Home/Business/Why Startups Fail
Loading...
Why Startups Fail cover

Why Startups Fail

A New Roadmap for Entrepreneurial Success

4.2 (463 ratings)
26 minutes read | Text | 9 key ideas
What if the key to your startup's success lies in understanding why others have failed? In "Why Startups Fail," Harvard Business School professor Tom Eisenmann unveils the treacherous traps that ensnare even the most promising ventures. Delve into the missteps of founders misled by early triumphs or trapped in the hypergrowth spiral. With six sharply defined patterns like Bad Bedfellows and Speed Traps, Eisenmann dissects the anatomy of failure with stories ranging from a bold electric vehicle project to a quirky dog-walking service. This book isn’t just a manual on avoiding pitfalls; it’s a strategic compass guiding entrepreneurs toward sustainable triumph. Whether you're a fledgling innovator or a seasoned disruptor, Eisenmann’s insights arm you with the foresight to navigate the perilous startup landscape with confidence.

Categories

Business, Nonfiction, Economics, Leadership, Technology, Audiobook, Management, Entrepreneurship

Content Type

Book

Binding

Hardcover

Year

2021

Publisher

Crown Currency

Language

English

ASIN

0593137027

ISBN

0593137027

ISBN13

9780593137024

File Download

PDF | EPUB

Why Startups Fail Plot Summary

Introduction

Imagine standing in the ruins of what was once your dream—a startup that began with boundless promise but now lies in ashes. Your bank account is empty, your team scattered, and that revolutionary idea that kept you awake at night now feels like a distant mirage. This scene plays out thousands of times each year across innovation hubs worldwide, yet the patterns behind these failures remain surprisingly consistent and predictable. While we celebrate the unicorns and their visionary founders, we rarely dissect the valuable lessons hidden in the wreckage of ventures that didn't make it. This exploration of startup failure patterns offers entrepreneurs a powerful lens through which to evaluate their own ventures before critical mistakes occur. By understanding the six distinct ways startups typically derail—from building products nobody wants to scaling prematurely—you'll develop an early warning system for your own business. You'll learn to recognize when customer enthusiasm might be misleading, how to determine if your team has the right capabilities for your specific challenge, and when the pursuit of ambitious visions requires too many simultaneous miracles to be realistic. Most importantly, you'll discover that failure isn't random but follows identifiable patterns that, once recognized, can be navigated with greater confidence and clarity.

Chapter 1: False Starts: The Danger of Building Without Customer Research

Sunil Nagaraj was convinced he had identified a game-changing opportunity in online dating. After graduating from Harvard Business School, he founded Triangulate in 2009 with a bold vision: to build a "matching engine" that would analyze people's digital footprints—the websites they visited, content they consumed, and social media activity—to create more compatible romantic pairings than traditional dating sites that relied on self-reported information. Without conducting extensive customer research, Nagaraj and his team rushed to build their technology. When venture capitalists showed little interest in licensing the matching engine to established dating sites, Triangulate pivoted to launch its own dating service called Wings on Facebook Platform. The service offered a unique twist: it supplemented objective data with "social proof" in the form of a friend's endorsement—an online version of the "wingman" concept familiar to singles. However, this pivot happened without meaningful validation of whether users actually wanted the wingman feature. Wings initially attracted users through press coverage and Facebook promotion, but engagement metrics told a troubling story. Only 27% of new users in California returned in the second week after signing up. Virality was disappointingly low, and revenue remained minimal. After another pivot to a service called DateBuzz, which let users vote on various elements of others' profiles before viewing their photos, Triangulate still struggled to gain traction. In March 2011, with $200,000 of cash remaining but burning $50,000 monthly, Nagaraj made the difficult decision to shut the company down. "We built something people didn't want," Nagaraj later reflected. "I was so enamored with our technology that I never stopped to thoroughly validate whether it solved a real problem for daters." This painful experience exemplifies the "False Start" pattern—rushing to launch a product before conducting enough customer research. By giving short shrift to early and accurate customer feedback and neglecting to test assumptions with minimum viable products, Nagaraj's team simply ran out of time and money before finding product-market fit. The lesson is clear: before writing a single line of code, entrepreneurs must undertake a thorough design process. This includes customer interviews to identify unmet needs, user testing of existing solutions, competitor analysis, and prototype testing. Only after these steps should they move to MVP testing, which puts a facsimile of a real product in consumers' hands to gauge demand. When you feel the urgent desire to start building immediately, that's precisely when you should slow down and invest time in understanding your customers more deeply. Remember that your initial concept is merely a hypothesis, not a proven solution. The most successful entrepreneurs approach their ventures with genuine curiosity about customer problems rather than unwavering conviction in their particular solution. This mindset shift—from solution advocate to problem explorer—can make the difference between a costly false start and a venture built on solid customer understanding.

