Tech Capital Partners Blog

In my last post, What’s in the Deadpool?, I listed the various types of companies that had entered the TechCrunch deadpool from 2007 to the present. Now let’s take a look at the most common reasons for entering the deadpool.

First I should declare a few things:

1. Deadpool members are failed companies that have been reported by and entered into the deadpool by TechCrunch. Does this mean the list of companies is biased in some way? It could be but we don’t know for sure.
2. I did a high level analysis to determine the reason these companies failed using publicly available information. Obviously there are many uncertainties in this approach, most notably:
   • many things can contribute to the failure of a company, reducing it to one or two reasons is a difficult task and obviously I wasn’t able to capture the entire picture but this is an approximation
   • what is reported publicly and what really happened aren’t always the same

The Process: I already had the list of deadpool members, from there I spent some more time collecting info to determine:

• the reasons for failure
• the location of the company
• if the company was funded by an outside investor

The result of my analysis:

Reasons
What probably isn’t surprising is that there are a number of common reasons for failure among startups.  What is surprising is that most reported reasons are secondary problems. Sure, a company might have had to close shop because competition was fierce but it could be that they weren’t differentiating themselves effectively, or maybe they blame poor user adoption. The reality is they were trying to solve a problem nobody cared about. When I dug deeper I found that many of the companies suffered from the same usual problems we all hear about on a regular basis.  Some of the key takeaways are:

• Business Model / Funding
  • Lack of funds and cash flow problems came up as a reason for failure in the majority of companies. Again, in many cases this is a secondary problem… If you’ve been at it for a few years and can’t generate enough cash to sustain yourself, at some point the primary problem might not be a lack of funding but the lack of a business model.
  • You need a way to generate money. We’ve all heard this a million times and I’ve written 2 other posts that deal specifically with identifying a suitable business model: Selecting a Business Model, Part 1 and Selecting a Business Model, Part 2
• Competition / Differentiation
  • Granted, it can be a tough market out there but if you can’t carve out some market share for yourself because of competition then maybe there is something else going on. Without a doubt, certain markets are extremely competitive… If that is the case then you should try to answer many of the necessary questions before deciding to enter the market.
  • What differentiates your product from the competition? Why are people going to buy from you or use your service over the competition? Does competing head on with an incumbent that has unlimited resources (compared to you) make sense?
• “False Problem” / User Adoption
  • “User adoption was not what we anticipated.” There are many reasons why this may be but I think in many of these cases you’ll find that the company started off with a “False Problem.”
  • The “False Problem” is when a company tries to solve a problem nobody really cared about in the first place, or creates a new service with a marginal improvement or slight variation over an existing one.
• Shifting Strategy / Implementation
  • Yes a company does have to adapt to market changes and customer needs but when you don’t have a sound strategy you just end up confusing all stakeholders and slowing implementation. Don’t try to reinvent your company every 6 months.
• Partnership Issues / Regulation
  • This is the Single Point of Failure (SPOF) problem. You rely on a single partner to provide data or services and if they disappear or turn off the tap then your business fails. Another extreme example is businesses based on legal loopholes or arbitrage… If these holes get plugged you’re out of business immediately.
  • It’s a good idea to identify if your company has any SPOFs. If you do have a SPOF then you’ll want to figure out a contingency plan in case the unthinkable happens but more importantly, how you can remedy the problem so you will never have to deal with it.

Geography
Maybe this has to do with the TechCrunch bias I mentioned earlier but most of the deadpool members originated from California and Washington state, 72% of the members in fact. Seattle specifically seems to be a hotbed of Deadpool members. Interestingly, no Canadian companies made the list (even though there have been failures) as reported by TC.

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