10 Not So Obvious Reasons Why Startups Fail
While many people share mantras and quotes about how failure is an essential learning opportunity, and how it is the next step towards success, nobody starts a business with the mindset of, “Yes, this is my first startup, failing will help me get it right next time.” If they did, it would be like accepting a wedding proposal and spending so much money on a wedding ceremony, while expecting divorce within the next few years.
Regardless of this, many startups still fail. In fact, the popular statistic cited for startup failure is a whopping 90%. With this huge percentage of startup failure, many people are afraid of starting a new business because nothing guarantees that your startup will fall into the 10% of successful startups.
Nonetheless, you don't have to lose hope. The best way not to be like the 90% of startups that fail is to understand why most businesses fail, and not make the same mistakes that the startups that fail make.
Top Reasons for Startup Failure
Here are some of the most common mistakes that cause startups to fail, many of which may not be so obvious to everyone:
1. Product issues
Sometimes, startups do not complete their product design and test phase before pushing it into the market. It is vital that you test the compatibility of products with potential customers, as well as validate their assumptions and hypotheses to a certain extent before sending the product into the market.
Many startups also fail because of premature scaling. That means they obtain funds very early in their production phase and instead of testing the products market compatibility, they increase production before they’re sure of the product-market fit. The best way to avoid this problem is to build a prototype of your product and get extensive feedback on it.
However, startups must be careful not to use this as an excuse to delay launch. In the search for product perfectionism, don’t wait too long because this can lead to launching the product too late, much after the market for your product has died down or has been catered for by others.
A good example of the danger of waiting too long to launch a product is the monthly CD subscription service launched by Bob Smith. Apparently, the startup failed because its team took too long trying to perfect their product and new technology filled the gap before the product launched.
Another product mistake startups make that can lead to failure is creating products that do not address a need that customers have or that customers are willing to pay for. So watch out for that, as well.
2. Market fit and other problems
Most of the successful startups you see succeed only because they found an unsolved problem or a large product gap in the market that they are providing a solution. For your startup to avoid failure, you must create a product that not only solves a problem, but also fits the market.
Imagine a startup like Facebook existing in the 1900s when there was limited internet connection and few people owned devices that could connect to the internet. Failure would have likely been inevitable.
3. Lack of focus
Most startups are founded by people with ideas and it is very possible for passionate founders with ideas to lose focus and get carried away with ideas. Instead of focusing on making a product work, startup founders can get distracted trying to increase their offering way too early in the game or begin to focus on unimportant aspects of the business, like how to make more money.
People who have trouble with getting easily distracted or finishing what they started should not start businesses. Despite the many stories in the media of overnight startup success, most unfocused businesses fail. Startups have to dedicate a lot of time, effort and focus to ever reach true success.
4. Team disharmony
Many startups have failed because of personality incompatibility, or strife between founders and investors. Startup team disharmony is caused by a number of things. For example, one of the cofounders may not be willing or committed enough to put in effort after the initial excitement of launching the startup has died down. Some cofounders have terrible work ethics and can be very dishonest. Some others are the flighty types that easily lose focus and are ready to jump from project to project, leaving piles of incomplete projects and wasted resources.
Moreover, a selfish cofounder is also a great recipe for startup failure. One cofounder may be eagerly searching for a way to make profit while the other is working hard to build the startup and stabilize it. With a team that is experiencing lack of cohesion in core values, vision and strategic decisions, as well as poor execution skills, lack of trust, commitment issues, cultural differences and unaligned stakeholders, communication gaps and conflict are bound to result. Then, a startup is doomed to failure.
5. Business model mistakes
Although coming up with an effective business models is not easy, a business model is vital in every startup. This is because the business model determines how economically viable a startup will be and the possible value and money-making potential of the startup.
Oftentimes, startups overlook different aspects of their business models. Most common is ignoring the customer acquisition aspect. Sometimes they are too excited about the product they think customers will automatically come rushing in. They overlook the task of attracting and winning customers.
A good business model, however, should have a cost of acquiring customers (CAC) plan that is relatively higher than the lifetime value of the customer (LTV). CAC should be recoverable from customers within a year. Therefore, for you startup to avoid failure, it is essential that you assess the scalability of your customer acquisition strategy and estimate your ROI and sales cycle.
6. Poor marketing
What do you expect will happen to a startup whose products and services are never promoted and, thus, its products are not known and have never been heard by anyone in the market? Failure will happen. Many startups ignore marketing and focus only on product design and production. Eventually they fail because after production no one has heard of the product and hence, only few are buying it.
Marketing is not just about spreading the word about your product, though. It is also about knowing your target audience and knowing how to attract their attention and convert that attention to sales. A business or startup that is not aware of the cardinal rules of marketing and how to apply them is doomed for failure. Emulate startups making waves in competitive niches via marketing and promotion.
7. Pricing issues
You've established a startup, started product design and might even have a prototype that you're testing. The next question is how much you are going to sell your products or services. Needless to say, the art of pricing products and services has led to many a startup post-mortem.
The challenge of pricing arises when you want to set a price high enough to cover costs and low enough to fit market prices and attract customers. Ultimately, the best product pricing strategy is to simply put a price to your product, see the reactions of customers and competitors, and adjust the price as necessary.
8. Failure to pivot
Another major thing that leads to startup failures is the failure to pivot on time and a product is unable to serve customers due to changes in the marketplace. It is essential that you move to another means of solving the same problem or another problem. For example, Google started as a simple directory and soon became an intelligent search engine. To avoid startup failure due to failure to pivot, every startup should be customer-centered, always ready to evolve in the way that better serves their customers.
9. Money problems
Inability to raise capital is yet another factor that kills startups. Sometimes money issues kill a startup even before it has moved from the idea stage to reality. Raising capital for a startup can prove very difficult and every startup founder should be ready to weather a lot of financing rejections.
In order to raise enough money to fund your startup, you’ll need to find and woo the right group of investors and present them with proof that they can benefit in some way by investing in your business.
Many startups have also failed because they ran out of money. No matter how essential is the problem your startup is trying to solve in the market, if you’re unable to pay your bills and cover your costs, you're doomed to fail. So, make sure you adequately manage available startup funds. “Pay by touch” was a fingerprint startup that reportedly failed because of bad money management.
10. Ignoring customer feedback
Many a startup have failed because they ignored or didn't keep tabs on customer feedback and what people were saying about their products or services. What a company does with user feedback can determine their success or failure. Your customer feedback will tell you if you missed the product-market fit and how to make positive customer-oriented changes to your products. So pay attention to what your customers are saying always.
Although many startups fail, you should not be scared of launching your business or product. The prospect of failure did not stop highly successful startup founders who failed a number of times before they succeeded. Besides, not all startups fail. The 10% of successful startups learn from the mistakes of others. You can also learn from others’ mistakes and succeed.