Chapter 2: Bad Bedfellows: When Team and Partners Misalign

Alexandra Nelson and Christina Wallace met at Harvard Business School and bonded over a shared frustration: as tall women, they struggled to find professional clothing that fit properly. This personal pain point inspired them to launch Quincy Apparel in 2011, offering work apparel for young professional women with a unique sizing approach that specified four separate measurements—similar to men's suiting but adapted for women's bodies. The co-founders did everything right at the beginning. They conducted trunk shows where women could try sample outfits and place pre-orders. The response was impressive: 50% of attendees made purchases averaging $350. Their survey revealed that 57% of respondents considered fit to be the most important factor when choosing work apparel, and 81% had trouble finding clothes that fit well. Armed with this validation, Nelson and Wallace quit their consulting jobs and launched Quincy with $950,000 from angel investors. Initial sales were strong, as were repeat purchases: 39% of spring collection customers subsequently bought items from the fall collection. However, beneath the surface, fundamental tensions were brewing. Nelson, with her background in finance, prioritized operational efficiency and cost control. Wallace, who had worked in the arts, emphasized brand building and customer experience. These different approaches created friction in daily decision-making. Meanwhile, their manufacturing partners in China repeatedly delivered garments with quality issues, resulting in a 35% return rate that eroded their already thin margins. After just nine months in business, Quincy was on track to run out of cash in two more months. The co-founders disagreed about how to proceed. Wallace wanted to shut down "gracefully," paying vendors in full and offering severance to employees. Nelson preferred to continue searching for new investors while reducing complexity by offering a narrower range of sizes. After a tense boardroom showdown, Nelson's plan prevailed and Wallace was forced out. However, after just five weeks alone at the helm, Nelson saw that her plan wasn't working. New investments were not forthcoming, and she too threw in the towel. Quincy had fallen victim to the "Bad Bedfellows" pattern—despite identifying a promising opportunity, the startup failed to assemble the resources required to capitalize on it. The founders lacked apparel industry experience, their team members weren't flexible enough for startup life, their investors didn't provide sufficient guidance, and their manufacturing partners gave them poor service. These misalignments were the source of Quincy's operational problems and, ultimately, its failure. When selecting co-founders, entrepreneurs should look beyond friendship and shared enthusiasm. The critical questions involve how you make decisions under pressure, handle conflict, and prioritize competing values like growth versus profitability. "We were great friends who shared a vision," Wallace later reflected, "but we never discussed how we'd handle disagreements when millions of dollars and our livelihoods were at stake." Similarly, early hires and key partners should be evaluated not just on their technical capabilities, but on their alignment with the venture's core mission and operating philosophy. Remember that in the pressure cooker of startup life, small differences in approach can magnify into irreconcilable conflicts. Taking time to establish clear decision-making processes, communication norms, and explicit role definitions isn't bureaucratic overhead—it's essential infrastructure that can prevent relationship breakdown when inevitable challenges arise.

