Why start-ups fail

And a great many do. There are lots of reasons, but in my experience, the most common cause is they develop technology and not products.

Most start-ups fail. There are lots of reasons, but in my experience, the most common cause is that they develop technology and not products. Lots of people confuse the two terms, but the distinction is critical in start-ups. Here's why.

According to the book Marketing High Technology by the field's godfather, Bill Davidow, "Marketing must invent complete products and drive them to commanding positions in defensible market segments." Bill called this the Strategic Principle.

Bill Davidow
Bill Davidow Mohr Davidow Ventures

In case you've never heard of him, Bill Davidow was senior vice president of marketing and sales at Intel, where he helped the Santa Clara company to become the chip goliath it is today. Later, he founded Mohr Davidow Ventures, a prominent Silicon Valley venture capital firm. The man has credibility.

Let's break down the Strategic Principle.

The first part means this: it's one thing to develop technology that does something cool, perhaps even something that's never been done before. It's another matter to deliver a complete product that meets a critical market need better than the competition. And by "complete product," I mean hardware, software, infrastructure, sales channel, promotion, customer service--the whole nine yards.

The second part means that if your product does not have what it takes to be a market leader, then you might consider segmenting the market more narrowly. Perhaps the product will then have a chance at sustainable market leadership. The catch is that the narrower segment still has to be big enough to be of interest from a business standpoint.

Now tell me, who can argue with Bill's logic? What company, start-up or otherwise, doesn't need marketing?

Apparently, most start-ups. I've heard it dozens of times: "We're early stage, developing technology; we don't need marketing yet." And then the inevitable: "Have you read our business plan? It's all in there."

Customers and competitors aren't static, like a document. Markets are dynamic; they call for processes, analysis, occasional changes in strategy. Technology alone will not carry the day when it comes to dynamic, competitive markets. That's even more evident today than it was when Bill wrote his breakthrough book in 1986.

Not surprisingly, some of the most successful technology companies owe their lofty positions to breakout business and marketing strategies. Here are a few examples:

CDMA was a breakthrough, but what's unique about Qualcomm is the business model--instead of being a phone company, it became in essence the technology inside a multitude of phone companies.

Google had trouble getting investors for a search engine company. Its innovative search advertising scheme got the company to $160 billion market cap in record time.

Instead of a one-time engineering fee to develop IBM's operating system, Bill Gates thought to ask for an exclusive per-system fee.

Cisco could have been just like every other network company, but focused its efforts on connecting isolated networks with multiprotocol routers.

The list goes on and on: Amazon (e-commerce), Dell (direct sales), eBay (online auctions), Flextronics (supply chain outsourcing), Ingram Micro (technology distribution), and Yahoo (Internet portal) were all about business and marketing, not just technology.

Don't get me wrong; I'm not saying technology isn't important. Why else would they call it the technology industry? What I am saying is this: most start-ups confuse technology with products, and technology alone isn't enough to make it. Start-ups that distinguish themselves by developing complete products capable of sustainable market leadership at least have a chance.

Not only are start-ups subject to the same market and competitive forces as more mature companies, but they're more vulnerable since they're typically focused on a single product and often navigate in uncharted waters.

Good marketing is like a good navigation system: it helps to point you in the right direction and makes corrections when you go off track. It helps you get where you're going faster and more efficiently. Every high-tech company needs marketing throughout its journey, but contrary to popular belief, it may be most critical at the start.

 

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