Why Does Startup Failure Happen?
Starting a company is much more difficult than most people believe and startup failure is common. Aspiring entrepreneurs, especially first-timers, often launch a business only to discover that building a company from the ground up is no mean feat. It is near impossible for a startup to be so in-tune with its niche that it barely needs to make an effort in order to thrive and prosper.
The vast majority of business books devote themselves to spreading success stories. However, survivorship bias often paints an image that is too good to be true. To know how to be successful, you must first know how to fail – this is the most efficient way to learn the pitfalls of entrepreneurship and how to avoid them.
Here Are a Few Common Reasons Why Startup Failure Happens
Miscalculating the Problem
Every startup is guided by the market and competitors; the market has an unmet need or an opportunity gap that needs a solution that can be monetised.
However, determining the correct market and problem is not easy. If the solution is created for a problem that no one has or that is trivial, both time and money are at risk. There are also chances that a lot of competition already exists, hence the idea should be unique. The demand for a solution is also influenced by the timing of its release, so budding entrepreneurs should think carefully about whether their business solution is solving a prevalent problem.
Business Model Failure = Startup Failure
The skeleton of a corporation is the business model, which determines the commercial and economic viability of a company’s ability to generate revenue and value. Some businesses are focus so much on the solution that they forget about the importance of their business model.
Many startups also do not prepare for the future because they believe that their product or service concept alone will be enough to bring them success. Although writing a business plan can be complex and time-consuming, it provides a road map that you can refer to in the future. Business plans are important even if your startups trajectory doesn’t always go to plan.
Running Out of Cash
Some entrepreneurs struggle to keep track of their finances and, as a result, fail to take appropriate action when they need to.
Founders of companies financed by private equity firms, venture capitalists, and other external investors should be acutely aware of the KPIs they should demonstrate in order to secure the next investment. In the first four years of existence, businesses that are not backed by venture funds fail more frequently than those that are. This is often due to the lack of funds available to keep their business afloat and to incite sustainable growth.
Failure to meet KPIs and incurring unplanned expenditures with a low return on investment will likely lead to the startup’s demise.
Poor Product Experience
It’s difficult to gain an advantage over your competitors in the market if your product has a poor interface, takes too long to process, or needs more clicks than is normally required. Customers should be able to tell your product apart from those of other competitors, not only by its price but also by its experience.
If you want your startup to scale up with investor help, you have to make sure your idea is unique and well-executed. Moreover, it must provide users with a high-quality product experience.
A great product will fail if there aren’t sufficient marketing efforts. Nowadays, marketing isn’t only about increasing awareness of the product’s features, it’s also about incorporating influencer marketing and retargeting.
Individuals who make up the management team should be able to effectively handle massive projects while still delegating responsibilities to others when required. Making the right hire in your marketing department is the first step in creating a successful startup.
Conflict Among Team Members
When it comes to building a startup, self-centred thinking and excessively emotional actions can lead to disagreements, which in turn can kill company culture and values and which can ultimately lead to failure. Both founders and investors alike do not want to see founder conflict.
If you want your startup to grow, you need to ensure efficient and precise communication amongst all team members and shareholders so that everyone involved in the startup’s development can be on the same page at all times.
Relying on Credit
Many startups agree to work on credit in their early days, which can sometimes make the situation harder for the business in the future. Although it can be difficult to resist credit temptation in order to demonstrate business momentum in the early stages, always try to rely on venture capital or angel investments in private equity agreements before turning to credit.
Expanding too Quickly
When a startup grows too quickly, it can be hard to maintain and give attention to every aspect of the business. This will likely prove to be problematic as time goes on and is one of the many growing pains a startup often experiences when scaling up. Expansion can be a hurdle when a startup doesn’t prepare enough for growing demands.
Make sure both your founding team and your startup are ready to scale up and grow. For some startups, this may occur suddenly. For others, it may take more time. Only encourage rapid growth when you have the finance, time, and expertise to do so without too many issues.
Hiring the Wrong People
A founder will likely recognise the importance of hiring workers at various stages of the startup’s development. However, many businesses recruit the wrong people for the wrong jobs.
For example, some startups prefer to recruit their friends and family for roles, even if they lack the required experience and knowledge to handle responsibilities. Additionally, founders often recruit too many employees too early on in the startup’s lifespan. For example hiring a whole in-house marketing team when just one person could do the job well.
It is critical in the early stages of any startup that your employees are knowledgeable in their roles. It is equally important that this role is necessary for the business. Your startup will scale up more swiftly if you recruit the right staff at the right time.
Not Focusing on Customers
Many entrepreneurs fail to scale up because they do not take a customer-centric approach to running a business. You should show your customers that they are valuable to your startup if you wish to maintain your success. For instance, it is important that efforts are taken to ensure professional and efficient customer service at all times. Lendable is a great example of this.
If this isn’t the case, then your startup is likely not fostering a trusting relationship with your target audience. Don’t be afraid to dig deep and research as much as possible about this audience. After all, the more you know about them, the more you’ll be able to pitch them.
High Competition Leads to Startup Failure
Approximately 20% of startups fail to find success because there’s too much competition in their field.
While there will always be some competition, it’s crucial that your startup demonstrates differentiating factors to its market competition. In fact, competition can be a healthy motivator for your team. Entering a highly competitive market will make it difficult for a company to be unique to visitors and users. This is why ensuring a strong Product Market Fit (PMF) is so important.
Investors now firmly feel that the era of free money and unicorns is past, and businesses must demonstrate a concrete return on the investment, rather than merely growth. Strive to understand from the errors of others, whether you are just starting out or have already launched your enterprise. Why else do startups fail? Read our blog post about it here.
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Amit has 18 years of experience in the industry and an MBA. He supports entrepreneurs with every aspect of their business including concept and product development, investor presentations, and fundraising. Amit & 7startup assist startups in the pre due-diligence process and help connect them to our vast network of investors. Reach out to us today and see if we’re a fit! If you found this post to be helpful, check out our post on Investment Readiness!