Examining the Social Roots of Startup Failures
Turn off your laptop, leave your desk and interact with people face-to-face
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Strategic thinkers are not lonely philosophers. Moreover, leaders lacking communication skills may lead a company to failure.
In 2016 I quit my CEO job to launch a consulting startup. I knew that I was an expert in business strategy, and I was sure that I could help many companies thrive. But finding and retaining the first customers was a nightmare.
And now I understand why. Unfortunately, I fell victim to a common mistake many startup founders make.
But first, some sad statistics
The statistics around startup success don’t make the best reading:
9 out of 10 startups fail
7.5 out of 10 venture-backed startups fail
2 out of 10 new businesses fail in the first year of operations.
Only 1% of startups become unicorn firms like Uber, Airbnb, Slack, Stripe, and Docker.
The success percentage for first-time founders is 18%.
According to CB Insights, the top three reasons for the failures are the following:
Ran out of cash/failed to raise new capital — 38%
No market need — 35%
Got outcompeted — 20%
What do all three reasons have in common? These problems have social roots, rather than market roots.
Social creatures
We are social creatures, it’s obvious. But our social capabilities have their limits.
In the 1990s, the British anthropologist Robin Dunbar proposed a theory. He claimed that humans could effectively maintain social relationships with no more than 150 people. He based this number on the correlation between the relative size of the neocortex and group sizes in non-human primates.
Other scientists disproved Dunbar’s findings. But neuroscientists agree that people’s ability to maintain social connections has its limits. Our brains are the results of evolution, and our ancestors lived in small groups. So they didn’t need to communicate with hundreds of people and didn’t get this skill.
The number of 150 connections is also examined in The Tipping Point: How Little Things can make a Big Difference by Malcolm Gladwell, and Tribal Leadership: Leveraging Natural Groups to Build a Thriving Organisation.
Both authors insist that our brains can’t manage an unlimited number of relationships efficiently. You may have thousands of “friends” on Facebook, but how many of them do you really know?
But running a business implies communication with many more people.
Business is about communication
Let’s look at the startup failure stats once more:
Ran out of cash/failed to raise new capital. It means that the founders couldn’t persuade investors.
No market need. This means that the founders didn’t do their job of identifying customers’ requirements well.
Got outcompeted. If a company loses the competition, its rivals understand their clients better.
People run businesses. And they do it for other people. We call them stakeholders: customers, partners, investors, and team members. It means that people inside a company must maintain close relations with the ones outside.
But “maintaining relationships” doesn’t mean just knowing people’s names and faces. It, among other things, implies that we understand their needs, at least to an extent, and we can interpret their reactions to your actions and analyze them.
So, we need to have hundreds of connections. But nature limits our social capabilities to 150 contacts or so. And don’t forget that our family members, friends, and relatives are among them. So, we don’t have a lot of “brain slots” for business partners, customers, subordinates, and investors.
And what do we do? We ignore their needs and reactions. Our brain can’t process so much data. And this biases our worldview.
Who needs your product, and why?
Six years ago, I, like many other founders, focused on my products too much. I was looking at my product from the opposite perspective from which my customers were looking. We all do so.
Is your software user-friendly, fast-working, and cheap? But your customers don’t care. They solve their life or work issues.
Does your product, from your point of view, look good on a store shelf? But how does your typical consumer from a distant town see it? Do they need it?
Your investors don’t care about your product too. All they need is the return on their investments.
Your team members want a decent job to help them reach their goals and support their families.
They all have their needs that we, most often, ignore — because of natural constraints. We can’t overcome them, but there is a workaround.
Communication, communication, communication
You may have millions of customers, hundreds of employees, and dozens of investors. How can you maintain contact with them if our brains have limitations?
But there is good news:
You don’t need to keep long relationships with most of them
You may use modern communication tools to make it easier
You may learn to create a big picture using small fragments
Bernard Arnault, the CEO of LVMH, once said: “Don’t go to the offices too much. Stay on the ground with the customer or with the designers as they work. I visit stores every week.”
Arnault doesn’t make friends with customers or employees. But he listens to them carefully, establishing deep connections with them for a short time.
Some other entrepreneurs strengthen their communication capabilities with online tools. For instance, Elon Musk is not only a remarkable businessman, but he’s also a good conversationalist too. He used his army of Twitter followers to help Tesla grow.
In 2021 Inditex handled a total of 51,609,795 customer contacts (calls, emails, chats, and social media messages).
Many founders start communicating with their audience long before launching their product. They build it in public. By doing so, they both involve their customers and receive their feedback along the way.
But from my experience, having face-to-face conversations is critical. In 2009 I was a CEO of a large company struggling with the economic crunch. I seen that year talking to people — to customers, shareholders, employees, and bankers. And I know that a single chat can spark dozens of valuable insights.
What have I learned?
Communication with stakeholders should be a founder’s primary activity.
You can authorize professional executives to perform operations management. But you can’t delegate contacting the essential people for your business to anyone else. The most successful founders I’ve worked with were excellent conversationalists.
I follow ten simple rules to make this communication efficient:
Schedule your day so that you have enough time for meetings with stakeholders
Never ask people about your products. Ask them about themselves and their problems. It’s their favorite topic of conversation
Try to be fully concentrated on what they say. Listen to them. Talk less and listen more
Don’t try to sell. Ask questions
Start every chat by acknowledging the importance of the other person’s opinion to you
Write down the key facts, insights, and takeaways you get from these conversations. Don’t rely on your memory
Create a database, a knowledge base for them
Cluster them based on topics and importance
Discuss them with your team regularly
Adjust your strategy accordingly
I recommend that founders invest up to 80% of their time in communication. And I follow this rule in my own business.
Don’t worry too much about your operational results. Instead, hire a decent team, devise a strategy, and trust them. You’ll help them more with the insights your conversations with the stakeholders will bring.
Unfortunately, I managed to forget this wisdom in 2016 when I launched my consulting startup.
Conclusion
A startup founder is responsible for many business aspects, from recruiting policy to cash flow. But their primary task is to stay in touch with stakeholders. A deep understanding of their needs helps them make major strategic decisions.
Market research, data analysis, and hypotheses testing tools may be of much help. But face-to-face conversations with people are irreplaceable.
Some more stories on communication:
Spaghetti, Marshmallow, and Business Strategy
Some root causes of weak strategies
Read the article.
Strategy as an agreement
The most important agreement in a company's life
Read the article.
Mission statement — a practical guide
Answer four crucial questions
Rear the article.
Best regards,
Svyatoslav Biryulin