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Kyrylo Lazariev
CEO and Founder
Articles
7
min read

Funding for Startups Isn’t a Cure-All: Why They Still Fail

A white flag, which is a sign of defeat is shown on a yellow background.
Summary

Venture-backed startups still have a chance of downfall. The percentage of tech startups that fail proves it. Find out how to avoid being one of them.

Key takeaways

1. Funding for startups is only one part of the equation in achieving success. Understanding your users’ needs and the potential market are vital things you should pay attention to.

2. User-centric digital product design, analysis, and testing of your solution before launch can help you cater a tailored product for the target audience and get a foothold in the market. 

3. Striking the right balance between taking risks and understanding the potential of your product and its fit in the market can help to maximize the chances of your venture-backed startup attracting newcomers and loyal mainstream adopters.

The world of startups seems so exciting and futuristic teeming with groundbreaking technology ideas that are about to disrupt the market and make billions. At least, this is what it looks like from the outside. 

But behind this appealing facade, the reality is more down-to-earth. A significant amount of ventures don’t succeed. And it’s not always about lack of capital.

What percentage of venture-backed startups fail?

According to the National Venture Capital Association, 25% to 30% of venture-backed startups fail. And one of the reasons why they never make a positive return to investors is that entrepreneurs build startup products that can run for the first several years but don’t make them mainstream for the long haul. 

No, I don’t mean to bring your entrepreneurial spirit down. My goal is to show you how your venture can avoid it. Together we’ll take a closer look at real cases to see reasons why startups fail and talk about powerful ways to avert them. 

Let’s dive right in!

Funding for startups ≠ ultimate success

 While investment for startups is often the goal they work tirelessly to achieve, funding is far from the final destination — you still have to deliver a product that will make a juicy ROI. And it takes time and long-term vision.

A crucial lesson from failed ventures: don’t jump the gun

Color Labs

The photo-sharing startup hit the market in 2010. The company raised $41 million from high-profile investors such as Sequoia Capital, Bain Capital, and Greylock Partners. Color Labs aimed to offer a new way for people to share and view photos on their devices. 

Seems like a great idea, right?

But here comes trouble. After the launch, the app got 1 million downloads, then by September 2011, it had something under 100 000 active users.

The service got backlash for having a complex and cluttered interface. It was a challenge for people to navigate it — they didn’t understand how to use the app, which ultimately turned them off. 

On top of all that, Color Labs faced a gap between what the company offered its target audience and what people actually looked for. Instead of focusing on a market need and user experience, the company went on delivering features that were far from relevant or useful, which contributed to the app's drop in adoption rates.

A venture-backed startup still needs to run a market research
Funding for startups doesn’t guarantee success

Despite all the challenges, Color Labs did try to make changes and keep its business afloat. The startup pivoted its strategy and rebranded as a social networking company, but it turned out to be too late, and the new approach didn’t patch things up. Color Labs struggled to gain traction in the market and eventually shut down in 2012.

So why did this startup fail? 

It had almost everything you could strive for — a multimillion funding and an all-star team of executives. But the problem lies in the approach Color Labs overlooked — a user-centric one. 

Even though they knew how to get investment for the startup, the company failed to focus on a major aspect — running market research and creating robust digital product design that would align with their users’ needs.

Yammer 

A social network for businesses kicked off with massive success. After its launch in 2008, Yammer rapidly gained an extensive user base and attracted significant attention from investors. Its key advantage was an innovative approach to enterprise social networking and meeting the growing demand for more collaborative and connected workplaces. 

And their success roll didn’t stop there. 

In 2011, Yammer raised $85 million in a tech startup funding round, valuing the company at $500 million. The next year, Microsoft acquired the service for $1.2 billion, highlighting the company's initial success and its potential for future growth.

Despite all of this, the startup took a downturn. Yammer faced tough competition in the enterprise social networking market. It started struggling to retain users, especially with industry big players like Facebook and LinkedIn and new startups such as Slack and Asana.

