July 13, 2024

When startups fail, one of the most frequently cited reasons is running out of cash.

This explanation, while seemingly straightforward, often masks deeper, more fundamental issues that lead to the financial shortfall.

Understanding these root causes is crucial for entrepreneurs aiming to avoid failure. A pre-mortem analysis and the ‘5 Whys’ technique, can help to discover the real reasons behind potential failures, enabling startups to address these issues in a proactive way.

It’s true that many startups fail because they run out of cash. However, this is a surface symptom rather than the root cause of failure. Cash flow problems are often the result of underlying issues that, if addressed early, could prevent the eventual financial crisis. To get to the heart of these issues, startups must go beyond the obvious and conduct a thorough analysis.

A pre-mortem analysis is a forward-thinking strategy where a team imagines a future scenario where the startup has failed and works backwards to determine what could have led to that outcome. This exercise helps identify potential risks and challenges before they become critical problems. By anticipating these issues, startups can develop strategies to mitigate them, increasing their chances of success.

The 5 Whys technique, developed by the Japanese entrepreneur Sakichi Toyoda, is a simple yet powerful tool for root cause analysis that also helps to perform a good pre-mortem analysis. It involves asking “why” five times (or as many times as necessary) to drill down into the fundamental cause of a problem. Here’s a simple example of how both techniques – the 5 Whys and the Pre-mortem analysis – can be applied to come to the root causes of a startup’s failure:

The startup could fail because we run out of cash.

Why can we run out of cash?

Because we do not have enough working capital.

Why could that be the case?

Because our revenue might be lower than expected.

Why would we have that problem? Because our product didn’t attract enough customers.

Why would we not have enough customers?

Because our market research was inadequate.

Why could that have been the case?

Because we rushed the product development phase without validating our assumptions.

Through this process, it becomes clear that the root cause is not merely a lack of cash but a series of strategic missteps, starting with inadequate market research and a rushed development process.

By systematically applying the 5 Whys, startups can uncover a variety of underlying issues such as poor market research, flawed business models, team issues, ineffective marketing strategies, operational inefficiencies or unrealistic unit economics. Without a deep understanding of these potential ‘start-up killers’, founders may develop products that don’t meet customer needs or preferences, leading to poor sales and insufficient revenue.

The same principles can be applied to larger firms embarking on innovative initiatives. By performing pre-mortem analyses and using the 5 Whys, established companies can anticipate potential pitfalls and address them early. This approach ensures that new projects are grounded in solid research, clear business models, and efficient operations, thereby increasing their chances of success.

By conducting a pre-mortem analysis and applying the 5 Whys, startups – but also bigger firms that are initiating a new project – can identify and address these root causes before they escalate into critical issues. This proactive approach allows for the development of robust strategies and contingency plans, thereby reducing the likelihood of failure.

Read more:
Why every startup should do a ‘pre-mortem analysis’