Chapter 3: False Positives: Mistaking Early Adopters for the Mainstream

Lindsay Hyde founded Baroo, a pet care provider, in mid-2014. After her original concept of office-based pet daycare showed low demand, she pivoted to offering pet care services in apartment buildings. To gauge demand, Hyde surveyed 250 pet owners at a festival and learned that 80% were not satisfied with their dog walker and a similar percentage said they'd use a pet daycare in their apartment building. When Baroo launched at Ink Block, a newly converted luxury apartment building in Boston, the results were spectacular. About 60% of residents owned a pet, and an impressive 70% of these pet owners used Baroo's services. Hyde was thrilled with this strong adoption rate and took it to mean that high demand would be replicated with other apartment buildings. "The data was clear," she thought. "Our service solves a real pain point for urban pet owners." As word spread about Baroo's hot new pet concierge service, Hyde was flooded with requests from other property managers. Plans to steer clear of venture capital were set aside, and Baroo rapidly expanded to Chicago, Washington D.C., and New York. But as the company scaled, Hyde noticed troubling patterns. In new buildings, adoption rates were significantly lower than at Ink Block. While early adopters had enthusiastically embraced the service, mainstream pet owners were more hesitant, often preferring to stick with existing arrangements they'd made with independent dog walkers. What Hyde hadn't realized was that Baroo's initial blockbuster success was misleading due to three factors unique to the launch: First, Ink Block was brand-new, so residents lacked a preferred pet care provider and didn't incur switching costs. Second, many units were occupied by a Hollywood production crew who had brought their pets, had no time to care for them, and had generous per diems. Finally, Boston experienced record-breaking snowfall that month, so nobody wanted to walk their dogs, leading to multiple daily service requests. By August 2017, Baroo had earned $600,000 in revenue for the first half of the year but had an operating loss of $800,000. Despite projecting a 50% increase in revenue for the next six months, the forecast still showed a $700,000 operating loss. When venture capital funding failed to materialize, Hyde approached potential merger partners, but all deals unraveled, and she shut down Baroo in February 2018. The false positive had led Hyde to expand too rapidly, and the startup simply didn't have adequate resources to operate successfully in four cities. "We mistook our early traction as evidence of product-market fit," Hyde reflected. "In reality, we had product-market fit with a very specific subset of customers under unique circumstances, not with the broader market we were targeting." To avoid false positives, entrepreneurs should conduct early research that exposes differences between early adopters and mainstream customers. When surprised by positive responses from early adopters, they should consider whether the broader market will respond similarly, asking "What might be unusual about these early adopters?" Testing your solution with more skeptical, mainstream users early on can provide crucial reality checks before committing to major expansion. Remember that crossing the chasm from early adopters to mainstream customers often requires significant changes to your product, messaging, and business model. What delights innovators and early adopters may confuse or alienate the pragmatic majority who form the basis of a sustainable business.

Chapter 4: Speed Trap: The Perils of Premature Scaling

Jason Goldberg and Bradford Shellhammer launched Fab.com in 2011 as a flash sale site offering deep discounts on products selected for their aesthetic appeal and functional excellence. Fab was an instant hit, selling $600,000 in merchandise in its first twelve days. By year-end, the startup had over a million members and had raised $48 million in venture capital. "We're going to be the Amazon of design," Goldberg confidently declared to investors and media. To prepare for further expansion, Fab secured an additional $120 million in 2012. That year, the venture sold an impressive $115 million of merchandise, up from $18 million in 2011. However, Fab lost $90 million in 2012. Why? Because to supercharge growth, Fab had invested $40 million in marketing. Unfortunately, the shoppers attracted through ads were less obsessed with design than Fab's early customers and were much less likely to purchase multiple times or spread word of its offers. Compounding the cash drain was the cost of breakneck expansion into Europe, where Fab had been quickly cloned by several startups. To jump-start its move abroad, Fab acquired three overseas flash sales startups, committed $12 million for a ten-year warehouse lease, and staffed a European headquarters in Berlin with 150 employees. By August, Fab had 1.4 million registered members in Europe generating 20% of company sales, but its European operations were hemorrhaging cash. In April 2013, Goldberg announced a pivot away from flash sales, shifting to a broader selection of products and bringing inventory in-house rather than relying on drop-shipping. In June 2013, Fab raised $165 million in new venture capital at a $1 billion valuation. But as Goldberg later admitted, "The reality was, we had failed; we needed $300 million to pursue the plan-of-record and support the large investments already underway." Fab's cash burn rate peaked at $14 million per month, and by mid-2014, after massive layoffs and restructuring, it was a shell of its former self. Its assets were eventually sold for about $30 million. Fab had fallen victim to a "Speed Trap"—expanding at an unsustainable pace and losing product-market fit as it grew beyond its first "golden" cohorts of design-obsessed customers. "We were intoxicated by growth," Goldberg reflected. "We confused growth with success and didn't pay enough attention to unit economics until it was too late." The pressure to maintain growth at all costs led to compromises in product quality, customer experience, and organizational health. Before stepping on the growth accelerator, entrepreneurs should apply the RAWI test: Are you Ready (with proven unit economics and sustainable competitive advantages), Able (with the operational capacity to handle growth), Willing (to accept the personal and organizational consequences of hypergrowth), and Impelled (by competitive dynamics that reward first movers)? Only when all four conditions are met should you pursue aggressive scaling. Remember that venture capital often creates perverse incentives around growth. While investors may encourage rapid expansion to capture market share, ultimately they're betting on your judgment as a founder. Having the discipline to grow at a pace that preserves product quality and customer experience is often the wiser long-term strategy, even if it means saying no to seemingly attractive growth opportunities.

