3 Reasons Why Tech Start-ups Fail (And How to Avoid Them)

12/30/2014 10:01 am ET Updated Dec 06, 2017

Recently, I was part of a group that met with a young entrepreneur. He had started a new business venture and wanted to "plant seeds" with possible buyers. Everyone was very congratulatory of his work thus far and some even called him a "wiz kid." But at the age of 23, he had already started five other businesses, all of which had failed. When asked about his past ventures (by yours truly), he stated that he had "no regrets" for his blunders and followed it up with, "you win some, you lose some." Statistically, he was correct, but his attitude and the congratulatory atmosphere for starting yet another business in the wake of so many failures seemed to erase the invaluable lessons he could have learned from each instance.

According to the RIP Report, tech start-ups typically die around 20 months after their last financing round, with a 90 percent failure rate among funded start-ups. The mantra of, "Fail fast, fail often," embraces this reality and encourages those entrepreneurs to try and try again. Inherently, this is good. Some of the greatest innovations have occurred as a result of individuals who are not afraid to try again with a new idea. The difference is that every successful entrepreneur learned enough from their mistakes to avoid repeating them.

Below are the top three reasons why tech start-ups fail.

1. Incompetence

2014-12-30-wrong.jpeg

By definition, this is a harsh word. In reality however, incompetence stands as the number one reason why tech start-ups fail, accounting for 46 percent. Little to no knowledge of pricing, lack of proper budgeting, and operational mismanagement drains venture capital and sales revenue. The opportunity cost of such expenses outweighs the notion that the "idea" is enough for a company to survive, and as a result, a company bleeds itself out before it ever has a chance to grow.

Possible Solution: Before putting out the new app, service, or tool on the market, do a competitive analysis of the industry and be realistic about what your company can offer. Do not conceptually assume that your product or service is better or is the best out there, because quite honestly, it probably isn't. Instead, focus on the need your brand is attempting to fulfill. Additionally, collect constructive, objective criticism from users who will be using your product/service. Be real about what your company can offer and what you're up against. The more honest your company is with itself, the faster it will move forward.

2. Lack of Managerial Experience

2014-12-30-poorprojectmanagement.jpg

A "big idea" is not enough. No company ever achieved long-term success as a result of one idea or concept. Proper management is needed, and such management requires experience. If a company's founder has never managed people in his or her life, there is a 99.9 percent chance they will not do it well. Successful leaders have honed their skills for years, both as a result of observation and continual practice. Project and personnel management, creating and implementing a company's mission and vision statements, and the implementation of a company's strategy are just a few challenges that require past knowledge and experience. Not hiring or pursuing advice from those with the experience will prove more expensive than ever conceived.

Possible Solution: Hire talent with the experience mentioned above. If you can't afford to hire talent, find a mentor with more experience than yourself. Above all, LISTEN. It is substantially easier (and cheaper) to avoid the mistakes of others if you learn from those who have already experienced them.

3. Lack of Clear Focus

2014-12-30-focus.jpg

Brands exist to solve problems. Companies that forget what problem they exist to solve cease to exist. If your company produces apps, the mission of said company is NOT the creation of apps. What is the "why" behind each application? What problem does each one solve? Does the solution reflect the company vision? As a start-up, your mission and purpose must be clear. With no mission or vision statements, long-term strategy, or experience in project implementation, an idea will sink in a wake of frustration.

Possible Solution: Utilize a macro/micro focus. As a company, develop and implement mission and vision strategies based on the mission/vision statements you (and your partners) have created. Answer the question, "What problem is my business trying to solve?" and move forward with that focus in the forefront. At the micro-level, embed the macro-focus into every project. In this way, the product/service that is being sold/implemented for each customer will embody the company as a whole and work to establish the brand. Do this in unison. It will be hard at first, but if you firmly know the qualities of your brand it will not be difficult (in the long-term) to confirm the same qualities in your product.

The young entrepreneur I met made the mistake of surrounding himself with people who told him he was doing a good job. There should be nothing congratulatory about failure. Failure is only as good as the lessons it can teach and used as way to grow and strengthen the next idea. By eliminating incompetence, gaining management experience, and developing a clear focus even the average idea has the potential to become something big. Above all, remember that the product or service your start-up offers began as an answer to a problem no one else cared to solve. Since you have the answer, it's your responsibility to share it.