Today’s global start-up economy grows rapidly, and its worth exceeds $3 trillion. More than 80 ecosystems have produced at least one billion-dollar startup. However, even with the help of numerous incubators and accelerators, the unicorn status is not easily met. In 2019, the failure rate of startups was around 90%, 21% of which failed during their first year.
Studies indicate there is no single major cause of startup failure, as most of the founders have pointed to a variety of factors. Most often certain problems are signs of, or lead to other problems. For example, if your business model isn't sustainable, you're going to run out of cash quickly and it is obvious that you can't grow without capital. One problem always leads to another if it is not tackled on time.
Some of the most common reasons for failure among startups, according to CB Insights research are:
1. Lack of product market fit
2. Poor financial planning
3. Not the right team
4. Outcompeted
5. Business model not viable
6. Ignoring customers’ needs
7. Bad timing
8. Lack of investor interest
1. Lack of product market fit
Right after Paul Graham, Jessica Livingston, Trevor Blackwell, and Robert Morris started Y Combinator in 2005, they chose “make something people want” to become their motto.
Many studies show that failing to do so is one of the best ways to ensure startup failure. An example of this is Intronet, a startup that aimed to compete with LinkedIn, but lasted only three years. One of the founders acknowledged that they ”hadn’t been able to offer what the market wanted.” What people needed was already there.
2. Poor financial planning
The second most quoted reason for startup failure is poor financial planning or “running out of cash”. Many of the newly founded companies ran out of resources to stay in business either because the expected success was not reached or because the expenses were greater than the income.
Cash outflows were also related to other causes of failure, including failure to find a product-market fit or failed pivots.
3. Not the right team
Another reliable killer for startups are any team's discrepancies. If there is no cooperation between the members of the team, the startup will not stand a chance either. The unbalanced composition of teams concerning the competencies of the individual members also hinders the performance of the organization.
For example, sometimes there is a lack of tech talent to support the business, and sometimes there is a lack of a CTO that serves as an interface between management and the technical departments. Acquiring skills from outside may be a choice if the core team recognizes they can’t get enough tech people in-house.
4. Outcompeted
Many startups say that they were overtaken by their competitors and forced to give up. A good example is Wesabe, an online personal financial management service that failed simply because it was outperformed by its competitor - Mint. Mint studied the weaknesses of Wesabe's MVP and introduced the platform when they had developed a better and simplified solution. Wesabe’s platform was more powerful than Mint and offered more features, but was much more difficult to use.
Although obsessing over the competition is not very healthy, avoiding it is also a formula for many start-up failures.
5. Business model not viable
Failing to present a viable business model will put an end to the startup, but before that, it will lead to cause number 8 – lack of investment interest. Without a sound business model, investors are likely to doubt whether they will ever see a return on their investment, even if the startup has traction or product potential.
A simple way to focus on what matters in your business model is to look at these two questions:
Can you find a scalable way to acquire customers?
Can you then monetize those customers at a significantly higher level than your cost of acquisition?
6. Ignoring customer’s needs
Ignoring users’ needs and feedback is a proven way to fail. Tunnel vision and not gathering user feedback have brought a fatal ending to many startups. The majority of startups will tell their clients that they are their main priority, yet only some focus on what their users need.
For instance, eCrowds, a web content management system company, said,
“We spent way too much time building ourselves and not getting feedback from prospects — it’s easy to get tunnel vision. I’d recommend not going more than two or three months from the initial start to getting in the hands of prospects that are truly objective.”
7. Bad timing
The wrong timing for a launch, at times too early when there is no demand, at times too late when the window of opportunity has closed, might only cause you a loss of investment.
No matter how good your ice-cream marketing strategy is, launching it during winter won’t help.
8. Lack of investor interest
Many of the problems mentioned above can lead to a lack of investors’ interest. However, if you are dedicated to your business you will find a way to get their attention. You may need to improve your business model or pivot your idea, but eventually, you will get in the right direction and raise the funding that your startup needs. Make sure you understand the investors’ perspective and present them with proposals which are win-win.
There are almost as many ways of getting it wrong as getting it right. Any of these problems may lead to another, so handling them on time will make your startup progress. While there are many potential hurdles to take care of, keeping up your energy and passion for your ideal will be the fuel to overcome any obstacles on the long way ahead.