Chapter 5: Missing Resources: When Critical Talent and Capital Run Dry

Anthony Soohoo founded Dot & Bo, an online retailer of home furnishings, in 2013. The startup's key differentiator was its carefully curated collections of décor and furniture, presented as components of cohesive room designs. Each collection was conceived as an episode of an imaginary television show (e.g., "Einstein's Office," "Modern Outlaw"), with the products as "characters." This storytelling approach resonated deeply with millennials seeking design inspiration for their first homes. Monthly sales grew rapidly, from $10,000 in February 2013 to $750,000 in December 2013. Dot & Bo's promotional emails were opened at 2-3 times the industry average. By 2014, revenue reached $15 million, and the lifetime value of customers was projected to be about $200, with each customer costing only $40 to acquire—a far better ratio than competitors. Investors were impressed, and the company raised $19.5 million in venture funding. However, exploding growth strained Dot & Bo's supply chain. The startup sourced products in various ways: some suppliers shipped in volume to Dot & Bo's warehouse in advance; others sent smaller shipments after orders were placed; still others drop-shipped directly to customers. This complexity resulted in variable delivery times and a concerning gap between the post-purchase Net Promoter Score of 41 and the post-delivery NPS of -17. Customers loved the products they ordered but were frustrated by unpredictable delivery and poor communication. Soohoo realized he needed a seasoned manager to lead operations, but his first hire lacked e-commerce experience. One of the new VP's first tasks was selecting an enterprise resource planning (ERP) system, but the team's collective inexperience led to a poor choice. The system couldn't handle Dot & Bo's complex sourcing methods, resulting in inventory tracking problems, delayed orders, and customer service issues. "We had the wrong person making a critical decision about technology that was fundamental to our business," Soohoo later reflected. In May 2015, with operations improving and revenue projected to reach $40 million for the year, Soohoo set out to raise $30 million in Series C funding. Unfortunately, investor sentiment toward e-commerce companies had soured after seeing consumer internet stock prices decline by an average of 40%. After four months of futile fundraising, Dot & Bo's board decided to try selling the company instead. They received a few bids, including one for $50 million, but as negotiations dragged on, capital reserves dwindled. In September 2016, Dot & Bo's bank called its loan, and the startup shut down. Dot & Bo fell victim to the "Missing Resources" failure pattern—it sustained product-market fit as it grew but couldn't mobilize the resources needed to continue expanding. Specifically, it was hampered by failure to recruit the right senior specialists and couldn't raise capital due to a sector-wide investment drought. "We had a business that customers loved," Soohoo said, "but we lacked the operational expertise to deliver consistently excellent experiences at scale, and when we needed capital to fix those issues, the market had turned against our category." To mitigate such risks, entrepreneurs should be alert to boom-bust dynamics in capital markets, raise more capital than projections show they'll need, and preserve flexibility to cut costs should the need arise. Equally important is identifying and filling crucial skill gaps before they become critical. This requires honest self-assessment about your team's capabilities and limitations. For functions outside your expertise, recruiting experienced leaders isn't a luxury—it's a necessity. Remember that financing risk is an unavoidable aspect of the startup journey. Market sentiment toward entire sectors can shift rapidly and unpredictably. Building a cash cushion during favorable fundraising environments and having contingency plans for extending runway during downturns can mean the difference between survival and shutdown when capital markets freeze.

