Why Do Startups Fail?
Guest post by Mark Phillips, Managing Partner of 11 Tribes Ventures.
Mark is an action-oriented strategist with a strong track record working with teams of all sizes, from pre-seed startups to multi-national corporations. Before launching 11 Tribes Ventures, Mark was a management consultant, focused on M&A between corporations and growth stage startups. He advised on deals totaling more than $750M, actively supporting clients throughout the due diligence and post-merger integration processes.
Mark earned his MBA from the University of Chicago Booth School of Business, focusing heavily on entrepreneurial finance and strategic management. He is an adjunct professor of finance at his alma mater, Wheaton College. He lives in the Chicago suburbs with his wife Emily and their two boys.
Why do startups fail?
It is a question that we as venture investors have asked ourselves countless times. If only we could identify a root cause - think of all the start-ups and founders we could help grow and scale!
But of course, identifying and treating the root cause has been a historically challenging task for investors. There is no one ‘right’ answer because businesses are built by people and no two are the same. And at the earliest stage, start-ups are led by one bold and brave individual, standing at the helm of every key decision: the founder.
What do we know about founders? For starters, they are some of the hardest working folks you’ll ever meet. They experience rejection constantly and continue to fight. They battle scarcity, sleepless nights, and against all odds build many of the businesses and brands we rely on most in everyday life. And most of all, founders deserve an approach to venture funding that truly cares for them as humans, not just the next great investment.
To figure out how to care for founders, we first need to hear their stories. We need to know the depth and breadth of the challenges they face – not just as business leaders, but whole people with difficulties and demands that span well beyond the workplace. What we believe you will find in the story below, and in many others, is that core issues of identity don’t go away when founders embark on their entrepreneurial journeys. With their personal value and worth tied up in business outcomes, many find it harder than ever before to keep their heads, and hearts, above water.
Troy’s Story
I met Troy in late 2020. Like every other meeting that year, we exchanged pleasantries across the screen before I asked Troy to share his story. It was a story that started like many other entrepreneurs; Troy had graduated with an MBA from a top-tier business school, earned a fantastic job with a boutique consulting firm after graduation, but felt compelled by life in the Big Apple to ‘go big or go home.’
Even when his business was merely an idea, it was Troy’s battle with his own identity that drove progress. Troy had grown up on a chicken farm in the rural South, but as he weighed his options, he knew he wanted ‘more.’ His desire to fulfill that story of transformation from life on a farm to becoming a successful CEO propelled him forward.
So, Troy launched a tech start-up in 2011 as the founder and CEO. He and his team had a strong business plan, a functioning, if rudimentary product, and early signs of customer traction. They set out to raise capital and received some promising interest. Pretty soon, Troy had his first prospective investor. But as momentum increased, cracks in the foundation began to appear.
Troy and his first investor agreed to terms, but when the investment arrived, it was only half of what had been committed. Troy chose not to question it—keep the investor happy, right? But with each decision from then on, he felt one step behind.
In terms of business expenses, Troy knew his salary was the largest. Private school, a comfortable apartment, and other personal expenses added up in time. He didn’t want to change his family’s lifestyle to give back to the business for fear that others might see and call his success into question. As Troy fought to keep the business afloat, continue to be the husband and father his wife and kids deserved, and maintain his identity as a start-up founder, the cracks in his foundation continued to spread. Troy started to experience a deep struggle in fulfilling all of his roles.
It was then that life took a very different and dark turn. Troy’s wife suffered a miscarriage and this personal challenge added to the already immense pressure at work. It became too much to bear. Four years in and, at this point, borderline suicidal, he knew he needed out. He emailed his business partner and asked to leave his role and dilute his ownership. He admitted that his income had been more than the business could support. Because of all that Troy had done to protect his identity as a "success," this came as a huge shock to everyone involved.
Nonetheless, an investor caught wind of Troy’s decision and demanded his money back or face a lawsuit for improper use of funds. When Troy couldn’t come up with the investment dollars, the District Attorney’s office was contacted, and he was formally charged with a felony. Things unraveled quickly from there.
Troy started his business career at one of the most prestigious business schools in the country; but before he knew it, he was spending the day in a jail cell alongside men from Riker’s Island after he was arraigned.
While the case ended in a plea bargain that involved no further jail time, these events left their mark on Troy’s life. This wasn’t the success story he’d dreamed of. But, as we’ve seen in recent headlines, his story is not an outlier in the entrepreneurial community.
The Challenges of Entrepreneurship
Adam Neumman, former CEO and co-founder of WeWork was ousted from his role at the firm in 2019 due to investor pressure. His leadership had created a toxic work environment wrought with substance abuse and excessive spending; when WeWork went public, share price plummeted among the controversy and investors were left with a company worth fractions of its original value. [1]
Elizabeth Holmes’ story is even more harrowing. The former CEO and founder of Theranos was found guilty of four counts of defrauding investors in January of 2022. Theranos had raised $945 million from investors who believed Elizabeth’s claims surrounding the functionality of their blood testing device to be true. As it turns out, they were not; she now faces up to 20 years in prison. [2]
Stories about founders like Adam and Elizabeth are often difficult to reconcile. We empathize with Troy but, in contrast, struggle to see the humanity behind his counterpart’s vast sums of wealth, drug use, and dishonest behavior. Peel back the curtain just enough, though, and it’s clear that the same system that opened the door for Troy’s challenges and mistakes led to the downfall of front-page news entities like WeWork and Theranos.
