Why do startups fail? (Hint: it’s bad management)

They surveyed leading venture capitalists and found that 65% said that bad management at senior level was the major contributing factor for failure in high-potential startups. In their responses, VCs sent a clear message “senior management is the critical ingredient that makes or breaks venture-backed businesses.”

Decades of research dating back as far as 1989 has pointed to people problems being the prime reason for startup failures. Whether it’s tension between founders, management and employees or entrepreneurs and VCs, bad management at a senior level can be the death knell for any startup.

The reality is that founders are inextricable from their business and their attitude and motivations become the company culture. VCs place the highest importance on the founders when selecting investments. Founders were listed as “an important factor” by 95% of VCs, and as “the most important factor” by 47%.

Of course, not all startups are backed by VC firms, so they don’t have the additional support to get off the ground.

Why do startups fail?

There are many reasons, but management incompetence is still clearly the biggest problem. At the end of 2019, statistics showed that 82% of startups failed because of bad management and leadership inexperience.

Most startups open for trade with the founder or founders, and possibly one or two employees. It’s all manageable, and focus is on sales and bringing in revenue! But as the business scales (and that can happen quite quickly in some instances), things start to fall off the edge and stress builds. Without well-developed management skills, daily pressures can soon lead to bad choices, shaky systems and reactive decisions.

If cash-flow is steady, startups can go on a hiring drive without thinking long-term. Short of experience in hiring the right person for the job, founders can start approaching previous colleagues, friends and even family. Because of past relationships, they can also appoint these people to roles that hold a high level of responsibility, which usually has disastrous consequences for everyone.

Choosing senior employees, and even a co-founder, based on personal relationships is, for the most part, a bad idea!

Here’s what the stats tell us

According to international statistics from December 2019:

90% of new startups fail
75% of venture-backed startups fail
40% of startups actually turn a profit

Failures mainly pivot on:

Bad management
Conflict between co-founders
Bad hiring decisions
Underestimating market need
Poor competitor analysis
Poor stock control (particularly being overstocked)
Poor quality control
Underpricing
Lack of marketing skills
Poor financial systems
Cash-flow problems

Without thoroughly understanding how a successful business runs, lack of experience can quickly trip up any startup, even ones with excellent product concepts and business potential.

Note: these statistics are pre the global pandemic that has decimated many startups and had a massive negative impact on many international corporations.

What are the effects of bad management on employees?

“People don’t quit their job; they quit bad managers” is a well-worn phrase, but it’s as accurate today as it’s ever been. Poor leadership can make the working environment intolerable, no matter what the size of a company.

In larger organizations, department managers can be moved, transferred or even paid off. But what happens when the problem is the founder or one of the founding members of a startup? The honest answer is that it could be a precursor for business failure? When people come up with a brilliant concept and decide to start a business, their people skills rarely get brought into question.

All focus is on devising a business plan, creating systems, raising capital, product development, working on a marketing strategy and planning the launch. Most startups are born from the creative minds of product specialists. People who develop an excellent business concept, test its usefulness in a specific market and then decide to start a business.

Note the emphasis on creative minds who understand their product and have the courage and determination to go out and startup on their own. There’s no mention of founders having previous experience at managing other people or knowing the critical attitudes of a successful entrepreneur. Their intentions are good, they’re willing to put in the hours, make the investment, they’re probably lovely people – but people management is a learned skill. You can be the most delightful person, with natural leadership traits, but you still have to learn how to be a good manager through training, mentoring and coaching.

Every lousy decision has an impact on employees

Bad management, whether it’s how employees get treated, or a symptom of poor decisions, impacts the whole workforce. Cash-flow problems as a result of lack of financial planning, poor marketing, stock problems or quality and service issues, puts people’s livelihood at risk.

The spin-off that exacerbates the business’s woes is that staff morale declines, and people lose interest. Engagement and productivity decline, problems increase, and the company is at even greater risk. Stress levels rise, and without proper management, the overall situation worsens.