Chapter 6: Cascading Miracles: Navigating Moonshot Ventures

Shai Agassi, a former SAP executive, founded Better Place in 2007 with a bold vision to revolutionize transportation. His concept was to build a network of battery-swapping stations for electric vehicles, where drivers could exchange depleted batteries for fully charged ones in less time than it takes to fill a gas tank. This approach would address the "range anxiety" that deterred many consumers from buying electric cars and accelerate the transition away from fossil fuels. Agassi was a charismatic leader who painted a compelling picture of a world free from oil dependence. "Oil is the greatest challenge to the security of the West and the greatest reason for the West's support of despotic regimes," he declared in his TED talk. His vision captivated investors, and he raised an astonishing $850 million from HSBC, Morgan Stanley, General Electric, and others. Israel was chosen as the first market, with Denmark to follow. The Israeli government provided tax incentives for electric vehicles, and Renault agreed to manufacture cars with swappable batteries. Better Place built 38 battery-swapping stations across Israel, each costing about $2 million. The stations were marvels of engineering, with robotic systems that could remove a depleted battery and install a fresh one in about five minutes. The company also developed software to help drivers plan routes with swapping stations along the way. Everything seemed poised for success—except for one crucial factor: customer demand. By 2013, Better Place had sold only about 1,400 cars in Israel, far short of the 100,000 Agassi had projected. The company burned through cash at an alarming rate—reportedly $500 million by early 2013. Agassi was ousted as CEO in October 2012, and in May 2013, Better Place filed for bankruptcy. Its assets were eventually sold for less than $12 million, representing one of the largest startup failures in history. Better Place fell victim to the "Cascading Miracles" failure pattern—it required multiple low-probability events to all occur for the venture to succeed. The startup needed to simultaneously: 1) convince consumers to change their behavior by adopting electric vehicles; 2) persuade car manufacturers to design vehicles with swappable batteries; 3) build expensive infrastructure before having many customers; 4) secure government support through tax incentives and regulations; and 5) raise vast amounts of capital to fund it all. When just one of these elements faltered—in this case, consumer adoption—the entire venture collapsed. As venture capitalist Vinod Khosla has noted, "Any one miracle in a business plan is acceptable, maybe even necessary. It's when you start stacking them that you run into trouble." The lesson for entrepreneurs is to be wary of business models that require multiple miracles to align. Instead, consider a more incremental approach that allows for testing and validation at each stage. If you must pursue a moonshot venture, look for ways to create a "base camp" business—an ancillary offering that leverages some of your technology while generating revenue and providing proof of concept as you work toward your ultimate vision. Tesla, for instance, started with a high-end sports car before moving to mass-market vehicles, allowing them to refine their technology while generating revenue and building brand cachet. Remember that while moonshots can change the world when successful, they're inherently high-risk endeavors. Breaking down a grand vision into smaller, independently valuable milestones can create multiple paths to success and reduce the need for all miracles to occur simultaneously.

