People problems are the biggest reason startups fail - Business Insider

Research published by Harvard Business School professor William Sahlman analyzed why startups fail.Sahlman surveyed leading venture capitalists and approximately 65% said that senior management was “the most important contributing factor” for failure in high-potential ventures. With their responses, VCs sent a clear message: Senior management is the critical ingredient that makes or breaks venture-backed businesses.Click here for more BI Prime stories.The one reason for startup failure that eclipses all others isn't scaling or product market. Decades of research show that it's actually people problems.These conflicts can take the form of tensions between founders, or between VCs and the entrepreneurs and employees who helm the startup — i.e., senior leadership. In fact, VCs consider founders inextricable from their enterprise. “It may not be far from the truth to say that, to the venture capitalist, the entrepreneur is the company,” Harvard Business School professor William Sahlman wrote in the 1989 research paper “What do venture capitalists do？”VCs have always pointed to senior management when explaining startup failureIn 1989, William Sahlman surveyed 49 leading VCs in the US. He wanted to understand what VCs saw as the most common cause of failure in the companies they worked with. He defined failure as companies that “have fallen seriously short of their objectives,” such that they might not be able to sustain themselves. Sahlman listed factors like market problems (end-user market failed to develop up to expectations), product problems (manufacturing failure, inadequate quality control), and poor product/market fit — but the factor that 95% of VCs picked, and 65% ranked first, was ineffective senior management.According to VCs, senior management was “the most important contributing factor” for failure in high-potential ventures — the 1% of startups. HBS professor Paul Gompers and his colleagues addressed the same question nearly 30 years later, to similar results. “In selecting investments, VCs place the greatest importance on the management/founding team,” Gompers wrote in the research paper “How Do Venture Capitalists Make Decisions？” “The management team was mentioned most frequently both as an important factor (by 95% of VC firms) and as the most important factor (by 47% of VC firms).”Noam Wasserman, a former Harvard Business School professor and current dean at Yeshiva's School of Business, talked about how Sahlman's research shaped his understanding of startup failure at a recent BI Prime webinar. “It went and shifted gears to me in a way that then formed the next 20 years of what I was going to be going and doing,” Wasserman said. He went on to research the people issues behind startup failure, and publish multiple founder-focused books. The modern-day 'people problems' impactIn the past few decades, the startup world has expanded in scope. The landscape attained mythical status with the addition of unforeseen unicorns, or startups worth at least $1 billion. In 2019 alone, at least 30 companies that didn't even exist a decade ago achieved unicorn status, including Robinhood, Glossier, and Warby Parker. The number of unicorns today stands in contrasts with the fewer number of prominent unicorns in the '60s (Intel), '70s (Apple, Oracle, and Microsoft), '80s (Cisco), and '90s (Google and Amazon). So, since 1989, the potential payoff for startup investments has increased — but so has risk.“The big shift in venture capital over the past 30 years is the increase in failure rates — from 30-40% to 60-70%,” Sahlman told Business Insider. “That change in mortality has been offset by an increase in the returns from big winners (e.g., Facebook, Slack, etc.). VCs try to find teams and ideas that have a big upside because they know many portfolio firms will crash and burn.”WeWork lost its unicorn status this year, in part due to problems with senior management and poor governance. Unicorn luggage brand Away faced scrutiny over culture problems that grew as the company did — and stemmed from senior management.Why VCs might point to senior management over failure more than any other factorLead-investor VCs visit portfolio companies about once every three weeks, for a morning or afternoon. Sahlman wrote in “What do venture capitalists do？” that their primary concerns are hiring and firing high-level managers, and working on matters of financing and strategy. They typically meet with founders and a company's growing C-Suite.VCs commit funds to senior leaders in the early days of a startup and continue to keep those leaders as their main points of contact. Senior leaders deliver bad news, spend time with VCs on the phone, and meet with them in person.If the company isn't doing well, the entrepreneur and the VC are suddenly on opposite ends of the bargaining table: The founder wants to keep the dream and the company alive, and the VC wants to maximize return on investment. Thus if the company fails, the failing becomes personal to VCs — traceable back to the source of investment, or the founder. Sahlman wrote that in responding as they did to the survey, VCs sent a clear message: “Senior management is the critical ingredient that makes or breaks venture-backed businesses.”