How Investors Can Use UX to Identify Better Startups

This article is based on a presentation by Erik Wingren and Petra Wennberg Cesario

by Julian Scaff

Startups are cool and exciting, and the opportunity to innovate and build a profitable business (or get bought by a big company for a lot of money) is tantalizing for both the founders and investors. But the stark truth is that about 90% of startups fail. Some of the reasons for this are beyond the control of the people involved in the startup, but many of the reasons for failure are absolutely in their control. It’s critical for founders and investors alike to know what those controllable factors are as early as possible. A large majority of those factors have to do with User Experience, and so below I’m going to look at each one of those factors to see how good UX design done early can help a startup avoid common pitfalls, and help investors better evaluate their chances of success.

20-Reasons-Startups-Fail

CB Insights compiled a list of startup post-mortem failures. Not all the reasons for failure have to do with UX, but most of them are either entirely UX or UX-related. This means that UX is by far the number one reason that startups fail. Let’s examine the top factors along with the percentage of failed startups that cite each as a reason for their failure:

1. No Market Need – 42%

This was by far the number one factor of why startups failed. It’s pretty simple: if nobody wants your product, then you have no business. So how can you find out if there’s a market need for your product or service? User research and user testing are the best methods to find this out, and you should know this before you start building anything. A startup that hires a UX designer (or has a UX designer as a founder) before they hire an engineer is already off to a good start.

If you’re an investor, make sure that a startup has done their UX research before they started building anything.

2. Ran Out of Cash – 29%

Typically a lot of engineering time and money is spent fixing bad features, or re-doing work that wasn’t done right the first time. User research, lean prototyping and testing helps ensure that you’re building the right product with the right features before you start building it. In fact, UX has been shown to reduce development time by 30%-50%. That adds up to a lot of money!

If you’re an investor, you want to look for startups that are using UX to build the right product in the right way and not just wasting development money.

3. Get Outcompeted – 19% / Poor Product – 17%

Getting outcompeted and making a poor product are closely related. Most companies don’t have a unique product or service and have to compete in a crowded marketplace. The factors that give products an edge over their competition are typically superior functionality, ease of use, and a positive emotional experience with customers. Factors that kill a product’s competitive edge are poor functionality, complexity, and customer frustration. A study by Gartner revealed that 90% of companies believed customer experience to be their primary differentiator.

Making a really good product is hard, and nobody gets it right the first time. UX design follows an iterative design process, meaning products are developed in lean cycles of researching, testing and improvement, leading to incremental, data-driven design solutions. If a product has flaws (and all do) it’s very difficult to identify those flaws and how to fix them without using the UX design process.

If you’re an investor, look for startups who are leveraging UX design to ensure high quality and gain a competitive advantage.

4. Poor Marketing – 14%

Knowing who your customer is and what they need leads to a deeper understanding of how to market your product to them. Further, UX design helps to create a differentiated brand and product proposition. The best marketing in the world can’t cover up a poor user experience.

In you’re an investor, look for startups that leverage their user experience as an integral part of their branding and marketing experience.

5. Ignore Customers – 14%

This is a no-brainer from a UX standpoint. The UX design process is also called ‘human-centered design’ because the focus from start to finish is on the people who use the product. If a startup isn’t doing UX research and testing, they’re flying blind.

If you’re an investor, look for startups who pay attention to their customers with UX research and testing.

6. Lose Focus – 13% / Pivot Gone Bad – 10% / Burnout – 8% / Failure to Pivot – 7%

Managing a product and a business through iterations and growth cycles is tricky, and it’s very easy to lose focus on the core customers and/or core business model. With it’s user-centered iterative methodology, UX design helps startups to stay focused on core business objectives, the most important features, and to know when to pivot and how. Keeping good focus and getting positive results prevent burnout because teams won’t waste time building the wrong product or features.

If you’re an investor, look for startups who leverage UX to stay focused and respond intelligently to change.

How do you know if a startup has done “good” UX?

Here is a checklist of key indicators that a startup has done good UX and not just thrown around some buzz words:

  • Have they done User Research? When pressed for time, it’s common for research to be the first thing cut, but this can lead to catastrophic wastes of time and money, and ultimately business failure.
  • Do they understand the entire Customer Journey? The user experience doesn’t just begin and end with the customer using your product. To really understand the user, they need to know their entire journey through deep user research.
  • Do they Prototype and Test before development? The most common mistakes that startups make are building products nobody wants, not being able to compete, and building poor quality products. The only way to know they’re building the right product with the right features is if they prototype and test. This also helps ensure they won’t run out of money building the wrong thing.
  • Do they have Senior Design Leadership? It’s critical that design thinking and usability are core company values. This only occurs when design experts are at the leadership table, in the form of a founder, a Chief Design Officer or VP of Design, or a company that keeps a UX design agency on retainer to serve that same role. Senior Design Leadership is so important that some Silicon Valley investment firms will only invest in startups that have designer founders, and many VC firms are hiring designers to help evaluate opportunities.

If you’re a tech entrepreneur, investing in UX design is the most effective way to boost your chances of success. If you’re an investor, it should be the number one thing you look for in a startup investment. Research definitely shows that UX is the key.

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