Why Most Startups Fail

Understanding your customers so that yours doesn’t.

Historically, launching a company has always been a capital-intensive business, reserved for those with strong financial backing. However, in today’s globalised world driven by technological advancement and the ever-present nature of the internet, entrepreneurship has become a viable career path for those willing and able to take on the challenge. Entrepreneurship in this digital age is more affordable than ever, with computer hardware being a fraction of the cost it was 15 years ago, software often being offered for free and the internet providing relatively easy access to global markets. Although this has led to a significantly lower barrier of entry for the majority of industries, venture creation remains a high-risk undertaking. Between 2014 and 2019, over 60% of UK startups were forced to cease operations by the 5-year mark.

Some of the most commonly stated reasons for startup failures are a lack of financing, a poor or incompatible founding team, a frail business model or being outcompeted. However, the chart-topping cause for startup failure is a lack of market need. The founders simply commit to building something that nobody truly wants.

How do you avoid building something nobody wants?

Customer development.

Invest the time to understand who your customer is and get to product-market fit. When this is achieved, customers who have a specific problem are satisfied with the solution you are offering and are willing to pay for it.

“The most common mistake startups make is to solve problems no one has” — Paul Graham

Netflix, Quibi and Blockbuster can teach us a great deal about the do’s and dont’s of agile customer development.

Netflix vs Blockbuster

Similar to the way renowned business successes become known worldwide, the most notorious failures equally leave their mark in history. One such example is the downfall of Blockbuster in the early 21st century and the simultaneous ascension of Netflix. Blockbuster, one of the most iconic brands in the last few decades, is in recent times perhaps better known for its gradual decline in the early 2000s than its sustained prosperity prior to that. The video rental giant tumbled from its peak in 2004, with 9000 stores globally and a revenue of nearly $6 billion to filing for bankruptcy in 2010.

The rapid rise of the internet in the late 1990s and early 2000s created a plethora of new markets in a relatively short time span. Netflix, newly founded in 1997 and agile to change, was ideally positioned to seize this opportunity provided by the market shift, whereas Blockbuster was set in its ways. At this moment in time, Blockbuster was a well-established, profitable company, paying too little attention to both the internet’s and Netflix’s potential along with the threat they posed to Blockbuster’s current success. This neglect led to the most pivotal moment in Blockbuster’s history, when its executives made the decision not to acquire Netflix for $50 million in 2000.

Moreover, Blockbuster failed to adapt its thus far faultless business model which relied to a large extent on charging customers ‘late fees’ on their rentals. In the long term this proved to be an outdated model at odds with the rapidly changing landscape. Even though considerable efforts were subsequently spent towards digitising Blockbuster’s content as well as making the rental process more customer-friendly by eliminating ‘late fees’, salvaging the plummeting company from insolvency proved to be an impossible task for its management.

Though it is often argued that Blockbuster’s downfall is entirely attributable to the decision not to acquire Netflix when it had the chance, this explanation is far too simplistic and does not take into account Blockbuster’s internal issues. Blockbuster, at the time the most successful video rental company, relied heavily on its immense past success to determine its future strategies which may have elicited a sense of complacency. While their meticulously established business model led to a well-oiled, profitable firm, it was not suited for the novel digital era the internet ushered in.

By contrast, Netflix thrived where Blockbuster misfired. Netflix has continued to flourish due to its customer-centric culture. The company’s offering looks vastly different from two decades ago. The first iteration of Netflix’s product allowed users to buy or rent DVDs which would physically be sent to them by mail. This solution was far from optimal and had Netflix stopped there, it probably would have failed. However, due to the ongoing urgency within the company around customer and product development, it has consistently upgraded its product to the customer’s real, changing behaviours.
Today, Netflix has over 200 million worldwide users. Not by chance, but by investing in a customer-centric company culture.

Quibi

A more recent example of a startup that failed to recognise the real needs of its customer base is Quibi — a short-form mobile streaming platform aimed at people on-the-go, recently acquired by Roku in the wake of its failure. Backed by nearly $2 billion from VCs, Hollywood studios and well-known names in the industry, Quibi was intended and expected to become a major success in disrupting the video streaming market when it launched in April 2020, during the global pandemic.

Alas, the company announced it would cease operations merely six months after its launch, naming a variety of external factors such as the global health crisis, for its lack of success. The founders, who had a successful and extensive track record in the industry, were unheeding to the fact that Quibi’s failure came from within the organisation. Although, the global pandemic certainly impacted Quibi — as it did every other business — it was not the primary reason for its foundering. Quibi failed because it was unaware of its customer base. As people’s lives were influenced by restrictions, social distancing and lockdowns, their consumption habits changed along with it. Quibi — designed to be consumed by busy individuals on-the-go — did not change its approach. Although it was widely requested by its customers, Quibi failed to adapt its mobile-only service to be accessed on different devices or to be shared with others. Quibi’s founders spent a tremendous number of resources on creating what they perceived as the perfect product. While the product was well-made and backed by some of the most influential players in the industry, there was simply no customer demand for it.

Conclusion

Even though Blockbuster and Quibi have differing stories, both persisted with their strategies when dealt with setbacks. This persistence was misplaced. It merely delayed their inevitable failure which was a direct result of being imperceptive and uncomprehending of their customers’ real needs. In Blockbuster’s case, its customers were satisfied with the company’s offering for many years. With the rise of the internet however, their needs slowly began to change. Netflix seized the opportunity while Blockbuster was oblivious to it until it was too late. Quibi, on the other hand, set out to create a product for which it had no customer base to begin with.
As said by Eric Ries in The Lean Startup, a company cannot provide quality to the customer if it does not understand who the customer is.

Customer development is not something to be ticked off on a to-do list. It is a continuous process, not an end result. The market isn’t static, and neither is consumer behaviour. Businesses who fail to recognise this are on the back foot from the get-go.

“Don’t find customers for your products, find products for your customers” — Seth Godin