Why Startups Fail

Failure and entrepreneurship go hand in hand, because it is always risky to do something new with limited resources. While it would be extreme to say that failure is almost a badge of honour for entrepreneurs, there is no doubt that the ability to accept failure, and learn from it, is an important skill. Most startups are unsuccessful, and more than two-thirds of them never produce a positive return for investors. So, why do so many startups come to such a disappointing end? Investors tend to blame the founder, especially their lack of drive, business knowledge, or leadership skills, but this is an over simplified explanation for a much more complex situation.

A comprehensive and effective tool we can use, in order to accurately assess the risk of failure of a startup is the ‘Diamond and Square’ framework, which focuses on both the people involved in the venture, such as founders, investors, partners, and the team, as well as the idea, its execution, and its potential.

The framework consists of a diamond inside a square, where the diamond represents opportunity, and the square symbolises resources. The four corners of the outer square show the founder, the team, the partners, and the investors, while the diamond represents the customer value proposition, which is linked to marketing, technology, operations, and finally the profit formula. 

In a promising startup, all eight points of the framework are strongly aligned. In essence, a successful value proposition must be implemented effectively in technology and operations, and must be clearly communicated and made available through targeted marketing, in order to generate long-term revenue, which is higher than the cost of acquisition and the cost of delivering the value proposition. What’s more, all this must be done with the limited resources and capabilities of the founders, team, partners, and investors. The framework is therefore able to determine whether an aspiring entrepreneur has actually identified an interesting opportunity, and what kind of resources they will need to capitalise on the idea successfully. The tool allows us to anticipate and avoid many of the common mistakes made in the early stage of startups.