Crisis management in the hands of inexperienced leaders is mostly reactive, threatening and even irrational. Employees can’t handle the endless stress and leave. The business falls into a cycle of self-destruction.

What makes a bad boss?

Many people who are guilty of bad management are unaware that they lack the skills and training. Because they’re managing based on their gut-instinct, they can’t see where they’re going wrong. For employees, working for someone like this can range from having a demanding boss to working for a loose cannon.

Founders of startups often believe that they’re putting the interests of the business first without realizing that their employees are their most valuable asset. Without highly engaged, happy staff, the startup is virtually doomed, no matter how great the concept.

Here are a few negative traits of bad managers, particularly in a startup environment:

Poor listening skills

Many founders of startups see the business as an extension of themselves; therefore, they know what’s best. They don’t listen to employees regarding customer feedback, product mix, quality, stock levels, etc. They take the input personally and very quickly start defending themselves and their decisions. They adopt a “who are you to question me” attitude. They don’t listen to the facts despite the fact that the employee is relaying critical info directly from the rock face.

Employees back off and feel alienated. Word spreads in the team that their feedback isn’t valued and it’s better not to question anything. Faced with daily real-time crises, employees lose interest and move on. A manager with poor listening skills will never be able to develop high-performing teams.

Dictating rather than explaining

Managers who speak far more than what they listen tend to dictate and often threaten rather than explain. This is an absolute motivation killer and can invoke fear in individual employees. This trait is linked to poor listening skills, but takes it a step further – it comes with arrogance.

Whether it’s in response to employee input or discussing a new project, the manager tells, tells and tells without allowing any opportunity for team input. It’s all one-way communication! Teams get told how things will be done, by when and what the consequences will be if the deadlines aren’t met.

Very few people can embrace a new task or project with enthusiasm when they dare not ask questions, discuss potential challenges and offer realistic input. Instead, they take on the work filled with either fear or indifference. “I hate my boss!” Although there might be successful results in the department, employee churn will be high, and productivity levels will average at best.

My way or the highway!

The manager has the attitude that employees should be lucky that they have a job. They dictate, threaten and spell out consequences for anyone who doesn’t comply. Comments like “well if you don’t like it, you know what to do” permeate their conversations. There’s a constant low level of underlying fear, and employees never know where they stand.

Managers like this “rule” departments by willfully creating an environment of insecurity. Employees tend to avoid interaction and focus on doing precisely as they’re told. This management style can often apply to individual employees only, while others might get treated very differently.

There’s a level of bullying in this management style, and in my 20 years of working in HR I’ve often seen this kind of management directed at, for example, women, lowly paid workers or people from marginalized communities. These managers create an almost “master/servant dynamic”.

Although some people will put up with it to keep their job, it often doesn’t go unnoticed by other employees who dislike the environment and leave. The implication could be that the company loses top talent without knowing why. Managers with this style can do massive harm to an employer brand and business success.

Practices favoritism

Favoritism can easily set in in a startup if the founder has brought friends, family and previous colleagues onboard. Personal relationships spill over into the business environment. Poor performance, a toxic attitude or lack of skills gets overlooked. Employees quickly learn that the person is untouchable and that there’s no way that they can say anything and expect to get heard.

It’s not uncommon for untouchable friends and relatives to actually be leeching off the business owner at the expense of overall productivity and ultimately the company’s success. Although many friends and family members start businesses or become employees, very clear and distinct lines must get drawn between their professional relationship and personal lives.

Favoritism can also rear its head in environments that are inclined to bias; managers who employ carbon-copies of themselves, or certain types of people. The more the employee reflects the manager’s traits or preferences, the more favor they gain. They get higher raises, get promoted above people who are more skilled and deserving, and their opinions get given more credibility. Employees realize that they’re in a dead-end situation, become disengaged and leave.

