is some background information on the MVP development process and basic idea validation techniques.

The lean MVP development methodology always follows a path:

1. Discovery;
2. Moodboarding / prototyping;
3. Pre-development;
4. Development;
5. Launch;
6. Feedback gathering and processing.

Once you gather the feedback, the team processes it and iterates. During this process, the team size and roles can vary. The important one is the role of the Product Owner who works through these iterations to ensure the product-market fit and maximizes the value of the product.

In our article “How to Validate Your Startup Idea Before Investing in Development?”, we have already covered pre-MVP validation through pre-sales. It also mentions waitlists, user interviews, F.O.C.U.S., PEST, Porter’s Five Forces, and SWOT techniques. However, in terms of why startups fail, applying the pre-sales experimentation is often the first and foremost safeguard.

There are also many more techniques that can be used during the MVP development. For instance, a “Fake Door” technique can be used either to test the entire product or a single feature. You just place a button that does nothing that users click. You measure clicks and inform “Coming soon! Want to be notified”. Lean MVP development employs a wide variety of ways to validate, test, and challenge assumptions before implementing anything. 

In addition, we have compiled an article, “Common Mistakes of Custom MVP App Development” which provides a deeper dive into applying all of the lean MVP development tools correctly.

Case study 1 of Why Startups Fail: Nutrition B2B SaaS Startup “WePlate”

Alex Hu, while being a student on campus, struggled with adjusting to cafeteria menus. He was raised in a home where nutrition was central, and starting a student life on campus resulted in gaining weight and dissatisfaction with available choices. While there are plenty of apps that count calories, not even one works with the food served on campuses…and there are still zero solutions for that. 

From the founder’s perspective, the market is huge: count all colleges, universities, and high schools. Remaining healthy, maintaining weight, and navigating food choices in that setting would seem like a real pain point. 

So Alex Hu set out to work on an algorithm that will enable these cafeterias to set menus and an app for students to navigate the choices.

WePlate lean MVP development process

So, in terms of the MVP development process, it was as follows:

1. Discovery – The founder signed up 100 universities through cold calls.
2. Moodboarding / prototyping – UI/UX developer worked to create the interfaces and user journeys shown above, while a campus dietician from a 10,000-student US university and a nutrition researcher with a P.h.D in the field worked on information architecture.
3. Pre-development – the team selected the tech stack and made architectural choices.
4. Development – 2 backend and 1 frontend developers implemented the product.
5. Launch – when the time came to implement the solution, all universities did not return the calls. And the offer was made to cooperate for free!
6. Feedback gathering and processing – investors did not provide additional funding, as even a free offer did not yield early adopters.

As a result, the 8-month development went to waste. And in the words of a startup founder:

“ … we found it tantalizingly difficult to fundraise in a stale market (nutrition and colleges are not growing markets)…. Finally, even though college students technically needed our product, most students are more bothered about studying and their careers to pay attention to their diets.“

Lessons from WePlate failure

1. Discovery – cold calls to interview universities should be a complementary technique. It can help to better understand the problem. First, the founder should have tried some sort of pre-sales or letters of intent, or commitment to pilot. Unfortunately, clients are willing to hear out about a new product, but, especially in SaaS, then they ignore if it was not a real commitment. This is often the core reason of why startups fail. 
2. Moodboarding / prototyping. Having done prototypes, there was an opportunity to test with students. Is it catchy enough? Are they going to use it? How does it compare with what they use already? How much do they pay for it? If they don’t use anything, why?
3. Development – the team did not need to implement the entire functionality; one or two features could have been done as a ‘Fake Door’. This would have fast-tracked the product into the hands of the real users and saved costs.
4. Launch – If there had been letters of commitment to pilot launch, the team could have probably figured out how this could have increased the university’s bottom line.
5. Feedback – at this point, having implemented all the suggestions above, the team would have probably spent much less time and money (if any) and could have been looking at a round of fundraising.

Overall, Alex Hu is the startup case study where tweaking the early validation technique would have saved the day.

Case study 2 of Why Startups Fail: Dating Website “Wings” & “DateBuzz”

This startup did not use MVP methodology at all. The founder of a dating startup, Triangulate, Sunil Nagaraj, had an idea to develop a unique matchmaking algorithm and license it out to other dating sites. The idea was to pull data from social media like Facebook, Spotify, and others to match users based on their interests and preferences. With no tests done, Sunil Nagaraj approached investors who turned him down asking for proof – some signed licensing deals. 

Wings development process

So, instead, Sunil Nagaraj decided to use his own existing website and pull the data from a Facebook app. This time, investors got on board and provided $750,000 in funding. 

With that investment, they launched the Wings dating site was launched with the algorithm and a ‘wingmen’ feature, where users’ friends could vouch for them, boosting their dating profiles. Revenues were coming from small payments for sending stickers, virtual gifts, and messages. 

