The 5 Most Common Reasons For Startup Failures
Numerous startups already fail with their business idea in the first few years. After more than five years, only one in ten is still in the race. There are many reasons why startups fail. Usually it is not just one factor that prevents success, but a combination of several reasons. The five most common reasons for startups failures are presented in this article.
Fail fast. Fail forward. Those are just two of the mantras you’ll see hanging in startup offices and incubators across the globe.
In the startup world, a failure is considered a learning opportunity, at the least; a feather in the cap of the Founder, at best. We fetishize failure. We normalize it. But as much as we talk a good game about failure, the reality is that failing sucks. Just as no one goes into their wedding day planning for divorce, no one starts a company thinking, “Yeah, this one will just be my starter. I’ll get it right next time.” No wants to fail, and yet the majority of startups do fail.
Starting a startup is not easy, and looking at the number of failures makes it all the more difficult.
We often hear about the glamour of making 25x on an investment and there are many to choose from. The most popular are Space-X, Airbnb, Uber who have all graduated to become unicorns. But as the unicorns rise, in the ashes are many a failed startup that either failed to launch or was acquired by a multinational and failed within that organisational culture. Thus, entrepreneurs and startup founders must be good at risk mitigation. Successful entrepreneurs always learn from others’ mistakes and try to avoid them in their start-up journey.
The good news is, we know why these businesses go under, and we can learn something from these startup failures.
A company is most vulnerable at its beginning. Early-stage startup founders must be able to juggle many deals, teams, and targets while keeping customers, startup investors, and other stakeholders happy. Disorganized or unprepared founders may find themselves unable to cope. To avoid such a situation, I compiled a list of the ten most common reasons why startups fail.
To make your startup thrive, you need to understand some core issues that make startups fail.
Be it startup, investor, academic or economic development person, everyone will be keen on gaining some insights into the reasons behind the failure of startups. I have curated a list of reasons behind the failure of startups. These can help budding entrepreneurs prevent the chances of failure.
Startups Failure Reason #1: Lack of Market Demand
Many entrepreneurs go into a startup pumped about a new idea, with grand visions of selling a million units in the first year, but without an accurate understanding of the market need for their item. It’s impossible to drive meaningful innovation without a full concept of what’s out there. The market is an incredibly complex beast, so it’s no wonder many startups can’t reliably figure out their chances of success accurately.
No Market, no cash.
A study by CB Insight shows that more than 40 percent of the 101 shutdown companies examined failed because they had planned their product or service completely out of the market. In some cases, the market was not yet mature or features were developed that were not relevant from the point of view of the target group and which the market therefore did not want. Startups fail when they do not solve an existing market problem. Most companies believe that their invention is quite appealing and there will be a huge demand for their products and solutions. If the product fails to create demand due to low market demand, then the company will face a downfall.
Most startup founders do not fully understand what their product might be able to achieve in the market — especially in the early stages.
That is the reason for many pivots — when a company changes its course and product to satisfy another market. If they could validate their product in pilot projects before launching, or even beta-testing instead, those entrepreneurs might reduce significantly their failure and market rejection risk. Besides, some companies launch products before their time and either the market demand or the technology is not there yet. Others launch too late, although they might not notice that it would be too late already. The key factor here is to always question yourself with competitors benchmark and with common sense when sales are not taking off. This would be the best time to call a “stop loss” and pivot or invest time, capital and efforts in another market.
The buzz that you create with your product matters. No matter how great your product is, it will go down if no one knows about it.
Proper marketing ensures spreading awareness about the product in proper ways. A startup does not necessarily require a PR team initially but to get the buzz going, the product must be advertised appropriately through social media channels and press. You must also make sure that it is published in magazines and websites popular and authoritative for your target audience. If the product is not marketed correctly, no one will know about it; therefore, no one will buy it. Spreading awareness about the product may seem a waste of time and money to some people, but in fact, it plays a crucial part in getting the business up and running and is fundamental for a company to survive.
Product market fit is the most important thing for any startup, it is hard to find and it is also a requirement for making it, there is no way around it.