Won’t relinquish control

Founders of startups can easily fall into this trap. When they started the business, they managed every aspect. As the company becomes more established and starts scaling, they have to employ more staff. But they still try to control every element down to the minute details. They’ve invested so much of themselves in the company’s success that to let go feels like giving away a part of themselves. They can’t trust. They want to check every stage and approve every decision.

Apart from stalling progress while people sit waiting for the nod to continue, all innovation is stymied. Their ideas rule and stand-out staff become a threat to their success. Employees stop contributing and just go through the motions. With no scope for growth and development, they start looking for better opportunities.

This is a bad character trait because it mainly stems from personal insecurity and the belief that to remain successful, they must control everything. It results in micromanagement, and eventually, the success of their venture will get put in jeopardy. In an ever-evolving world, organizations need to continually innovate and reinvent products and services to meet consumer expectations.

Innovation and re-invention is the result of a team of diverse minds spontaneously sharing ideas while working towards the same goal. A one-trick pony mindset won’t cut it in today business landscape.

Takes all the credit (and shifts all the blame)

Successful startups have every reason to feel a sense of personal pride because they took an idea and created a thriving business. Insensitive, immature or arrogant managers, however, continue taking all the credit even when their workforce has grown considerably.

Employees make or break an organization, but some managers have the bad character trait of believing that without them, the business wouldn’t be what it is.

Employees aren’t appreciated. If a team comes up with a spectacular idea, they’ll immediately claim it for themselves and fail to accept the team's contribution.

Conversely, if a project fails, they won’t hesitate to lay blame on the team, or individuals publicly. Managers with this trait will rarely investigate the circumstances of a situation and are inclined to jump to conclusions. If proved wrong, though, they’ll never retract a statement or apologize. For employees, it becomes virtually impossible to trust their manager, and no one can function in an environment where there’s a lack of trust and transparency.

Lack of appreciation and recognition

Many managers believe that employees earn a salary, and that’s enough recognition for their efforts. It’s not uncommon for these managers to adopt a harsh style that keeps employees bound to the clock and under constant supervision. To people with this mindset, employees are much the same as machinery; they start producing when they walk in and don’t stop until they leave.

Managers with this thinking seldom make any attempt to get to know the person behind the employee and are very miserly when it comes to at work benefits. Their working environment has the minimum required to get the job done, employees have nothing like a chill-out space to relax, and rules are strict. Staff are there to get the company’s work done, and that’s all. There’s no provision for performance bonuses, recognition awards or anything else. Under this management style motivation is low and productivity below average.

How does this weigh up against the good manager?

Good managers have learned how to work with people more than to “manage” them. They build mutual trust and respect through:

Always leading by example
Sharing information openly
Admitting their mistakes
Listening to challenges
Taking action when problems get identified
Treating everyone equally and fairly
Encouraging cooperation within the workplace
Publicly giving credit where it’s due
Acknowledging employees efforts
Discussing employees’ career ambitions
Offering advice and on the job training and coaching
Getting to know about the person behind the employee
Showing empathy and supporting staff through difficult times

Good managers know how to motivate people through building a give and take relationship. They know that the success of their startup depends on how motivated and engaged their employees are. That’s why they encourage personal development, welcome innovation and understand that staff are people with individual needs. They know that a happy workforce is an engaged and productive workforce.

While bad managers may be great at what they specialize in and have a high IQ, they lack people skills whereas good managers have the technical expertise and IQ, but are also high on emotional intelligence.

Wrapping it up

People management skills aren’t a given, even in people who display natural leadership traits. Leaders must be trained, coached and prepared for management. Negative traits are often learned, and anything that’s been learned can be overwritten and relearned with the right coaching and support.

Bad character traits like arrogance and ego can stand in the way of change though. A leader will only change if they’re willing to embrace it for the success of their enterprise and all its employees.

Now more than ever strong leadership skills are essential to get businesses through these challenging and insecure times. F4S is a people analytics platform that can help you improve your management skills, whether you’re already in a leadership position or thinking of embarking on an entrepreneurial venture.