For decades, start-up success and failure have been primarily evaluated in terms of bottom-line value. Venture capital firms have been so focused on the numbers that they’ve lost sight of, arguably, the most critical success factor: people. Research has shown that 66% of start-up failures can be attributed to people; things like co-founder conflict, broken team dynamics, poor investor relationships, depression, and burnout. [3]
It’s no wonder that relationships are strained; of a group of 500 founders surveyed, nearly half reported feeling stressed “pretty much every day.”[4] Perhaps even more staggering, the National Institute of Mental Health has found that 72% of entrepreneurs are affected by mental health issues. [5] These figures represent an overwhelming number of business owners and operators living in a place of deep pain and unrest.
Considering these stories and statistics, what is the proper response? Should identity issues, loss of relationships, and deterioration of mental and spiritual health be the norm for entrepreneurship? Should the cost of a successful business be the loss of one's soul?
We believe there is a better way.
11 Tribes Ventures
At 11 Tribes Ventures, we are disrupting the venture capital business model.
We’ve rejected the status quo of dollars-driven, people-indifferent fund management in lieu of an approach that centers around building businesses that are profitable and sustainable. We’re changing the narrative from burnout to flourishing by focusing on investment not just in the business itself, but in the founder.
What we do with our portfolio founders at 11 Tribes isn’t transactional—it’s relational. We’ve accomplished this through the creation of an ecosystem of support around entrepreneurs underpinned by our 2% commitment—a direct allocation of capital to each founder for them to put towards their own mental, physical, and spiritual wellbeing.
But if we only support the human side of the equation, we may lose the right to having these critical conversations with our founders. We are compelled to also help them build excellent and profitable businesses. Which is just what we do through the help of our Venture Partners Program—a group of incredible leaders and advisors, eager to help the next generation of entrepreneurs build great businesses, but with a focus on doing so through strong and ethical leadership.
Does this work? Yes. Remarkably well. The most critical component to a venture fund’s success is their ability to invest in the most competitive companies run by the best entrepreneurs. Our thesis is profoundly unique and we have heard hundreds of founders respond with: “I’ve never heard another VC talking like this”. You can imagine when they have their pick of venture investors to bring into their company, 11 Tribes is at the top of the list.
But it’s not enough. At 11 Tribes, we’ve changed the business model of venture capital, but there is so much more to be done. We need to redefine the ecosystem of support that we can bring to each founder. How do we deliver on that 2% commitment and ensure that the “root cause” leading to potential failure is addressed lovingly and effectively?
From this, Kadence Group was born.
Kadence Group
You may be asking, what specifically is done with that 2% commitment? How are founders being equipped to strategically invest that capital in their own wellbeing? Kadence Group fills that gap. Our mission is to enhance the wellbeing of entrepreneurs through cohort-based learning, world-class coaching, and alumni community support. In short, we equip them to build without burnout.
Tactically, this looks like providing entrepreneurs with access to a wellbeing program, Kadence Core, which includes a combination of cohort-based learning and 1:1 coaching sessions. Our cohort-based learning empowers entrepreneurs to pursue wellbeing as an integral component to building a business. Each develops an awareness and practical application of what wellbeing means for them and their business; from sleep optimization to managing stress, communicating in healthy ways, and discovering what emotional management really looks like. Every session is designed to provide entrepreneurs with the unique opportunity to interact with each other, discuss topics safely and share questions with our facilitator: a world-renowned wellbeing specialist.
The week following each group session, entrepreneurs meet individually with one of our expert coaches to receive more personalized support. Together, in collaboration with their coach, they develop goals, create a support system, and develop a clear action plan to fuel their own unique wellbeing journeys. After they complete Kadence Core, we encourage entrepreneurs to stay engaged through Kadence Connect; our on-going 1:1 coaching service. Each participant also becomes part of our alumni network to further build their entrepreneurial connections through Kadence Community. We believe all leaders are better together and encourage our entrepreneurs to re-balance regularly in community.
It is a privilege to be a part of establishing wellbeing as the cornerstone of entrepreneurial growth and success. We eagerly anticipate life in a world where the narrative centers not around burnout and mental health challenges, but businesses led by healthy entrepreneurs for the good of whole communities.
To learn more about 11 Tribes Ventures unique approach to investing, visit us at 11Tribes.vc or reach out to Mark Phillips directly (mark@11tribes.vc).
And to engage with Kadence group as an entrepreneur, a coach, or to support the mission, visit FindKadence.com.
[1]: Article available at businessinsider.com
[2]: Article available at cnn.com
[3]: Article available at cbinsights.com
[4]: Article available at businessinsider.com
[5]: Article available at medium.com