Product market fit basically means to find a product, that you can build at scale, that the market wants, and at a price that the market is willing to pay. It is certainly more relevant in the early stages where most startups look for it, but a lot of companies become very mature, raise multiple rounds of funding while still not having a product market fit. A new company’s challenge is to create a great product and match it with an appropriate market need. Unfortunately, many companies become so blinded by what they’re trying to create that they fail to see if there’s even people who are interested with their offers.
Startups Failure Reason #2: The Wrong team
Another reliable killer for startups are problems and inconsistencies within the team. If the cooperation between the team members does not work, the startup doesn’t stand a chance either. The cliché in startup land is that a startup is like baby — and your co-founder is your spouse. And, like a lot of clichés, there’s a lot of truth in it. Your team can make-or-break your startup.
A diverse team with various skillsets is very critical for the success of a company.
Many founders cannot do what is required for a business to turn successful. Both the founder and the team should focus on industries related to their skills and academic background. The skills they possess should be complemented with that of the team. Disharmony in the team might not help the business take off. Sometimes, there can be disharmony among investors of a company might also result in a failure. If you or your co-founders lack the skills or abilities needed to get your company going, be sure to identify those needs early on and read, study, learn and experience theoretical and practical knowledge that can give you the upper hand against your competitors and prevent your company from crashing.
A poor team is the reason for the downfall of many startups.
For a startup to be successful, it must have partners that share a common vision and have differing strengths. Partners must also develop trust among themselves. At any stage, a good leader has the charisma and track record to inspire a compelling vision for the company and its future, recruiting committed employees instead of top talent who will fly to the next offer very soon. Employees committed with the company mission and vision will help the founders realize their vision, not the so much “top talent” cherished by the media.
I happen to say founders build companies and founders destroy companies, there is a lot of truth in that.
If the founding team doesn’t work the startup will fail, if you see that happening you have to fix that and fix it fast. A broken founding team will never build a great startup! Founders usually have a lot of different skills, as there will be many different tasks that need to be solved. That said there are some core fields that need to be covered, a tech startup really should have a technical co-founder and most startups also need someone with a focus on the business side such as fundraising and sales. I’ve met very few people that are amazing engineers and at the same time amazing salespeople. Having both skills will require multiple founders and that is where things get complicated, multiple founders and personalities.
Many founders tend to focus on building products but neglect the need to form the right team.
As a new company, your team matters — more than you might think. Hiring the right people should be a priority for every new venture. Their personalities, values, and actions will influence the direction of the company. So it’s important that they fit into your organizational culture.
- Build your foundation first. A formidable team starts with its founder.
- Find some rock-stars. Consider candidates for their hard skills. But they must have the ability to collaborate.
- Focus on passion and potential. Aim to hire for culture fit.
- Check your compatibility. Team rapport is essential to growing a startup.
- Translate strategies to team building. Listen to your team to know what buttons to push to get their best performance.
Startups Failure Reason #3: Cashflow Issues
Another reason for startup failure is simply running out of money. Most startups rely on investors and venture capitalists to fund them until their product or service starts making money, and if that doesn’t happen fast enough, investors often balk at continuing to fork over cash for an extended period of time. If the startup doesn’t make sufficient efforts to find new capital as the original capital dries up, it will soon find it can’t meet operating expenses under the business model envisioned.
Startups need sufficient time and money to operate smoothly.
But there is no answer to how much money one needs to spend on the business. Many startups fail due to insufficient funds. Also, many companies fail to raise additional funding. People may always be surprised by the time and number of rejections required before they succeed in raising capital for their startup. Too often this process is started too late and the entrepreneur goes to the rescue with the wrong group of investors — the first ones. Fundraising in a startup environment is something that needs at least 6 months of active prospection, meetings, calls and visits. The more you are in the routine of fundraising, the more precise you are about what you need as a company and what investors who are looking for your profile want.
With most new startups, there are typically limited funds to build a team and execute their vision.
Founders who bootstrap their startups must become creative in how they execute their goals, whether it’s in how they market the product, gain the attention of the press and public, or build a brand reputation in today’s competitive business landscape. Learning to allocate funds to the activities with the most ROI is vital. It saves the limited startup resources and forces the team to build only features and services that benefit the customers. In the first 3 years cash flow management is key. Having enough cash for the next 12 months of development will ensure you avert closure. If the source of your cashflow is funding from investors, ensure you start fund raising well ahead of you timing. If the funding is from sales, ensure that your forecast is robust and realistic.
