FRAGILE STARTUPS:
Five types of businesses prone to crashing, even after a promising start I’d like to share some ways you can recognize a startup that might be headed for trouble. A business can die from something much worse than a bad launch or an ugly first version: a structural flaw. If you know what to look for, you can spot this problem on day one. You might never catch a startup smooth sailing through a rocky start, but you can sure recognize when it’s doomed from the start. This structural flaw might not be obvious at first, but it’s there. And it’s a death trap. Whether it’s a feature pretending to be a full product, founders who don’t understand the industry, marketplaces with no wedge, hardware with terrible economics, or demand that exists from hard selling — all five types of startups listed below are dangerous to invest in and even more dangerous to start. You might be surprised to know that it’s not the bad launch or the ugly v1 that kills a startup. Think about a startup that was hyped in the news and talked about in the investor circles. You’d think it’s all going to be great. But then, you realize that the startup has ended up in the graveyard — the Morgue.
THE TALE OF THE FEATURE
The first type of startup that often dies is the feature pretending to be a company. These startups build a small tool. They grow fast and people love it. A classic example is developing an AI tool to summarize Notion pages. Customers love it, probably because it relieves a common frustration. The tool grows fast. But then Notion updates and you’re left trying to compete with a button. When it happens, the company faces a lot of trouble. But if the platform you depend on can copy your whole business in one update, you don’t have defensibility. Some features might not be doomed, but if the platform can replicate your whole business with one update, ditch the idea.
THE IMPORTANCE OF INDUSTRY INSIGHT
The second type is easy to spot: founders who don’t understand the industry. An engineer might say, “Construction is outdated, I’ll fix it.” The problem isn’t software, though. It’s permits, insurance, union rules, procurement, who signs the contract, and how people behave on site. The same goes for healthcare, logistics, finance, and real estate. If you don’t have a real insight into how the market works, you build a beautiful solution to a problem nobody has. The problem isn’t software, it’s… [permitting], insurance, union rules, how people behave on site. The problem is who signs the contract. It’s a lot more complicated than just software. After the brief moment of validation from getting customers, many founders believe they don’t have to do any more to retain customers. But customers might not still come back if you stop pushing. The market won’t attract people anymore.
THE ANATOMY OF MARKETPLACE
Marketplaces are places where both sides need to be addressed at once. If you try to create a marketplace for freelance chefs, you’ll need both chefs and customers. If there’s no chefs, there’s no customers, and vice versa. Many platforms subsidize both. They offer free listings, discounts, ads, and guaranteed earnings. But it’s burning money, and it’s not sustainable. The ones that work have a wedge. A marketplace needs a wedge. Start with one city, one category, or one side first. That way, buyers and sellers will find each other.
ECONOMICS OF HARDWARE VS. SOFTWARE
The fourth type is hardware with great tech and terrible economics. The prototype of the hardware might look amazing, but the reality can be grim. Tooling, manufacturing, inventory, shipping, returns, warranty, certification, and retail margins — every unit needs cash before the customer receives it.When you're distributing hardware, you need a lot of cash. If you don’t have it, you might be in trouble. Every hardware unit needs cash, but software can serve a thousand users for almost nothing. Software can sell directly to users for close to $0. Hardware can’t. Hardware founders should ask, “What does it cost to make and distribute? How often does it break? Is there margin left after everyone takes a cut?
QUENCHING FAKE DEMAND
The final type is the startup pushing hard to create demand. These platforms rely on cold emails, ads, and discounts. When you onboard every customer personally, and revenue does look like validation. But what happens if you stop pushing? Do customers still come, do they stay, or do they tell others? There’s a big difference between I can convince people to try this and the market is pulling this out of me. You need to identify unique value to the market to survive, otherwise, the company might die. This type of demand is fake.
Practical guidance
If you are considering investing in a startup, you should make sure that the startup is not suffering from the weaknesses mentioned above. Before asking, "Is this cool?". There are some signs of a company that’s going to take off, and that you can recognize in advance.
- What gets stronger as it grows? The best startups improve as they grow. Software scales, for example. More users mean lower cost per user. Hardware doesn’t work that way. The market can’t copy or beat you. People desperately need it. It gets better with scale, or more expensive to defend You need to do more than just want it. It’s something that gets easier to defend, easier to distribute, and more valuable as it grows. Remember, a good idea isn’t just something people want. It’s something that makes the market pull it out of you, because you can’t make it without it.
Questions readers ask
What exactly is a 'feature pretending to be a company' and why is it so risky?
A 'feature pretending to be a company' is a startup that builds a single, narrow tool or feature, often on top of an existing platform. It's risky because if the platform updates or copies the feature, the startup loses its competitive edge and can quickly become obsolete. For example, an AI tool that summarizes Notion pages could be rendered useless if Notion adds the same feature in one of their updates.
How can you tell if founders truly understand the industry they're entering?
Founders who understand their industry will have a deep grasp of the specific challenges and nuances, not just a broad idea. For instance, in construction, it's not just about software but also about permits, insurance, union rules, and on-site behavior. If a founder thinks they can solve complex industry problems with just a software solution, they likely don't understand the industry well enough.
Why are marketplaces so prone to failure, especially in the early stages?
Marketplaces often fail because they require a delicate balance between two sides—a supply and a demand. Without both, the marketplace can't function. Many marketplaces subsidize both sides to attract users, but this can lead to significant financial strain. For example, a marketplace for freelance chefs needs both chefs and customers to succeed, and attracting both can be challenging and costly.
What are the signs that a startup might be headed for trouble even after a promising start?
Signs include a lack of defensibility, especially if the startup's main feature can be easily replicated by a larger platform. Another red flag is founders who don't have a deep understanding of the industry they're entering. Additionally, marketplaces that struggle to attract both sides of the market, and startups that rely on hard selling to create demand, are often doomed from the start.
Can a startup that starts as a feature evolve into a full-fledged company?
It's possible, but it requires moving beyond the initial feature and developing a broader product or service. The key is to create something unique and valuable that can't be easily replicated by the platform you're building upon. If the feature can be easily copied or integrated by the platform, the startup will struggle to survive.
What makes a startup a 'hard sell' and why is it a problem?
A 'hard sell' startup is one that relies on aggressive marketing or sales tactics to create demand for a product or service that might not have an organic market need. This is problematic because it's not sustainable in the long run. Once the marketing stops, the demand may drop, and the startup could fail.
Are there any types of startups that are more likely to succeed?
While no startup is guaranteed success, those that avoid the pitfalls mentioned—such as having a clear understanding of the industry, building a defensible product, and creating a sustainable market—are more likely to thrive. Startups that address real, pressing needs and have a clear path to profitability are generally more resilient.
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