A personal exploration of why the product startups fail in the silicon valley

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Last updated on November 26th, 2022

Let me start with a song of praise!
While some use these two terms interchangeably, the roles are far from being interchangeable.

The VP Engineering – technology champion or the people person?

Silicon Valley is more than a place. Like Florence in the Renaissance, it’s a byword for innovation and ingenuity. Home to some of the most highly-valued tech companies in the world, like Apple, Google, Cisco, and Facebook, the Bay Area has the 19th largest economy in the world! Silicon Valley has over the years experienced cycles of disruption and regeneration. We have seen the most ingenious as well as the most outrageous inventions from this region. The deep pools of capital, outstanding engineering expertise, strong universities, and a thriving business network coupled with a culture that redefined risk-taking have made the Silicon Valley model almost impossible to clone. Today, having a Silicon Valley set up has become a synonym for success.

But it‘s not all roses and rainbows. For every startup that grows into an Uber or a Netflix, you have those that implode spectacularly. For every shining unicorn, there are many product startups that have fallen, and this blog is about them. So, why do these product startups fail in Silicon Valley?

Negotiating the funding conundrum

The funding ecosystem has become quite complex today. Paul Graham, of Y Combinator, Silicon Valley’s most successful accelerator states, “Venture funding works like gears. A typical startup goes through several rounds of funding, and at each round, you want to take just enough money to reach the speed where you can shift into the next gear. Few startups get it quite right. Many are underfunded. A few are overfunded, which is like trying to start driving in third gear.”

Startups starved of early-stage funding or strategic funding at later stages find it hard to stay afloat in the challenging Silicon Valley ecosystem.

Battling high operational costs

The astronomical operational costs of Silicon Valley is a massive drain on startups. Space is limited, demand is high, and rentals are skyrocketing. Everything from utilities to food is expensive here. The cost of living in the Valley is among the highest in the world! Running a product startup in such an environment with almost debilitating operating costs and not enough funding is a challenge to beat even the most seasoned entrepreneurs.

Navigating tech talent wars

With many tech companies being within poaching distance from one another, retaining tech talent is hard. Especially if you are a scrappy startup. Startups struggle to identify ways to attract and retain senior engineering talent. Running a startup means learning to do more with less. However, when it comes to talent, you need to make wise choices.

One high performing engineer can provide ten times more value than an average one. But can you afford to hire such talent? Can you afford to retain them? For startups in Silicon Valley, this has become a major hurdle as the tech talent wars rage.

Talent is also migrating from the Valley to greener pastures further North. These areas such as Portland, Seattle, and even Vancouver are looking more attractive by the day

Managing escalating scalability challenges

Over the past few years, the speed of change suddenly seems to have accelerated. Startups, especially software product startups, have to get their products to market fast to address an immediate need. They also need to continuously update and upgrade their product to remain relevant.

In this quest, many startups build products that seem right in the beginning. But soon trouble starts to manifest itself when product scalability becomes a challenge in version 2+. Why does this happen? I blame technical debt. Product startups that haven’t accounted for technical debt from the beginning repay that debt at a huge cost.
And while every startup and every product company accumulates a certain amount of technical debt, that debt must be manageable. Like any financial debt, technical debt has to be paid off. The longer it takes to address, the later the release and the greater the opportunity cost! Technical debt has become a grueling challenge for developers. It inhibits long term scalability, impacts performance, and contributes to the demise of the product.

Can you be disruptive…enough?

Unfortunately, I feel that we have maxed out on the internet and mobile boom. It’s also probably true that most of today’s “disruptive” technologies are complex and expensive. Innovating in that sandbox tends to favor larger organizations over startups. The next tech wave seems to belong to technologies such as AI, IoT, AR/VR, self-driving cars, etc. Though hugely consequential, these are not quite as accessible for startups to drive disruption as the smartphone or the web was. And this makes the playing field even more challenging for the startups. Many startups are withering away because they backed the wrong side in the “feature, not a product” equation.

Clearly, we live in a new world now. One that seems to favor the big companies. Just because we have witnessed back-to-back tech revolutions does not guarantee that the next one is around the bend. As a Silicon Valley startup, your product stands a chance only if you can conquer the challenges the new ecosystem throws at you. You may not be able to change the funding dynamic, but there’s a smart way to address the operating cost, tech talent, and scalability issues -you know what I’m talking about!

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