Observing the analytics from the product, the team realized that users did not find value in the matching algorithm or the ‘wingmen’ feature. Moreover, the features that users enjoyed were just like on any other mainstream dating site: photo, proximity, and response rate. 

With striking out on virality projected for the matching algorithm and ‘wingmen’ feature, the site’s user acquisition costs did not balance with the revenues. 

So, it was time for a big pivot: the team launched DateBuzz. This dating site focused on redistributing attention through a voting feature. Users voted on elements of a dating profile before seeing the photo. This was popular, but it still did not fix the problem of high acquisition costs. So, the DateBuzz had to shut down and return $120,000 to investors.

Lessons from Wings and DateBuzz failed startup case studies

The core MVP value is testing one’s assumptions before developing anything. This startup poured money into the algorithm and wingmen functionality without conducting any validation or testing the assumptions. It is very likely that what they discovered after doing all the work – that users do not want friends in on their dating life – could have transpired much sooner. In addition, MVP validation tools can also test ‘shareability’. All of that could have been done with a simple landing page describing the algorithm and wingmen concepts with a button “Sign up,” which then would prompt to invite two friends to get waitlisted for early access. 

With the matching algorithms, instead of building their own website, the team could have tried to source pre-sale licensing deals like the venture capitalists initially asked. It still would have required some work in terms of showing how the algorithm would work and what results it would bring. Then, sign up for at least 2-3 dating sites for either exclusive rights or early access. 

Overall, this case study shows getting feedback after the development and wasting $630,000. So, talking of why startups fail, applying the MVP framework with early validation tools could have saved over half of million dollars and months of work.

Case Study 3 of Why Startups Fail: Project Management Tool Patron.ai

The founder, Ömer Taban, is a product manager with software engineering experience in back-end and embedded. Through his work, he realized that existing project management tools are simply record keepers, lacking the useful reporting features for project managers. Having taken this idea, without any validation, he proceeded with development, doing the backend himself while his friend was doing the front-end.

Patron.ai development process

Developer communities are excited to learn about new tools from fellow developers. So, when Ömer Taban started posting about this tool on LinkedIn and X, it got great engagement. Moreover, someone posted about this app on Product Hunt. They got 600 sign-ups almost overnight. However, 8 months of development, and 4 weeks after launch, all users churned. There was interest, but there was virtually no retention. In the founder’s words:

“Most of them mentioned they liked the product but it’s very costly for them to migrate. Also, our value proposition was not outstanding so they had some doubts about the value as well.”

When you think of all the projects, tasks, permissions, workflows, and integrations – moving from one project management tool like Asana, Jira, or Trello will be incredibly effort-consuming. In addition, those tools get the job done, and just a couple of interesting features do not really make it all worth it. 

Having analyzed the feedback, the team of two decided to pivot. Instead of a project management tool, they did a gamification tool for development teams that integrated with Jira. This time, they failed to gain any traction. In the end, they spent $12k and did not make any revenue. This can join a category of startup case studies where entrepreneurial and engineering mindsets combined create a bias for action.

Lessons from Patron.ai

In our previous article, we wrote that pre-sales, waitlists, and user interviews are valid testing tools. However, there are techniques like social media engagement that are now often referred to as ‘vanity metrics’. This case study is a strong proof that curiosity does not mean purchase intent. 

Had they done experimentation with pre-sales, used F.O.C.U.S. technique, or conducted in-depth user interviews, they would have landed on the ‘cost’ of transitioning to a new project management tool much sooner. In addition, they could have been able to increase the value of their solution to incentivize teams to move. For instance, some common questions to ask in user interviews are:

• What solution are you using currently?
• What features of that solution do you use most often?
• Does the tool satisfy you in terms of the insight you get from it?
• What frustrates you with your current tool?
• If you got a smarter solution, would you consider switching from your current tool?

Of course, there would be more questions asked, but those basic ones would have been insightful enough to create a better product or choose to pivot early based on user interviews and other validation tests.

Final Words

Lean MVP development provides a wealth of tools to ensure you develop a product that has a real market. However, it can be due to a cultural influence or an engineering mindset that forces entrepreneurs to rush into action before proper testing.

Out of the presented case studies, the most significant loss was suffered by a startup that decided to omit any lean MVP approach altogether. However, it is important to recognize that most validation tools or assumption testing ones can cost from virtually nothing to a few hundred dollars. In addition, the loss is not only in money, but in time and effort. In case study 3, they spent $12k, but the founder is likely to have been doing it for free for months, and the main spend was due to marketing and paying the front-end developer. Therefore, in order to not become one of the startup case studies on why startups fail, applying the available range of idea validation techniques is paramount.

FAQ: Why Great Startups Fail: Real Lessons from Real Founders?