17 Reasons behind why startups fail that you must know
“It’s fine to celebrate success but it is more important to heed the lessons of failure.”
Why startups fail
A business plan is critical to the success of a startup. No matter how great your idea is, you can’t sustain it without a great plan outlining your business model. It would be best to acknowledge many factors like logistics, team building, marketing, revenue model, and finance before starting any business to anticipate and survive future challenges.
You must know how to write a business plan perfectly to simulate your idea and decide on should you move on with your idea or not.
2. Market Research
Approximately 43% of startups fail because they attempt to solve a problem that they find interesting rather than solving a problem that already exists in the market. You need to figure out the niche- market suitable for your product or service. By doing proper market research, you will know precisely the real need of your potential customers.
There is a high probability that without market research, you may build a product or service with no demands. Market research is designed to find the gaps in the market because you cannot create a product you can’t sell.
3. Resource Management
In simple words, resource management is to get the best out of what you have and what you will acquire. It is one of the leadership skills that remains lacking in many of the new startup owners.
You must ensure the following points to have better resource management:
- Introspect, review, and improve your leadership skills. You can transfer your roles to someone in a team who has better leadership skills.
- Keep track of the input and output of your business and monitor the efficiency constantly. Take reforms to improve productivity.
- Bring in every human and non-human resource in use to their full potential.
- Form a super-skilled management department to explore and devise ways of utilizing resources in the best way possible.
In many cases, startups fail because they do not generate enough revenue to sustain the business. The business model also needs to be future-proof to gain investors’ faith. So, as a startup, you could fetch funding to set up and scale the business initially. But to maintain cash flow and pay all dues to clear the bill is not an easy task. Often, businesses fail to keep track of earnings and expenses and end up in debt or on the verge of bankruptcy.
To maintain cash flow without sufficient funds leads many startups ultimately to a financial crash.
You could avoid the problem of fundraising by focussing on few points:
- Build a sound revenue model that could give high returns on lesser investment.
- Connect with multiple investors and build a network to get the best funding you could fetch for your business.
- Keep track of funds being used and make the process precise and efficient, while the management should continue to look for funding opportunities in the future.
5. No Sound Marketing policy
Marketing is one of the best tactics to reach out to your customers, but it needs to be well planned. Many startups commit the common mistake of not targetting specifically on their niche audience. They spend money on marketing to reach every individual irrespective of their portfolio or demography.
Advertisement of your product or service is spam for one who is not interested or related to the domain targeted by your business. Also, companies often advertise those features of their product in which the market isn’t much interested.
Your marketing approach should be appealing, to the point, and should stand out as unique. So, to build goodwill along with a profit-giving customer base, make a sound marketing policy around your target audience. With its positive marketing influence, it should convince customers to trust your product.
6. Revenue Model
A revenue model is an aspect that many startups ignore while building a customer base. But, a flawed revenue model could pose a severe threat to positive cash flow. Your business could dry out of the money required to run a business. Also, investors may back out from investing due to no returns of profit. Many investors hesitate to involve in a business model with low revenue schemes.
Main points that should be focussed on while forming Revenue model:
- High return on Investments.
- Focus on building a long-term and frequent revenue-generating customer base rather than a one-time customer.
- CAC of your business should be lesser than LTV and must recover within a time limit.
- Target a market with the potential of scaling up and generating significant revenue continuously.
Core of a Business Model: The CAC / LTV "Rule"
CAC = Cost of Acquiring a Customer
LTV = Lifetime Value of a Customer
This rule is a mantra followed by every successful business model. The fundamental goal in the rule is to bring down the value of CAC lower than LTV.
CAC is the sum of costs of all the resources involved in acquiring a customer. These resources can be advertisement, marketing, employee salaries, customer’s bonus benefits, product and service costs, etc.
LAC is the total revenue generated from a customer acquired by the business. These revenues include one-time charges, subscription fees, extra fees on maintenance and operation.
Hence it is a visible fact lesser the CAC than LTV, the higher is the profitability for any business.
7. Organizational structure
To run a business is a very complex process as it includes many departments to handle at once in coordination.
You must have a solid organizational structure to manage priorities, track daily progress and coordinate all aspects of business like marketing, R&D, finance, production, and customer service all at once.
8. Customer Care
Initially, the first impression that a startup puts on their new customers is the best marketing. Word of mouth from happy and satisfied customers will later bring on more customers and expand your market reach. But, many startups fail in impressing customers with their service and product. Due to poor customer care and reviews, a startup can fail badly even before starting.
It is therefore smart to take your time to get feedback and launch your product or service when you know the value proposition of what you’re offering. As you may have heard, “The first impression is the last impression.”
Overpromise or underdeliver both can be fatal to your brand value and customer base.
“Get closer than ever to your customers. So close that you will tell them what they need well before they realize it themselves”
- Steve Job
9. Lack of innovation
Many startups are built on duplication of existing ideas or businesses with little to no modification, leading to their failure as existing companies outcompete them. Innovation is the process that keeps thriving businesses relevant and competitive in their fields by giving them new life.