Chapter 7: Running on Empty: Knowing When to Pivot or Quit

Jason Jacobs founded FitnessKeeper in 2008, launching the RunKeeper app that allowed runners to track their workouts using their smartphone's GPS. The app gained traction quickly, reaching 5 million users by 2011. Jacobs raised $10 million in venture capital to build what he called "the Facebook of fitness"—a platform that would connect various fitness devices and apps, creating a comprehensive health ecosystem. Despite its large user base, RunKeeper struggled to generate significant revenue. The company tried various monetization strategies: a premium subscription tier, in-app advertising, and selling training plans. None produced the growth investors expected. "We had millions of users who loved our product," Jacobs recalled, "but we couldn't figure out how to make money from them at scale." Meanwhile, competition intensified as giants like Nike and Under Armour entered the space, and new entrants like Strava gained popularity with serious athletes. By 2015, FitnessKeeper was running low on cash. Jacobs faced a difficult decision: raise more money, pivot to a new business model, sell the company, or shut down. After exploring his options, he concluded that selling was the best path forward. In 2016, athletic shoe company ASICS acquired FitnessKeeper for $85 million—a respectable outcome, though less than what some investors had hoped for. Jacobs later reflected that he should have recognized the warning signs earlier: "We were burning cash without a clear path to profitability. The market was getting crowded, and we didn't have a sustainable competitive advantage. I was emotionally attached to our original vision, which made it hard to see that we needed to change course." The decision to pull the plug is complicated by several factors. Entrepreneurs are constantly told that persistence is a virtue, creating a mindset where quitting feels like personal failure. The ambiguity of a struggling startup's situation allows founders to cling to glimmers of hope—maybe that big customer will finally sign, or perhaps the next investor pitch will succeed. Many founders also feel a deep moral obligation to employees who depend on the company for their livelihoods and to investors who believed in their vision. Mike Gozzo, founder of a failed tech startup, described the emotional toll: "The thoughts of what we could have done better drown out the faint voices of the morning news. The feeling is paralyzing as I stare blankly at my screen and continue to seek some sense of purpose. I have failed those that rely on me and I have to find a way to put on a good face for my family and friends." When considering whether to shut down, experienced entrepreneurs suggest asking several key questions: Are you truly out of viable moves? Have you exhausted all reasonable options for pivoting, raising capital, or finding an acquirer? Are you and your team miserable, with the emotional toll becoming unsustainable? Do you still believe in the vision that motivated you in the first place? And perhaps most practically: Is the window for a "graceful" shutdown—one where you can honor commitments to customers, pay employees and vendors, and return some capital to investors—about to close? Remember that failure, while painful, doesn't define you as an entrepreneur. Many successful founders experienced shutdowns before building thriving companies. The key is to extract meaningful lessons from the experience—about yourself, your leadership style, your risk tolerance, and the market dynamics that shaped your venture's trajectory. These insights become invaluable assets for whatever you choose to build next.

Summary

The path to startup success is paved with predictable pitfalls that claim even the most promising ventures. At their core, these failure patterns stem from fundamental misalignments: between products and genuine market needs, between founding teams and their required capabilities, between growth rates and sustainable economics, and between ambitious visions and realistic execution paths. The entrepreneurs who navigate these challenges successfully aren't necessarily smarter or luckier—they're more attuned to early warning signs and more willing to adjust course before small problems become fatal. Protect your venture by conducting thorough customer research before building solutions, selecting partners based on aligned values rather than just complementary skills, testing your product with mainstream users early to validate broader market appeal, and applying the RAWI test before accelerating growth. Proactively identify and fill crucial skill gaps, raise more capital than you think you'll need during favorable windows, and break down ambitious visions into independently valuable milestones. When facing potential failure, have the courage to ask yourself the hard questions early, and if necessary, execute a graceful shutdown that preserves relationships and your ability to bounce back stronger with your next venture. Remember that in entrepreneurship, failure is rarely final—it's simply the tuition you pay for the education that leads to future success.

Best Quote

“crucial to know how the needs of early adopters and mainstream customers differ before commencing product development.” ― Tom Eisenmann, Why Startups Fail: A New Roadmap for Entrepreneurial Success

Review Summary

Strengths: The book is accessible and clear, making it easy for readers without a business background to understand. It offers a unique perspective by focusing on the failures of startups rather than their successes. The author provides detailed case studies and clear explanations of the various situations under which startups fail. Each chapter addresses specific issues that can lead to a startup's downfall, offering valuable insights for entrepreneurs and investors. The book is highly recommended for those interested in entrepreneurship, providing a wealth of information and learning opportunities. Weaknesses: The review mentions a preference for more data and fewer anecdotes, suggesting that the book relies heavily on the author's theories and experiences rather than a broad range of data. There is also a noted focus on the VC/tech space, which may limit the applicability of its lessons to other types of startups. Overall Sentiment: The sentiment expressed in the review is predominantly positive, with a strong recommendation for those interested in entrepreneurship and business. Key Takeaway: The book provides a comprehensive and insightful analysis of why startups fail, emphasizing the importance of understanding these failures to avoid similar pitfalls in future ventures.

About Author

Loading...
Tom Eisenmann Avatar

Tom Eisenmann

Read more

Download PDF & EPUB

To save this Black List summary for later, download the free PDF and EPUB. You can print it out, or read offline at your convenience.

Book Cover

Why Startups Fail

By Tom Eisenmann

0:00/0:00

Build Your Library

Select titles that spark your interest. We'll find bite-sized summaries you'll love.