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Why Startups Need To Die

Why Startups Need To Die

There’s a lot of excitement when a startup is launched, but there’s considerable unhappiness and sorrow when it fails. There’s often a lot of soul-searching and recrimination as to why it failed. What went wrong? Who was to blame? What could have been done to salvage it?

This is especially true when the startup has burnt through a lot of money and there’s always tonnes of finger pointing at the time of the post-mortem. Not only does the failure cause personal and emotional pain, it’s also considered to be very wasteful because so much money has gone down the drain.

Mature entrepreneurs will step up and take responsibility for the failure because the startup died when they were the CEO; while others will try to pass the back and find someone else to blame. Either the investors failed to support them, or the external environment was not favorable, or the competition indulged in predatory pricing, or they were too early, and the market conditions weren’t right.

I think we need to understand that startup failure is not a bad thing. The truth is that startups are designed in order to fail ! Not all of them, of course, but obviously the ones which aren’t able to compete efficiently deserve to fail.

Remember that this is the way the capitalistic system has been designed. The rule is survival of the fittest, and startups need to compete with each other in order to earn the right to win. Especially when an area is “hot”, you will get a rash of entrepreneurs who want to enter the field. They will usually have very similar ideas at the same time, as a result of which they will start startups which seem very similar to each other. This is why we see a spurt of “me-too” startups every few months in the industry which happens to be the flavour of the month (right now, it is AI). Since the market is not big enough for all of them, a few will grow, some will stagnate while the majority will die.

Let’s not forget that if a startup needs to become a market leader, it needs to earn market share by crushing the competition. After all, if one company needs to become big, the others need to fold – this is what Schumpeter’s creative destruction is all about!

The startup space is fiercely competitive, and we need to accept this. This is true, not only for entrepreneurs but for investors as well, which is why so many of us end up losing our money.

However, there’s really no need to mourn the demise of the startup. Yes, the financial loss hurts, but we need to understand that this is part of the natural history of startups.

It’s a bit like the life and death of a human. We’re all excited when a baby is born and we all mourn when someone dies, but the truth is that death is as much a part of life as birth is, and we need to learn to take both of these in our stride.

Now I’m not trying to get all philosophical here – it’s just that the sooner we accept reality, the easier it will be for us to live with this fact of life. In the big picture, this is actually more efficient for the economy. Startups are small experiments, and the financial loss caused when they fold is much less than when a large company goes belly up. By contrast, socialism forces us to keep inefficient dinosaurs like Air India alive by putting them on expensive life support, when it would be much kinder to kill them and allow more effective alternatives to take their place.

Yes, startup failure does cause short term pain, but instead of mourning their demise, we need to imbibe the lessons the failure teaches us, and move on, so we can do a better job the next time.


[This post by Dr. Aniruddha Malpani first appeared on LinkedIn and has been reproduced with permission.]

Author

Aniruddha is Director at Solidarity Investment Advisors

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