Have you been a part of a start-up that failed? What were some key lessons you learned?

I have seen many start ups fail. Just a few of the more common reasons are:

1. Founders don't understand the market or their potential customers. Too frequently there is a technology looking for a market rather than a market need that they are trying to solve.
2. Incompetent management - this does not mean that the team is stupid, rather that they didn't have the right people on the bus in the right seats to execute. Usually they lack the sales & marketing expertise in their industry.
3. Lack sufficient capital - usually because they did not forecast properly and underestimated how much cash would be needed. This is usually accompanied by poor accounting systems & reports so that the team does not realize that they are running out of cash until it is too late.
4. Founders are unwilling to accept or seek advice & help. Pride is the operative word and there is too much of it!
5. Feature creep - because technology start ups aren't talking to their customers at the right times and levels, they react to each piece of feedback independent of an understanding of market need and are continually developing new features but never get a product that they can actually sell until it is too late.

I hope this helps.

Many years ago I worked as the finance lead for a start up firm. We operating for about 3 years chasing a super sized customer in the hopes of striking it rich. We lived on a shoestring budget with a great funding partner. In year three we had secured a contract with our customer for phase I of a multi year venture. We were cash flow positive and began paying back our funding partner. At the end of year 3 our customer pulled the plug on phase 2 and we were without any near term source of revenue. Therefore, end of business.

Lesson learned is that although we have no regrets chasing the super sized customer, for long term sustainability we would probably have been better served securing some smaller customers in the process thus diversifying our sources of revenue.

I have been CFO at a number of start ups that failed . The issues I saw incuded

1. Not having a clear and focused strategy. One CEO told me his target market was everyone and everywhere..

2. Not willing to stop doing things and thowing good money after bad.

3. Lack of healthy dialogue. CEO was a bully so people were afraid to tell him the truth. It became a yes man culture.

4. Not following a product road map by being distracted by customer requests.
Winning the deal was more important.

5. Weak Board.

Yes, I've been part of several startups that failed. Several lessons I can pass on:
1) Don't run out of money and surprise the investors by asking for more. The entire executive team was replaced.
2) Tend to your core business -- avoid distractions.
3) Be savvy about hiring, avoid growing too fast.
4) Listen to your customers!
And, I also agree with many of Joan's comments -

All good comments here. Have had some successes and some failures. Mostly comes down to lack of planning. Planning for capital, product, marketing, sales, timing, etc. Oh yeah...have a product that people really need is a good thing as well. Have seen some really great products that looked cool, but didn't have any real world application for the dollars being charged. Good luck!

Aside from strategy, product etc etc, both of my experiences with that (as a Controller) were due to ramping up too much in general and with fixed costs in particular, specifically rent and leases for computer servers. You can lay off people if you really need to, but you're stuck with those fixed costs. Both were VC funded, and VC's often want you to ramp up in order to go for the big win. That is a legitimate approach, but certainly more risky.

I have been involved in a few start-ups. In my experience the top three reason for failure - business runs out of money; too much dependence on one person (especially in technology); and general partner looses interest. It is not easy, but if these three issues occur, you can still salvage the business.

But once Managers loose trust in each other, there is no return from the brink.

My experience combines some of the comments made by Henry Schumann and Joan Varrone. Our business development person convinced us our software was going to be picked up by one of the largest companies out there. That led to three critical errors: too much focus on one customer, not supervising the business development person closely enough and making too many changes to meet that one customer's needs. It turned out that the BD person was not talking to the people with the checkbook; she never got above the level of the technicians. When the potential customer said "no", we had a weak pipeline and a product that had become too specialized.

I've worked with about a dozen start-ups over the last few years and seen three times as many fail during that time. The successful firms were always able to answer the simple questions in a clear, concise and defendable manner.

1) What solutions do the market need?
2) Which market segment will we target?
3) How are we going to make money in the short and long term?
4) When should a customer engage my competitor versus my firm?
5) Why am I/ the team committed to success?

Most of it comes down to planning and assumptions. Start ups who are explicitly looking to make money (versus a hobby turned business) need to work out every detail before they spend a penny of investor money. It's like that old adage; "Measure Twice, Cut Once." Planning takes time, but generally has a 10x saving on the back-end.

In my experience as a shareholder in a startup that failed, one of the key truths is that almost inevitably the company runs out of cash and goes looking for more. At that time every shareholder must understand, in the very deepest depths of their soul, that it is better to have a small part of something big, than a big part of nothing.

1> Timing counts - the best idea at the wrong time will still fail.
2> Don't go skinny on capital. A lot of entrepreneurs try to minimize the amount of cash needed to start up. If you are self-funding, double the amount you think you need. If you are raising capital, do not show investors your bare-bones capital forecast where everything runs perfect. Build your business model including contingencies and ask for enough money to fund operations under those conditions, or build into the funding model borrowing or investment triggers to raise more cash. Te worst thing you can do is have to ask for more money,
3> Hire smart - do not go light on people or talent. Staffing properly is important. Support staff means that your top level people are not spending their time in administrative or operational work that can be handled by a much cheaper resource.
4> Outsource. Payroll, HR, Legal and the CFO functions are necessary, but can be outsourced or filled by part-time/contract talent. Don't get stuck spending your time on back-office activities instead of being focused on building the business.

1. It is all about sales: If you don't make sales, then none of the other activities matter. If seeking VC funding after your product has been released, you need the sales track record to show that the product is one that is valued in the market. Otherwise, there will be doubts about the company's ability to perform. VCs want to feel that their investment has chance of bringing in a healthy return.

2. Choose activities you dedicate resources to, carefully: Don't waste valuable resources with activities that don't really add value to driving revenue. When cash is critical, the activities that count are contributing to revenue. The nice to have will be nice to have after critical functions are taken care of. Prioritize!

3. Use a critical eye: Everything evolves quickly within a start-up. It is important to understand if your messaging is reaching customers and analysts. If the jargon is not really clearly communicating your value proposition, time to rewrite.

4. Don't waste time with the wrong people in decision making positions. So what if someone is working for equity only? If they are just taking up space and not contributing to strategic direction and revenue, then they are not helping the company.

Many great thoughts to this point. The recurring message I concur with is capital. Lack of capital will cause a loss of FOCUS which is critical to reaching your initial goal. Stick to what it was as to why the business was started to begin with. Struggles will occur but that does not mean you had a bad idea to start with. Secondly, be honest with yourself and the team. If someone decides to jump ship because they do not like what they hear, they are not right for the team to begin with. You want your employees working to succeed and not gossiping around the water cooler! Finally, do not let pride keep you from making GOOD business decisions.

I think the biggest downfall I made when I was started my first company--and I've seen it happen in the companies for which I've served as CFO and VP of Finance--is this perception that you know exactly what the market is and what it wants. As has been documented through the Lean Startup principles, going into a situation where you continually make and test assumptions, then make adjustments based on that, is much more productive than banging your head against the wall, trying to fit a square peg in a round hole. In my instance, it was probably ego. In the cases where I've served a Finance role, early success can distort the long term picture, making it hard to 'pivot, to use a term from The Lean Startup principles.

Team, team and team!