Why do startups fail?
There are some things a startup can only learn by examining the post-mortems of those who tried their hand at it, and failed. How does a disaster present itself, and are there any warning signs?
Let’s take a look at how startups fail — a hypothetical scenario of everything that went wrong for a failed startup.
They had a great idea, but could find no financing or interested investors.
Imagine having a really great idea that’s good to go, but having no one to back it up. This can be deeply frustrating — ending up with entrepreneurs complaining about their lack of network and connections.
The thing is, one wouldn’t start a business without connections or networks, so this doesn’t really count. Yet in the survey conducted by CB Insights, this is still one of the most cited reasons for why startups fail.
Instead of eventually finding yourself stuck in a rut because of this, prevent it from happening right from the start. Discuss your ideas and plans to prospective investors, and get them involved from the start. Allow them to help out and pitch some ideas of their own. Get them invested — after all, that’s what they do.
Another idea is to work with PR and SEO agencies. Andrew Scherer of MarketersCenter told tech.co, “As long as you ask hard-hitting questions, you should be able to develop a great relationship with a company for years to come.”
You managed to start out, but your team isn’t on the same page.
The team is something that can make or break a startup, that much we have established, but how exactly can the wrong team break a startup?
Finding a balanced team is one of the hardest parts of starting a business.It’s important to find people with the right skill sets for the job, but equally important is the steps you take to make sure they know each other well enough to work together — knowing each other’s strengths and weaknesses, and how to communicate well enough to launch a decent product.
“The founding team couldn’t build an MVP on its own. That was a mistake. If the founding team can’t put out product on its own (or with a small amount of external help from freelancers) they shouldn’t be founding a startup. We could have brought on additional co-founders, who would have been
compensated primarily with equity versus cash, but we didn’t,” StandoutJobs’ postmortem reads in CB Insights.
You managed to go as far as to launch your product, but there is no market need for it.
One can get carried away in the outburst of ideas and forget that ideas need heavy bearing on reality. Realizing that there is no market need for a product you’ve been working on is one of the worst things that could ever happen to a business.
However, it is cited as the number one reason for startup failure — a staggering 42%.
Patient Communicators’ post mortem discloses, “I realized, essentially, that we had no customers because no one was really interested in the model we were pitching. Doctors want more patients, not an efficient office.”
How does one make sure that they’re working on something that has market value? Ask yourself, are you making a product/ offering a service that is solving a large enough problem that you could universally solve with a scalable solution? If the answer is yes, your business might have 42% more chance of surviving than your competitors’. If you are not sure of the answer, don’t hesitate to bring in reinforcements.
You managed so far as to launch your product, but the product was poor-quality.
So a business has managed to go as far as to launch a product — which turned out to be a flop. There are a lot of externalities that demand the team’s attention when starting a business, but if the focus isn’t on the end product itself, your product might end up disappointing customers.
GameLayers’ postmortem reads, “Ultimately I believe PMOG lacked too much core game compulsion to drive enthusiastic mass adoption. The concept of ‘leave a trail of playful web annotations’ was too abstruse for the bulk of folks to take up. Looking back I believe we needed to clear the decks, swallow our pride, and make something that was easier to have fun with, within the first few moments of interaction.”
You managed to reach the end goal, and then you run out of cash.
So you managed to launch a product and got good initial feedback. Good job! Celebrate if you must, but do not be complacent, as the second biggest reason for startup failure (29%) is just around the corner — running out of cash.
One of the main reasons startups cite for running out of cash stems from (and could have been prevented) the get-go: improper allocation of time and money. “In fact what eventually killed Flud was that the company wasn’t able to raise this additional funding. Despite multiple approaches and incarnations in pursuit of the ever elusive product market fit (and monetization), Flud eventually ran out of money — and a runway,” CB Insights explains.
Pricing and cost issues are another surefire way to deplete cash. All businesses know how hard to perfectly price a product, and if you feel like your pricing isn’t working, don’t be afraid to change or adjust — it might be a move that ultimately saves your business.
“Our most expensive monthly plan was US$300. Customers who churned never complained about the price. We just didn’t deliver up to their expectation. We originally price by the number of recording credits. Since our customers had no control on the length of the recordings, most of them were very cautious on using up the credits. Plans based on the accumulated duration of recordings make much more sense for us and the number of subscription showed,” Delight IO shares.
Startups require a degree of skill and research. Trails have been blazed and red flags have been marked, and studying them is an integral step you should take before everything else, especially considering that missing them could cost you your business.