Why Startups Fail: A Top 10 List From Geoff Entress, Seattle’s Prolific Angel Investor

Despite the post-election glow in some circles, the financial reality for most people remains gloomy (along with the weather here in Seattle). As Geoff Entress succinctly puts it, “The economy still sucks…Nobody’s writing any checks right now at all.” I sat down with the Seattle-based angel investor yesterday in between his appearances at the University of Washington—as part of a seminar series for UW faculty—and the “Entrepreneur University” event run by the Northwest Entrepreneur Network at the convention center downtown.

Entress was a venture partner at Madrona Venture Group for eight and a half years before leaving the firm this past June to focus on his own investments. He still works out of his office there. He has invested in about 35 companies in the past decade, including investments in prominent Northwest startups like BuddyTV, Isilon Systems, CultureMob, Sandlot Games, ICanHasCheezburger.com, Elemental Technologies, Geospiza, and Pressplane.

Although Entress actually sounds fairly optimistic about new ventures, I thought his talk at the UW was an appropriate dose of reality. It was titled “10 Reasons Why Early-Stage Companies Fail.” As Entress pointed out, his “top 10” list actually goes to 11, like a Spinal Tap amp (“when you ‘need that extra push over the cliff…'” he says). The audience of about 50 included folks from UW TechTransfer, as well as bioengineering professor Buddy Ratner (an Xconomist). I’ll give a quick recap of the talk here, in Entress’s words.

The main reason startups fail, of course, is that they run out of money, Entress said. Sometimes they shut down and investor money is returned, as in the recent case of Seattle-based ClayValet for instance, but that’s not the norm. Entress proceeded to drill down into the underlying reasons for startup failure:

1. They spend the money they raise too fast. “Conserve your cash,” Entress said. It’s very difficult to raise more funds, especially these days.

2. They hire too fast (ahead of their product development). The common mistake is hiring sales staff before the product is ready to sell.

3. They fire too slow. It’s better to do one deep, painful cut than to endure multiple smaller cuts, which are demoralizing to the team. … Next Page »

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3 responses to “Why Startups Fail: A Top 10 List From Geoff Entress, Seattle’s Prolific Angel Investor”

  1. Soc Seamon says:

    Good list, but I wonder what the definition of failure is. I prefer not to take any investment for my startups unless they become very big. The cost of running a startup is almost 0 except for your time so there’s no reason to ever fail or give up. Just constantly reinvent it until it works.

  2. Roopinder says:

    Awesome list (esp 11!). Just wondering – wouldn’t this list apply to almost any company out there ? Whether you’re a Director in a company with 500 FTEs, or just one of two guys in a startup ?