Top 5 Reasons “Why Startups Fail”
Startup founders dream of becoming the next Airbnb or Uber, but the harsh reality is that most startups don’t end with a success story. The silver lining is that failed startups serve as cautionary tales for entrepreneurs. Much can be learned from why others didn’t succeed.
One issue didn’t emerge as the primary cause of startup failure, but rather most startups pointed to a combination of reasons. This is likely due to certain issues being symptoms of another issue. If your business model isn’t sustainable or profitable, you’ll blow through cash quickly. Without money, you can’t grow. If you don’t show signs of growth, it becomes difficult to get funding … and so on.
That being said, the following issues were the most common among the failed startups we analysed:
#1 Good idea, bad business
“Ideas are easy. Implementation is hard.”
Guy Kawasaki, Alltop co-founder and entrepreneur
More than a quarter of startups pointed to a weak business model as a reason they failed. As Vitoto founder Vinay Patankar wrote, a good idea but bad business was a primary reason for his startup’s shutdown. No matter how brilliant the idea, if you can’t make it profitable or scalable, you won’t have a successful business.
Don’t be too optimistic about acquiring your first customers; thoroughly think out the business model instead. A business model should account for all costs, the required technology stack and team, the marketing strategy, and different methods of monetization. The essence of a business model is to allow entrepreneurs to better understand how they’ll run their business and operations and how to attract and win customers.
The lesson we can learn: It doesn’t matter how good the idea is; if it can’t be profitable or scalable in the future, the startup eventually will fail.
#2 Lack of market interest
“What do you need to start a business? Three simple things: know your product better than anyone, know your customer, and have a burning desire to succeed.”
Dave Thomas, founder of Wendy’s
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
Poor market research leads to misunderstanding of the target audience and, as a result, a product that no one wants.
There are some common causes of poor product-market fit:
- Not enough demonstrated value to make people actually use or buy the product
- Wrong time to release the product – A startup can be ahead of its market by a few years and customers may just not be ready for a particular solution at the moment.
- The product doesn’t solve a problem for enough people
To avoid challenges with market fit, startups should validate their products using pilot projects before launching. Or alternatively, they can conduct beta testing to significantly reduce the risk of failure and market rejection. One more solution is to build a minimum viable product (MVP) that allows entrepreneurs first to build the core features of a product, test it, and then develop the next version according to user feedback.
The lesson we can learn: To make a startup prosper, provide a new solution that will be valuable for people.
#3 Premature scaling
“Premature scaling is putting the cart before the proverbial horse. The more a company grows, the further away from profitability it becomes.”
Michael A. Jackson
The goal of many startups is to not be a startup anymore. They’re all in a hurry to scale. Scaling refers to hiring people, getting funded, releasing new products, entering new markets – and growing too much too soon. Unfortunately, not everything is as smooth as it may seem. In reality, up to 70 percent of startups scale too early and, as a result, do things out of order.
As they say, slow and steady wins the race. So do everything step by step:
- Get to know your target audience
- Thoroughly consider what issues the product will solve
- Deliver an MVP to market and get feedback
- Add features, fix issues, and release the product again
- Promote the product so people know it exists
- Optimize the conversion funnel and find ways to retain more customers
- Scale when the cost to acquire a user is lower than their lifetime value
Here are a few indicators that a business is ready to scale:
- There’s a clear understanding of the lifetime value of customers and the cost to acquire a new user
- The business model is repeating, meaning the company is acquiring customers in a similar way
- Entrepreneurs work more on the business than in the business
The lesson we can learn: Don’t get ahead of yourself. Don’t try to grab a new market when the business isn’t ready.
#4 Challenges with the development team
The secret to successful hiring is this: look for the people who want to change the world.
Marc Benioff, CEO of Salesforce
An incredibly common problem that causes startups to fail is a weak management team. Weak management teams make mistakes in multiple areas:
- They are often weak on strategy, building a product that no-one wants to buy as they failed to do enough work to validate the ideas before and during development. This can carry through to poorly thought through go-to-market strategies.
- They are usually poor at execution, which leads to issues with the product not getting built correctly or on time, and the go-to market execution will be poorly implemented.
- They will build weak teams below them. There is the well proven saying: A players hire A players, and B players only get to hire C players (because B players don’t want to work for other B players). So the rest of the company will end up as weak, and poor execution will be rampant.
Lack of technical expertise
Usually, startup founders are unwilling to invest much money on product development in the initial phase. Accordingly, they look for cheap solutions and don’t hire enough technical experts. As a result, developers lacking proper qualifications build a low-quality product that no one will use.
Ineffective management
One thing startups definitely can’t afford is poor management. Poor management can mean a development team doesn’t know exactly what the company needs and isn’t 100 percent involved in the process. Delays are frequent. Due to lack of clarity, product quality deteriorates and the product development takes longer than required.
Lack of people
Needless to say, all founders are eager to hire the best specialists. Hiring locally is easy and convenient, but unfortunately, the local talent pool is usually limited. Startup founders should be ready for the fact that not all specialists want to relocate for a job.
Poor communication
The Holmes Report shows that due to poor communication, companies lose $37 billion annually. Poor communication isn’t just about language issues; it’s about the development team not setting up a clear communication flow, ignoring meetings, and not having so-called “constant fusion.” Founders just can’t work closely with the team during the whole development process and are in the dark. This leads to the development team lacking a vision for the product and simply not getting the idea.
Below, you can see some steps to prevent issues with your development team.
#5 Poor monetization
“It’s almost always harder to raise capital than you thought it would be, and it always takes longer. So plan for that.”
Richard Harroch, venture capitalist and author
Cashflow keeps the business alive, no matter how passionate you are, how many users you have or how great your idea is, you still need to pay dues to your employees, marketing agencies and clear your bills.
Some entrepreneurs fail to keep a record of accounts and hence fail to take adequate measures on time.
In businesses which are funded by private equity firms and other external investors, the founders should be extremely aware of KPIs they need to show for next investment, their burn rate. Failing to achieve KPIs, and performing non-thought through expenses with low ROI can push the business down the drain.
The lesson we can learn: A brilliant product idea isn’t enough. For a business to flourish, it’s vital to keep your eyes on monetization strategies.
Now that we’ve reviewed common reasons why startups fail, let’s summarize how to avoid these mistakes or overcome them.