Most entrepreneurs are either engineers or technicians at heart. They want to produce the best product that will solve all the problems of their customers at one go.
But while performing this task, they often forget to control their investments. Hence, it results in more cash outflow rather than the inflow. In such a scenario, it becomes difficult for the entrepreneurs to make the branding process smooth due to lack of funds. Sometimes, delay or non-payment from the customer’s end increases the difficulties even to meet the break-even point of the business. Therefore, the entrepreneurs either wind up their business or exit from the market.
As a startup founder, you often get asked what your startup runway looks like. It’s a super common question. And yet most of us end up balancing our time and money on an Excel sheet.
A startup runway is similar to how an actual runway allows airplanes to take off and land. It refers to how long your company can survive in the market if the income and expenses remain constant. If a startup doesn’t have enough runway, they risk going out of business before they understand the market they’re looking to serve. Imagine having just developed a great product but being left without the cash required to sell it. Every entrepreneur’s worst nightmare. You should look to raise more than you think you’ll need, without giving up too much equity or creating unattainable valuation expectations. If you raise just enough or far more than your runway, it indicates that you weren’t aggressive enough with your plans, or gave up too much equity, respectively. And if you raise too little for the period, there’s the risk of running out of money before you make enough progress to raise the next round.
Startups Failure Reason #4: Poor Marketing and/or Sales
Whether it’s one of the big companies doing exactly what you do or smaller companies killing you with a thousand little bites, getting outcompeted is the reason why 19 percent of startups fail. For a startup, it is essential to target the right audience. The business should focus on getting the attention of customers and converting them into leads. This is the most important skill of a successful company.
If the company or entrepreneur fails to market the product successfully, then the business might not grow as intended.
Noise matters and no matter how great your product may be, it’s going down if no one knows about it. Poorly managed marketing (or sales) is a major reason for the failure of many startups. You don’t necessarily need a professional PR team at the beginning, but you need to create buzz in social media and in the press about your company and products. Also, be sure that when you get published in the magazines and websites — that they are authoritative and popular for your audience. If your company cannot manage marketing properly, no one will know about your product, therefore no one will buy it. Spreading the word may seem a waste of time for some founders and more technical teams, but it is fundamental for a business to survive.
Competition is something all companies face. Competitors can be either direct or indirect.
It’s important to know your competitors, understand their products, services, pricing, and positioning. This information is critical for your own product development efforts and marketing strategy. There are five simple ways to beat your business competitors:
- Identify and solve the pain points of your customers.
- Set a standard price that has a competitive advantage. Ensure that your audience will love to pay for it.
- Innovate with your products and services.
- Improve your Customer Service. It’s the best way to differentiate your business from your competitors.
- Build your own niche to have more rooms for business. Prospects are easier to target on a specialized market.
Marketing is the heart of any company. It shows your company values, how it operates, and how you seek out and treat customers.
Your company’s growth and profitability rely heavily on how well your team can market your services to the right consumer. There is no point in having an innovative product in an untapped market if nobody knows about it. Startups fail in marketing when they misunderstand market research, invest in features nobody wants, and emphasize the wrong benefits in their marketing messages. Founders and startup employees often get caught up in a bubble with their shiny new products, leading to poor and unsuccessful marketing efforts. Pay attention to customer feedback and behavior, and emphasize the most used features of your product or startup in your messaging to improve marketing.
When you’re looking to set a price for a product or service that you offer, it’s important that this price will be appealing to your target audience and won’t conflict with what your audience expects.
If the products that you currently sell are known for being reasonably priced, it’s recommended that you stick with this approach. Many startups will change course and attempt to price one of their products higher so that they can market it as a luxury product. While this marketing approach can work from time to time, it’s also very risky for smaller startups that have yet to gain a loyal customer base. High pricing may significantly restrict the population that you can reach. Avoiding pricing conflicts will lessen your risk of failure with your startup.
Startups Failure Reason #5: Bad Timing & Flawed Business Plan
Sometimes a startup has a great idea, but doesn’t time a major product launch or marketing push well. Unfortunately, it may only take one ill-timed move to cause the startup to fail, if investors get wind of the poor decision-making and decide to bail. Some ideas have just been ahead of their time, like grocery delivery service Web Van. The concepts were great, but not enough people saw the need for the service, or it just seemed too “out there” because nothing else like it existed yet.
