Hey Startup Investor,

It’s Daymond again.

Now, we’ve talked about failure here a few times before. We’ve also talked about what exactly every single successful startup does to make it to the big leagues.

But one thing we haven’t broken down yet are some of the specific reasons why a startup company might fail.

Because the truth is, startups fail all the time. In fact, around 90% of startups won’t make it… And as startup investors, it’s our job to pick out the ones that will.

Of course, there’s no guarantee. However, knowing what to look for – and what not to look for – can put you on the path to gold.

In my time as an investor, I’ve seen startups fail for a wide variety of reasons. But at the end of the day, there are three main reasons that stick out to me from all the rest.

These are some of the most common ways a startup might sink, and it’s important to look out for these red flags before you cash in. Let’s dive in.

  1. The company asked for too much too soon.
Not every company needs a multimillion-dollar investment to get off the ground. Sometimes, all it might take is a few thousand dollars in a company’s earliest stages to kick off their product development.

A founding team asking for too much too soon tells me that they really don’t understand their product and what they need to succeed. I don’t want to see an overvalued company. I want to see hard numbers that justify exactly why a startup needs the amount of money they’re seeking.

Plus, taking on too much money from investors too early in the game can be damaging to a startup’s success. Investors care about a company’s growth, but at the end of the day, they want to see returns on their investment.

If a startup isn’t ready to grow fast and kick back those kinds of returns, it could hurt their investor relations and chances of taking on capital down the line.

Ultimately, I like to see a scrappy founding team. Because sometimes, having too much money can bring about the biggest mistakes.

  1. The team’s head wasn’t fully in the game.
Entrepreneurship is hard work, and it requires complete dedication from the founding team in order to make it work.

I always look for founding teams with laser focus. Of course, it’s difficult to drop everything and dive straight into a project right at the start. Everyone needs money to get a company off the ground.

And I totally get it. You probably remember me talking about how I worked shifts at Red Lobster during FUBU’s earliest days.

But as soon as I realized I had solid proof of concept, I quit my restaurant job to focus entirely on making FUBU the very best it could be.

Founders should be able to prioritize what needs to be done for the best interest of their business. It’ll help them grow, increase their sales, and ultimately, make their investors very happy.

  1. Their product didn’t land.
This one speaks for itself. Sometimes, a product just doesn’t work or have the traction a founding team thought it would.

But, here’s the thing. If a product is a wash, it doesn’t mean the entire company is a failure.

The best thing a founding team can do in this case is go straight back to the drawing board. What failed? Was it the entire product that didn’t land, or just one aspect of it? And how can they make it work next time around?

It’s all about the team’s dedication to building out their business. And the best founding teams are the ones that, instead of giving up, hop right back up and come up with an idea that’s even better than the last one.

It’s inevitable that many, many startups will fail. It’s also likely that a few of your own startup investments won’t pan out the way you’d expected. That’s all part of the game.

But by knowing the main reasons startup companies don’t succeed, you’ll be able to separate out the ones that are most likely to make it big. And in my opinion, it’s all about a great founding team that’s dedicated and willing to keep going, no matter how long it takes to get it right.

That’s all for now, but I’ll be back again next week.

We’ll talk soon,

Daymond John