• Your startup has a statistically unfavorable road ahead, as history shows 75 percent of venture-backed startups fail.
• How your particular startup performs over the long run depends on a slew of factors happening right now.
• A suffering ROI, trying to serve everyone, and not actively shifting to meet market demands are all signs your startup may collapse.
It’s old news that startups die often, fast and hard. Whatever stats you set store by — the one that says 75 percent of venture-backed startups fail or the one about 50 percent of all businesses failing within five years — the conclusion is the same: Your startup has a statistically unfavorable road ahead.
Of course, that doesn’t necessarily mean you should flip a u-turn at the next street and cut your losses (though it might). Every business is different, and how your particular startup performs over the long run depends on a slew of factors happening right now.
Those factors include how well your product resonates with your market, how healthy your ROI is, even how well you as leader are shifting to meet the demands of an unpredictable marketplace.
The truth is, sometimes cutting tail and running may be your best option, giving you the time and energy to start a more viable (and profitable) business elsewhere. In the words of Tim Ferriss, “Being able to quit things that don’t work is integral to being a winner.”
With that in mind, here are three signs your startup is on its last legs — signs pulled directly from startups whose founders left them dead and buried.
1. You’re drowning in a negative ROI
At its core, business is simple. You spend money to make money. And ideally, you make more money than you spend. Unfortunately, many businesses close their doors for one dead-simple reason: They’re not making a healthy profit. And a suffering ROI can happen for a lot of different reasons.
Sometimes, a lofty overhead and under-priced products create that negative ROI. Other times, poorly managed finances — you've hired too many people or bought too many tools before your business is ready — does the trick.
Airware, for example, a startup that had over $100 million backing it, shut down due to overspending. Here’s how CB Insights explained its death: “Airware will serve as cautionary tale of (a) startup overspending in hopes of finding product-market fit. Had it been more frugal, saved cash to extend its runway and given corporate clients more time to figure out how to use drones, Airware might have stayed afloat.”
Anthony Walsh, the founder of the health supplement startup EcoLife, in an email echoed this idea of initial frugality. “Unfortunately, many entrepreneurs don’t realize that a business needs to have a healthy ROI from the beginning [emphasis mine]," Walsh wrote. "Lots of entrepreneurs think it’s just a matter of time until their business succeeds. ‘I’ll just wait it out,’ they think. But if the business isn’t making money, then you have a problem — a serious one.”
2. You’re a generalist
It’s tempting to build a business that serves everyone. The bigger the market, the more potential for making money, right? Wrong.
In reality, the more finite your niche, the easier it’ll be to advertise, market and sell your products. Just because your business can serve multiple markets doesn’t mean that it should, especially not in the beginning. It’s much easier to start a successful business in a narrow niche than it is to compete with companies ten times bigger than you.
Still, you wouldn’t be the only one that’s tried. Gowalla, a social media startup that worked tirelessly to find its footing in 2007, failed fast as it desperately competed with Facebook, which eventually bought Gowalla for $3 million, $5 million less than the company had raised in venture capital.
In this light, Kenny Kline, the co-founder of a thriving startup, Jakk Media, shared with me his agreement with this notion of a narrow niche: “I've become convinced," he said by phone, "that targeting niche audiences is a sound business strategy.”
3. You’re not actively shifting to meet market demands
Perhaps one of the most important lessons regarding entrepreneurship was described by Eric Ries in The Lean Startup: “The only way to win is to learn faster than anyone else," Ries wrote.
In fact, the moment that you stop learning correlates closely with the moment that your business starts failing. Take Blockbuster, a massive company that failed seemingly overnight. Reason being that Blockbuster didn’t shift with market demands. As Netflix and Redbox (smaller, faster-moving startups) found their footing in a market seeking convenience, Blockbuster became obsolete.
What’s worse? The company did nothing about it.
The market will shift and you will need to build a business that adapts quickly. If you don’t, you’ll survive only until a newer, better version of your business offers the market what it really wants.
Commit to survival
It’s not easy to abandon ship when you’ve spent so much time and money building your startup, and you shouldn’t necessarily have to. First, you can try to fix your business. Build a healthier ROI, find a niche to operate in and ask, “How high?” when the market says “jump.”
If none of that works, though, and you find yourself stuck in a firestorm that isn’t getting any better, your efforts might be better spent building a new and different business that does work, for both you and your market.