The needs of customers also change with time. To cope up with that, you need to bring out innovative things at a constant pace. The market won’t think twice about switching to another company for a better and innovative product. The R&D department should be a must-have part of any business to sustain for long.
There is a rule: To survive and excel in the market, you need to evolve with time continuously.
10. Missing Opportunities
Startups can never be devoid of opportunities, but they need to be aware enough to grab as many they could. Many startups could not benefit from various startup schemes and opportunities that can be a booster for them. Hence, they fail to give that initial push that a business needs to launch and grab a position in the market.
Opportunities that a startup should not miss:
- Government schemes to fund, assist and promote the startup ecosystem.
- Incubators and accelerators like Y-combinator, NASSCOM startup hub, and many more can assist, nurture, and fund your startup throughout the initial journey.
- Startup contests are organized worldwide to promote the best of startups. Some of them are NASSCOM’s 10000 startups, Microsoft BizSparks, Conquest, NextBigIdea Contest, etc.
- Investors summits that could connect budding startup owners to potential angel investors.
11. Incompetent team
The core team of any business is its source of potential growth. Almost every investor bet on any startup after seeing their team’s remarkable strength and coordination. Many startup owners form their team casually, but this is the most crucial foundation of any startup. It could either build or destroy the future of business.
A winning team must have people with a shared dream and aspiration to work for your business idea. Every member adds value to the company with their strengths and talent. Build the perfect team, and they will work with a passion for achieving goals, not just for the money.
12. Failure to Pivot
In business, a pivot is that weapon; using it ideally can bring wonders, but mistiming or improper execution of it can wreck your entire market. Most people fall in love with their idea easily and couldn’t kill that idea even if it has many flaws. Pivoting away quickly to a new and better idea is always recommended. You must think about how you can serve your customers better and evolve as a business with time.
There is too much competition in the market coming up with better products or services over time. To compete with them, you must know when there is a need to pivot. Never do it too early nor too late; do it at the perfect time.
13. Premature Scaling
According to the survey of Startup Genome Project, around 70% of startups scale up their business too early and fail. The size of the customer base and the size of early investments do not guarantee success when scaling the business.
It would be best if you do not scale up or expand your business until you fulfill these points:
- There must be a significant increase in LTV as compared to CAC.
- You must have Developed infrastructure and logistics to handle new customers and markets.
- Customer retention should be high
- A flexible business model that could work in all different zones and conditions to acquire customers.
- Generate enough steady leads over your competition.
- Demand is more than your production limit or capacity
- There should be enough money to spend on expansion.
- You should have well-studied tactics and policies to deal with the new market of your business.
15. Wrong Investors
An investor comes in a startup with money and invaluable experience in the business world and their sector. Therefore, you must check the investor’s background and ensure that the sectors he invests in have a good track record.
You cannot get an investor experienced in the food sector to invest in the tech sector. His experience is of no use in the tech field as there is a stark difference between both the industry. The experience and connections of investors in his field are more important than money for a newbie startup.
15. Early Entry
Early Entry is one of the most hurtful reasons behind startup failures. Imagine a startup failing for being way ahead of its time.
However, it is a harsh reality that many startups have great management and innovative product or service, but the market they want to penetrate would occur in the future, not now. Hence, many such startups fail due to no market demand at the time of their launch. If they had launched the same product in the future, it would have boomed like never before.
There are few ways to get out of this situation:
- Wait till the market matures enough to generate the need for your product or service.
- Bring on other related products that could meet present demands and keep your business alive.
- Train and educate your market to create a fascination or need in their mind which only your product can fulfill.
Establishing a startup is a long process that requires immense patience and unwavering passion for working on the idea. Sometimes, it takes years of work to develop an idea into a viable and market-ready product or service.
Many startup owners fear missing out on other aspects of life due to overworking and getting no time for self-exploration. Hence, they quit after burning out and getting no immediate results.
It is essential to ensure few points to avoid Burnout:
- Ensure work-life balance and take small breaks for a trip or rest. Spend some family time.
- Enjoy the process without worrying about the result while giving your best shot.
- Don’t let your passion die. Keep it alive by having creative people around you.
17. Legal Problems
It is a scarce reason for business failure but still worth mentioning. Startups mainly in heavily regulated industries like food, finance, and transportation can face legal challenges. A slight irregularity detected by assigned authorities can put your business in serious trouble. Also, many startups do not register their business, picking up the correct business entity and well-balanced business structure.
You can avoid such legal complications by hiring experienced lawyers or firms that can advise on and look after legal processes and formalities in a business. Also, keep track of the company’s record to comply with defined rules and laws.
To sum up, the more you know the causes of why startups fail and how to deal with them, the more are chance of your success. It would be best to focus on every aspect of decisions you make to avoid those mistakes already committed in business domains before many times.
Future has many new avenues and immense possibilities for innovative startups. In the end, what matters is to stand out in the market with your innovation and set everything right without committing mistakes. You may become one of the following big success stories by learning from startups that failed and startups that succeeded.