The US venture capital industry poured a staggering US$130 billion into early-stage companies last year. But despite the appetite for deal-making and unprecedented access to cash, there’s one thing investors and start-up founders alike know – most start-ups will fail.

Whether you are trying to launch your big idea in Silicon Valley or Wellington’s Aro Valley, the same set of factors tend to see your business come undone.

Michael Seibel has witnessed them first hand, having sifted through the wreckage of dozens of companies to piece together what went wrong. The 37-year-old entrepreneur was in 2007 one of the co-founders of Justin.tv, a live video streaming platform that eventually became the better-known platform Twitch, which was sold to Amazon in 2014 for US$970 million.

Seibel and his colleagues had received seed capital from Paul Graham, one of the founders of Y Combinator, which since 2005 has helped launch over 2000 companies, Airbnb, Stripe, Dropbox and Coinbase among them.

That association in 2013 saw Seibel join Y Combinator itself, the first African-American partner at the firm and CEO of the famed Y Combinator accelerator. He’s had his fair share of success, but Siebel is as interested in what stops start-up founders from succeeding.

“Why even after raising that first million or two million do companies die?” He said at last week’s SaaStr Annual 2020 conference. 

“One of the things we try to do at Y Combinator, is hint at some of the reasons. We’ve thought a lot about why this is and how we can help change it.”

Here then are some home truths for start-up entrepreneurs, some common points of failure, but some tips for turning that big idea into a sustainable business that will thrive through seed, Series A funding rounds and beyond.

1. Fake product-market fit

Y-Combinator’s Michael Seibel

“This is one of the most common forms of death, or one of the common symptoms of impending death for post-seed companies,” says Seibel.

The product-market fit, as the phrase suggests, is the degree to which your product satisfies strong market demand. There’s no point sweating bucketloads and burning through piles of venture cash if there’s no market for your great idea. Most entrepreneurs understand that, but nevertheless deceive themselves into thinking their not very original, practical or commercial product is going to become a monster hit.

Too often founders, with fresh capital in hand, prioritise company building over product building.

“This is typically a no, no,” says Seibel.

The viability of the product is everything. You should be constantly talking to customers to make sure you understand their needs and making sure you have strong technical talent to make sure those requirements are reflected in the product.

Profitable usage of the app, gadget or service is what matters.  You need to get a handle on return on investment periods and customer churn rates. You can’t give in to “magical thinking” hoping those things will work themselves out as you bring on more customers.

“If you don’t know these numbers, or you don’t look at them, it’s very easy to convince yourself you have product-market fit when you don’t,” says Seibel.

Without reliable metrics and dashboards at this point, you are flying blind. Picking KPIs (key performance indicators) and sticking with them is crucial. 

“We used to measure monthly revenue, but that number is flatlining. So now we measure monthly usage. If you find yourself changing your KPIs, you have to ask yourself, what’s going on here?” says Siebel. 

Capping your cash burn rate is essential. If you are still developing your product-market fit, says Seibel, you should determine how much money you can spend each month and stick to that. Additional spending should only come out of the start-up’s revenue, rather than eating further into investment capital.

“That’s a great way to prevent yourself from going to fake product-market fit or fake company building,” says Seibel.

At this point keeping things as lean and product-focused as possible is what counts. It likely means the main hires are software engineers. Every employee should pay for themselves and there should be a plan to show unproductive staff the door quickly.

The problem of fake product-market fit can be exacerbated by big-name investors who are supplying the funding. Their involvement suggests they believe the start-up has good product-market fit. 

But, too often, that’s not the case, says Seibel, and start-up founders con themselves into thinking they are onto a winning product. 

“Nowadays, there are a significant number of companies that can raise five to ten million when they don’t actually have something yet that people love.”

Evaluating your product-market fit

2. Turning your investor into your boss

Just because someone has invested money in your company, it doesn’t mean you need to take their advice on how you run the company.

Every founder has self-doubt, says Seibel. If you process that self-doubt and continue to execute well, you are in a good position.

“If you use that fear and self-doubt to seek out someone to tell you what to do, you are typically in a position of hurting your company,” he adds.

Having people advise you what to do based on what they’ve seen work in the past is also something to be wary of. There are no 100 per cent repeatable paths to victory. The technology and the market change too quickly.

Stop talking to your investor and start talking to customers.

