Entrepreneurship for Engineers: Is Your Startup in Trouble?
Everyone likes to talk about the fun parts of the startup journey, when things are going well. But the hard truth is that a lot of fledgling companies fail — and all startups, even those that go on to have massive success, experience tough times. Ideally, founders will be able to spot the signs that things are going in the wrong direction before the ultimate death knell of an empty bank account.
So what are those red flags of a startup heading in the wrong direction?
What Are the Normal Ups and Downs?
One of the biggest challenges in seeing major red flags at a startup is that every startup journey includes a lot of bad times. There will always be bumps in the road, and sometimes it’s only apparent in hindsight which ones were signs of a major problem and which were normal.
“In the moment it’s often hard to distinguish between those two and that’s where the team you build around you is critical,” said Sri Rao, investor at Union Labs, a sentiment that was repeated by other investors and entrepreneurs. So particularly at the beginning, it may be hard to say exactly when a slide toward trouble starts, but often your advisors and mentors can see what you can’t.
On the other hand, if you’re seeing the same problems cropping up over and over, or if you’re spotting trends rather than one-offs, that is often a sign of trouble. Losing one big customer, for example, can be emotionally hard, but it’s not a sign that there’s something fundamentally wrong with the startup’s direction. A trend of high churn, or customers fleeing en masse to your competitors, is more concerning.
Encountering the same problem repeatedly is a warning sign. “I think sometimes founders feel like, because you’re engaging with the problem every month, it’s progress,” said Ellen Chisa, partner at Boldstart Ventures. “If it doesn’t result in an output that resolves the issue over time, it doesn’t matter how many activities you did.” In other words, if you’re not successfully fixing the problems, it doesn’t matter how much effort you’re putting in.
But where are real problems, rather than temporary setbacks, likely to come from? Experienced entrepreneurs and investors agreed that they tend to come from two directions: product problems and team dynamics.
A red flag that a startup is on the wrong track is that the product isn’t focused on bringing value to customers. This seems obvious, Chisa said, but many founders can end up focusing on how interesting it would be to build something, rather than thinking about how the new feature or product would bring value to customers.
Rao echoed this idea, noting that “prioritization is always key.” Startups that don’t have a clear way to connect the dots from their product roadmap to value for customers, and can’t explain why they are prioritizing one thing over another, are often on the wrong path.
Good founders, he added, are able to avoid the sunk-cost fallacy: If you’ve already invested in a new product or feature but customers don’t seem to get much out of it, you shouldn’t continue investing more time and money in it just because you’ve already invested so much. Instead, you should cut your losses and move on as soon as you discover that it’s not working.
This doesn’t mean that negative feedback is a bad thing! Some founders can get discouraged by feedback that is less than glowing, but that is a false red flag, Rao said. Feedback is important and helps you understand what customers value, even when their feedback isn’t all glowing.
In fact, a customer who is invested enough to provide feedback is a better sign than no feedback at all. No feedback might mean your product doesn’t inspire people to care.
When a product really has a product-market fit, customers will generally start using it even if it doesn’t actually meet all of their needs. So in some ways, customers who are actually using your product but offer liberal criticism is a good sign.
If there are problems with the team, there are problems with the company. In fact, Pete Soderling, serial entrepreneur and investor, said that the step right before running out of money is often that your team members keep cycling, especially the sales and go-to-market leaders.
Problems with the team can manifest as tension between co-founders (a certain amount of which is normal, even desirable, but too much can become toxic), communication problems between team members, and lack of alignment on vision.
According to Chisa, one of the pieces of advice she gives friends who are considering taking a job at a startup is that they should expect everyone they talk to to have a similar vision for the company. Each person might articulate it differently and see it through the lens of their unique role, but they should all agree on the company’s larger vision. If they don’t, it’s a bad sign.
If, as a founder, you notice that your team members seem out of alignment, or they are becoming increasingly fragmented in how they work, that should be addressed immediately. This seems like an obvious piece of advice, but can be really challenging to see as it’s happening, while founders are focused on the day-to-day of running the company.
Shut It Down — or Pivot?
At what point should a founder walk away from the startup? This is actually an easy question to answer: when they either are forced to, because they’ve run out of money, or when they don’t believe in the vision anymore. If you’re no longer inspired by the startup you founded, it’s time to move on.
If, as a founder, you feel like you’ve disproved the hypothesis you started with but aren’t ready to give up the entrepreneurial journey, it might make more sense to pivot: to address a different problem, or test a different hypothesis, rather than simply walk away.
“The decision to pivot is always fraught with imperfect information,” Soderling said. So you can’t know for sure if it’s the right decision ahead of time. But if you have enough runway and you’re still enjoying the startup journey, a pivot could make sense.
What Is ‘Failure’ for a Startup?
Startup culture often talks about “failing fast” and learning from your mistakes. That does not, however, make it any easier when you actually run out of money and are forced to shut down your startup. Failure can teach really important lessons, but it is also hard.
“The thing that probably separates a great founder from an average founder is just how they handle adversity,” Soderling said. “A lot of founders who have been successful on paper so far, they’re going to find that they might not have sort of the wartime CEO demeanor, because they haven’t really faced adversity.”
But a failed startup is a powerful learning experience, he said, and not just in the general, cliched sense. When you fail, you learn about your own weak points — how you specifically failed, what you specifically are not good at. So failing at one startup does not mean that your future endeavors are destined for failure, too.
As long as you’ve learned from the experience — not just how startups fail in general but how your specific habits and weaknesses are most likely to get in the way of success — you’re more likely to be successful in the future.
Do you have any topics related to entrepreneurship you’d love to see covered? Contact me on LinkedIn and let me know.