Tech startup funding doesn’t equal success, ventures need to compete
Why do venture-backed startups fail?

Plus, Yammer failed to fully integrate with other Microsoft products — SharePoint and Office 365. This turned into a real hurdle for the company to gain adoption within the market. The platform’s retention and churn rates were poor — numerous users stopped using the service over time.

But Microsoft didn’t drop Yammer. It kept investing in Yammer and tried to reanimate the platform. The company came up with several changes, including adding new features, but the efforts didn’t pay off. Eventually, Yammer merged with Microsoft Teams, stopping to be a standalone product.

What are the ​​reasons why the startup failed? The company lacked a differentiation that would stand them out in the such intense competition. The platform also struggled to keep up with the cross-device accessibility demand — while The Teams users leveraged the platform on the go, Yammer’s mobile version was far from a seamless user experience. Finally, for the startup, it was challenging to integrate with other Microsoft tools as well as to scale — users failed to adopt Yammer which limited its growth potential.

Decades later, the platform tried to make some progress — it introduced new interface design and features. But the question is: is it possible for Yammer to be something more than a player in a team of Microsoft 365 giants like The Teams, SharePoint Online, and Exchange Online?

Triangulate

The online dating startup is an example of an initiative that focused on developing a product as fast as possible and hitting the market. In 2010 Triangulate aimed to create a matching engine  — software that could be licensed to existing dating websites like eHarmony and Match. 

The engine would use algorithms to match users based on their tastes and habits, drawing profile information from social networks and media sites such as Facebook, Spotify, Twitter, and Netflix. But venture capitalists refused to fund it until Triangulate had a licensing deal in place. 

So the company decided to create an app called Wings to show how useful the matching engine is. And this time, it worked. The startup raised $750,000. The free-to-use app earned revenue from users who sent digital gifts or messages. This eventually became Triangulate’s primary focus, and so they put on hold the licensing plan. 

Why is digital product design important for venture-backed startups
Venture-backed startups can still fail

Wings connected to Facebook and other online services to automatically fill out user profiles. It also encouraged people to invite friends as "wingmen." However, a year after launch, the team discontinued the matching engine and wingman feature due to low user engagement and poor virality.

So Triangulate pivoted. Again. The startup launched DateBuzz — a dating website that allows users to vote on elements of others' profiles before seeing photos, which resulted in more balanced attention distribution and elevated user satisfaction.

But there was a “but” — despite being an innovative solution, the team spent a lot more than it could on customer acquisition costs. The end of the story is far from happy. Triangulate before it ran out of cash and returned $120 000 to investors.

So why did the VC-backed startup fail?

Triangulate raised decent funding and was ready to own the market, right? Not really. The company didn’t pay attention to one important thing in digital product design — in-depth research. They focused on launching and offering users a real product as fast as possible instead of taking their time and digging deep into target audiences' needs. 

As we can see, knowing how to get an initial investment for a startup is important, but it’s not the only thing you need to hit the market and stay there.

The good news is that there are steps you can take when creating a product to save it from becoming another post-mortem case study.

There’s another way for a venture-backed startup

There won't be a magic pill for success. You have probably already heard of it — the discovery stage. It may include both market and UX research. Yes, there’s no way around it — you need to dive into user interviews, surveys, competitive analysis, and testing before putting your freshly raised funding into development. Take your time and find that product-market fit to boost your chances of building a product that would cater both to new users and attract mainstream adopters. 

There’s no scenario where you’d 100% know what your startup can face after the launch and how to prepare for every trap possible. If you did, that would be a fairly predictable endeavor with zero potential for adventure. 

But there’s got to be a balance between taking a risk and offering a solution you believe in and going full tilt without a clear understanding of whether and how your product fits in the market. And from the experience of our digital product design agency, in-depth research helps to maintain such balance. You just need to trust the process, and the results will follow.

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CEO and Founder

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