No one wants to imagine their startup ceasing to exist — this is the last thing an entrepreneur wants to focus on in order to succeed. Still, a surprising 70% of startups fail within two years of their first financing round. Whether they have raised $500k, $5m or $500m, there is not one magic reason they die — all we can do is learn from their mistakes and attempt not to fall into the same chasm. We explore some of the most common causes of death below.
Not solving a large enough problem
By far the largest startup-killer is no market need. Too many startups are creating solutions that are interesting as opposed to needed. The greatest startups were formed when the founders saw a massive pain point — typically one they had experienced themselves — and no adequate solution in the market. This manufactures the perfect opportunity to either be a first-to-market leader or to reinvent a painfully traditional industry with efficiency.
Is your solution a vitamin (nice to have) or paracetamol (must have)? In order to acquire customers at scale and retain them, the problem has to be one that customers would be very disappointed to live without. A great way to test this is through a customer stickiness study. Ask each of your customers if your product was no longer available to them, would they be:
a) Very disappointed;
b) Somewhat disappointed; or
c) Not very disappointed.
If the majority of the answers are a) very disappointed, you know you’re on to a winner. If not, it may be time to think of pivoting. Either way, listen to your target market! They are the best source of actionable feedback you can use to better your business.
Running out of $
Cash burns quickly — typically much quicker than expected. It is ideal to raise enough money each round to give you 18–24 months of runway to ensure you have enough buffer to find more capital if times get tough. Particularly in the early stages of finding product market fit, money needs to be put towards marketing, customer acquisition and pivoting until the value proposition clicks. Unfortunately, this is not a cheap exercise.
When cash does get tight, naturally finding additional capital to replenish your bank account is needed. However, what happens when you can’t gain investor interest? Especially in smaller markets it can be challenging looking for capital. Always start fundraising long before you think you will need it — it is almost never as straightforward and quick as you think so leave lots of cushion room!
Not the right team
No matter how brilliant your mind or strategy, if you’re playing a solo game, you’ll always lose out to a team.
— Reid Hoffman
Not a single entrepreneur has become successful completely on their own. The most successful leaders have surrounded themselves with the best people — whether it’s employees, business partners or advisors. Particularly when creating the Startup Dream Team, a complimentary mix of skillsets is an essential. A staggering number of failed startups claim their reason for defeat is lack of diversity in abilities.
An idea doesn’t get funded — the expectation of execution of an idea does, and what better way to demonstrate execution capability than with evidence? Co-founders with a mix of sales and marketing, finance and operations, and technical skills will have a better chance than many at surpassing typical hurdles that startups face.
Startups are gruelling and sometimes it may seem like there will be no respite from challenge after challenge, but preparing from the get-go to anticipate the likely pitfalls are a sure way to avoid wasting time and energy when they inevitably present themselves down the road.