Some startups launch before their time and either the market or the technology just isn’t there yet.
Others launch too late, although they might not know yet that it’s too late. That’s what happened to Bob Smith, Founder of Drive & Grow Rich, a monthly CD subscription service, in 2007. At age 33, Smith was pulling in $10 million a year. Can you guess where this is going? You got it: Technology killed the monthly CD subscription star. he key factor here is to always question yourself with competitors benchmark and with common sense when sales are not taking off. This would be the best time to call a “stop loss” and pivot or invest time, capital and efforts in another market.
You can have the best team, a solid business plan, and find a market that needs your product, but if you don’t get your timing right, all of that will be for nothing.
An example of poor timing is if you create a product in anticipation of a growing trend, but cannot launch early enough to meet the market demand due to production delays. Now the market is oversaturated with competition, and you have to figure out a whole new way to rebrand and position your startup. At other times, you may be too early. Nobody knows they want your product yet, and you run out of runway before hitting critical mass. Timing, according to TED Talk speaker Bill Gross, is the most important reason why startups fail or succeed.
It’s also very difficult to avoid distractions when you don’t know what you’re working towards.
While creating a business plan might seem to be a daunting task, it will allow you to have a road map that you can reference in the years to come. This business plan should take your marketing strategies into account as well. Many startups won’t plan into the future because they feel like their idea for a product or service is enough to garner success. While having a great idea should help you in the early stages of forming a startup, you need to combine this product with a comprehensive business plan if you want sustained success. A lack of planning means that you’ll be required to make decisions about marketing strategies and product direction on an almost daily basis, which can be frustrating and time-consuming.
Having a business plan is Startup 101, and just about everyone knows you’re supposed to have one in the early-stages of any small business.
But just because you have a business plan doesn’t mean it’s a good one. A flawed business plan doesn’t take into account factors that later become important, and can cause business failure rather than startup success. Some common business plan flaws include being too vague, miscalculating costs, underestimating timelines for production or marketing, and getting key facts wrong when researching the market, as stated above. You don’t have to go to Harvard Business School to make a successful business plan, but it does help to get assistance from those with real-world experience who may be able to point out your flaws so you can correct them sooner rather than later.
While it is unavoidable to fall into the situations listed above, the founders must take responsibility and address the issues and make sure to make timely efforts to ensure the wellbeing of the business. It has been commonly seen that start-ups fail when they are not solving a market problem. A diverse team with different skill sets is crucial for the start-up’s success, along with a product that is relevant to the target audience.
Looking at this is so important because we can learn so much from the ones that don’t make it.
Hence, if you can avoid the mentioned errors in your startup business, then you can become successful in it. Take a close look and learn from the potential pitfalls and your chances of success will increase radically. Running a startup is a difficult endeavor for any entrepreneur, which means that you’ll experience a significant number of struggles in the early months and years of this process. Before you delve into the lengthy and complicated process that comes with building a successful startup, it’s important to understand that all companies run into their share of problems.
To recap, when you start a business, it must be clear that there are many obstacles and hard decisions ahead. Anticipation and open-mindedness is the key.
However, we understand that not everything goes according to plan and failures happen very often. It’s a good thing too! I always say: fail often so you can succeed earlier. It’s your attitude against failure that shapes you. You may either learn a lesson from your failures and try harder in the future or give up and let someone achieve your own dreams. Take Airbnb for instance. They had tried three times before they became a successful, global company. Try as many times as it takes, nobody’s counting.
In the future, startups will continue to lead innovation. Though some of the statistics may not sound encouraging, with careful planning and a lot of determination, it’s possible to create a product that would change the world and make your dreams come true.
Many entrepreneurs out there have failed countless times before succeeding. So, even if you have failed before, do not be discouraged. See these failures as learning experiences so as to do better the next time. In summary, being aware of these five patterns may help you prevent a crash-and-burn startup failure. Is your company going down one of these paths? If so, it may be time to reflect and reset.
Digital Dandy. Hacker From Heart. Workaholic. Coding Artist. Self-made.