Startups have been the success story of the decade, especially in Bangalore where many founders are making it big. But for every startup success story, there are countless others who fail.
These failed entrepreneurs are all still agonizing over the answer to that big question – “Why did I fail?” However, there is no single reason for startup failure. Rarely is one reason solely responsible for this. It’s usually a combination of a variety of factors.
Through this article, I would like to open your eyes to the most common 30 reasons for startup failure. Knowing why startups fail will make it easier for you to avoid it from happening in your own venture.
Little or no demand for your product or solution in the market. Entirely opposite to how Marc Andreessen defines product/market fit. Just remember these 3 rules of thumb – When a good product meets a poor market, the product loses; When a poor product meets a good market, the product loses; and When a good product meets a good market, then product/market fit happens.
Many startups commit the mistake of manufacturing products or providing solutions for problems that they find interesting, which they think is brilliant, but which are not in line with user needs and preferences. You can expect the worst when your product or service ignores your customer’s wants and needs.
A classic example is the 1985 launch of New Coke by Coca-Cola, a change consumers never wanted and as a consequence bore the brunt of their wrath.
For different reasons, many startups avoid developing a prototype, testing it, and getting feedback from prospective customers before launching the product as a commercial venture. Failing to read the market’s pulse is the shortest route to your own downfall.
Product launches can and do fail, and the question “What went wrong?” then vexes startup founders for years. Here are some of the common reasons why a product launch may end up as a failure.
The product doesn’t live up to its claims and the market rejects it.
There is little or no difference between your products and the others already in the market.
Product is revolutionary and demands substantial customer education, which they don’t get before the launch.
Wrong launch timing – Either the launch is too early and the market is not ready for you, or the launch is a bit too late and you have lost your window of opportunity.
If your cost of acquiring customers is more than the value they will generate during the lifetime of your relationship with them, then your business model has some serious flaws. The chances of you scaling, or even just surviving, are remote.
Remaining loyal to a single channel means you won’t be able to scale as fast as competitors who are reaching customers across all available channels. A one-trick pony startup can’t survive in today’s cutthroat world of growing online and offline marketing channels.
All new startups face a negative cash flow until they reach breakeven point. But if you run out of cash before scaling up to the next level, and you can’t raise more funds to fuel your fast capital burn rate, then your startup engine is going to come to a screeching halt.
Startups often fold up for want of proper budgetary planning and control, and for want of proper human resources management. Startup founders who have no idea about funding and spending priorities, the number of people to hire, whom to hire and when to hire may soon be looking for a job themselves.
Raising too much money too soon can badly hurt a business and is not at all advisable. You shouldn’t be raising more money than you actually require because the timeframe in which you will burn what you raise remains more or less the same. But you will be more liberal in your spending if you have more to spend. Also, you will have a tough time raising the next round. No funding constraints means no creativity in implementing sustainable growth processes. You are simply buying survival and growth until your funding runs out.
Another fast way downhill is treating external funding as your own money. As a startup founder, you are supposed to be extremely careful about how you use funding raised from investors and/or lenders.
A team without diverse skill sets, where cofounders and founding employees don’t have the required breadth of talents for running a startup, is heading fast and straight on the path towards startup failure.
Leaders are born and not made. A startup’s success depends on its leader’s ability to hire and motivate great talent. A leader not able to convey the company’s vision, and attract the right talent to believe in that vision (as opposed to working just for the money), is more likely to lead the business to eventual failure.
The practices of misreporting of financial figures and other relevant data, wilfully presenting wrong achievements and financial plans, and ignoring regulatory requirements, won’t go undetected for long and are sure to trip up your startup sooner rather than later.
While obsessing over the competition is not advisable, it’s also not good business to entirely ignore them. The reality is that once an idea strikes it rich and is accepted by the market, it will attract many other players trying to duplicate the same success. With a level playing field, ignoring or underestimating your competition is a sure recipe for failure.
Pricing strategy is a delicate balancing act that is difficult to master, especially for new startups. You will drive your customers away if the price tag is too high, or will struggle to break even or, for that matter, to just stay afloat if the pricing is too low.
Failing to know your target audience, their personas, and ways to get their attention is one of the most common reasons for startup failure. There is no way you can attract prospects, generate leads, and eventually convert them into paying customers without first understanding the audience whom you are targeting.
While it is often god to be confident and daring as a startup founder, this may make it difficult for you to see the flaws in your business model and product. This tunnel vision often creates a disconnect between startups and a wary investor or a potential customer who hasn’t yet decided to buy from you.
It’s still debatable whether you should quit your job to launch a startup, or do both until such time as the startup gets some traction. But this also creates the danger of founders losing focus of their vision and mission. Getting distracted by other work, personal issues or a general lack of interest in the growth of the startup is a guaranteed way to ensure it fails.
Most startup founders have this chink in their armour. They tend to lose patience and the ability to persevere when the timing of their expectations and the timing of reality doesn’t match.
Remaining married to a bad idea or bad decision can turn out to be fatal. Not pivoting or doing it too early or late is also one of the key reasons for startup failure. Maintain flexibility to rethink your decisions, and the option of a ‘Plan B’ if you want to succeed.
Pivoting should be according to a plan, at specific milestones, and only when your results don’t match that in your business plan or industry benchmarks. Pivoting whenever the pressure gets too much may turn out to be counter-productive and take you faster towards startup failure.
You may have a great business idea. But without in-depth domain specific knowledge, and without a passion that can be pursued through the idea, it will remain just that – an unfulfilled idea.
Do not venture into any business, especially a startup, with the sole objective of making money. You will throw in the towel at the first sign of trouble, and never have the courage to take risks that involve investing or spending money to grow the business.
Many startup founder try to do everything by themselves. Ignoring your connections as well as that of your investors, and failing to tap the expertise of industry leaders and mentors, will make it hard for you to gain sufficient traction even as your competitors grow faster with the help of mentors and their networks.
Entrepreneurs are typically workaholics and poor in managing their work-life balance. If you are not an expert juggler of your professional tasks and your personal tasks, you stand the risk of an early burn-out.
A sure recipe for failure is not knowing when to stop and cut your losses.
Refusing to listen to your investors and co-founders, or ignoring them, is equally as bad as being subservient to them. Both can be harmful for a business.
Located away from a place brimming with ideas and known for its talent pool can hurt your startup. The right location, apart from the talent and ideas, may also offer you the audience ready to use your product.
Lack of interest by lenders and investors probably means your idea is flawed, has very little commercial potential, or that your way of presenting the idea is falling short of attracting the interest of investors.
Lack of planning and no consultation with a business law expert sets the ground for legal issues to come up as hurdles later on. Many unexpected legal obstacles also crop up when a startup grows fast into different fields or enters into different markets.