Choose to do a start-up in an area where you have “organic insights”, Seibel advises. It will mean you will have strong opinions based on your experience and are less likely to be led by people who have strong opinions. You need to be able to back yourself.

3. Co-founder conflict

It is too often a company killer. Seibel talks of clearing any “relationship debt” you have with the people going on the start-up journey with you.

“So it’s this concept of how much bullshit exists between you and your co-founders that you haven’t cleared away,” he says.

If you don’t know your co-founders well, there’s a bigger risk conflict could prove fatal. You need to establish clear roles and responsibilities for founders and set up realistic expectations that everyone buys into.

You need to have “level 3 conversations”. This is a tough conversation between founders that needs to happen in a safe place to clear up where expectations aren’t being met. 

“Basically pay down down that relationship debt,” says Seibel. 

When communication breaks down between founders it is the beginning of the end.

4. Ordinary over extraordinary

The start-up scene is ruthless. The failure rates are so high because the competition is fierce. You will not succeed just being an ordinary start-up founder, you need to be extraordinary. 

Extraordinary founders run companies that release product faster, set goals and exceed them and maintain a great relationship between the co-founders. 

A must-read for start-up founders

“They don’t lie to themselves,” says Seibel.

When founders settle for being ordinary they no longer focus on metrics, they blame outside factors or bad luck for their lack of success.

“You’ve got to be extraordinary, you have to be many standard deviations better than the other people who are doing startups around you,” Seibel points out.

The key to being extraordinary is to never stop learning, he says. Find out more about your customers needs, your target market, your product and yourself.

Everyone can be extraordinary if they work hard enough.

Says Seibel: “This isn’t something that is decided by birth.”

Pay great attention to how productive you are. Think about habit formation, he says, recommending the book Atomic Habits, which has great tips on how to get more stuff done and to achieve your goals.

Finally, form a “Jedi Council”, a trusted group of people you can get advice from who are more extraordinary than you.

5. Slow product development

Without getting to market quickly, you risk everything. Slow product development is usually down to a lack of process for deciding what to build and managing the phases of development involved in creating the product.  

“You don’t do sprints, you don’t have deadlines, you don’t write specs,” says Seibel.

You need to carefully think through your product development cycle. Seibel admits he and his co-founders weren’t good at this in the early days of Justin.tv.

“We had meandering product meetings where we didn’t write down our decisions. We didn’t carefully spec new products so team members often had slightly different ideas about what we were building,” he writes in a blog post outlining the fundamentals of good product development cycle management.

A product meeting is not done until a spec is written. Use good product management software and always be collecting qualitative and quantitative feedback.

Again, talking to customers to inform product development is crucial. Too many founders think that they instinctively know what customers want.

“I call these people fake Steve Jobs,” says Seibel. “The people who believe they know what the customer wants without ever talking to them.”

Your technical co-founders should be strong enough to produce quality products quickly. You should have your engineers heavily involved in proof-of-concept decisions.

“My technical co-founders were not intimidated by building things they’d never built before. I never heard anyone say, I don’t think we can build this,” says Seibel.

One last takeaway – goal setting is crucial

Underpinning the success of any start-up, Seibel told his SaaStr audience, is setting aggressive goals as founders and embracing the challenge of achieving them.

It is really scary to set goals,” he admits. “It sets you up for failure.”

But the goal-setters always do better. Seibel points to Airbnb a Y Combinator company that was trying to raise funding in January 2009 in the immediate wake of the global financial crisis.

“Paul Graham told the whole batch [of start-ups], we don’t know if any investors are going to come to Demo Day. So you all need to try to become profitable,” he explains. 

The Airbnb folks internalized this. They basically said, ‘we need to be generating, $4,000 a month to be profitable’.”

They call this “ramen profitable”, the minimum amount to cover the start-up teams rent and enough ramen to keep them alive.

“They said, ‘if we want to hit that number by Demo Day, here’s every number we have to hit every week between now and then’,” Seibel continues. 

“They printed that graph out and they put it all over their apartment, they put it on the fridge, they put it on the bathroom mirror, they put it everywhere, and every week they tracked it to see whether they were going to get the numbers or not. 

“And before Demo Day, they were running profitably.”

Airbnb is currently considering an initial public offering in the US that could value the company at US$18 billion. That’s where aggressive goal setting can take you as a start-up founder.

Watch Michael Seibel’s full SaaStr presentation here.