Why Do Startups Fail
Entrepreneurial activity has gone up by over 25% in the last few years. However, according to Statistic Brain, 25% of startups will fail within the first year. This rate goes up over time, with 71% failing by their 10th year. Why do so many startups fail?
In this article, we will look at (1) why so many startups fail, and (2) how you can avoid making the same mistakes.
REASONS WHY STARTUPS FAIL
The reasons for the high failure rate in the startup world can be attributed to one of three things: the team, the product/market fit, and the resources available. We’ll look at these one by one, and explore the various problems within each issue.
PROBLEMS WITH THE TEAM
If you interview 10 fast growing startups, 9 out of 10 will say their biggest challenge is attracting top talent. It starts with the founders, is driven by vision and culture and great companies NEVER compromise in maintaining high technical and cultural bars. – Michael W Ellison
- The inexperienced founders are running things; Over 30% of companies fail because their management was not experienced enough to handle issues like finances, hiring, and marketing. Take a look at the startup culture. 20-year old CEOs are building products and raising venture capital. Innovation comes naturally to younger people, especially in today’s technology driven world. But are these innovative young minds ready to take over day to day management?Being a founder of a startup and being its CEO are two different things. Often, people assume that the founder will become CEO, but this is where they are mistaken. The founder should only become CEO if he/she is qualified enough to take on the role. They may not have the experience required to take on tasks like expansion planning, underestimating budgets, and lack of planning or inventory issues.
- The team is not flexible enough; Most startups have specific goals in mind they want to achieve. However, with the fast-changing online landscape, these plans might need to be re-visited, and having a team that cannot adapt to these changes will lead to failure. Roles might need to change, responsibilities might be re-assigned, and the team structure might also be up for debate. Most startups are not able to adapt quick enough to the changing market requirements, and therefore go under.
- The team was not built keeping requirements in mind; Early on, it is important to define the core requirements the startup has of its team members. Buffer is a great example of a company that puts its customers first, and each team member they hire must fit into their company culture. This basic requirement means that each hire they make is made keeping in mind the specific requirements they have of their employees – they must be able to keep customers happy. Many startups don’t think about the main requirements or values they have for their culture. These are important things to think about, and hiring based just on experience is often not the best way to go for a new startup that has to keep culture fit and even flexibility in mind.
- Team members are over or under-experienced; Why would both under and over experience be an issue in startups? Let’s look at both sides of the issue. Startup founders, when hiring new talent, can overlook experience in favor of personalities, comfort level, lower salaries or even relationships (hiring friends or family). This inexperience can be a massive issue later on if the startup starts growing because these inexperienced team members do not have the experience in their roles required to take the growth the next level. When team members are hired on a budget, and lack experience, they may also not be willing to commit the time required to learn new things, since they don’t feel they are being compensated enough. The other side of it is an extremely experienced team, which is being paid top dollar for their work. Why would they cause failure for a startup? Simply by being too expensive, and using too many resources. Imagine paying every member of a team the most competitive rates in the market, all before the startup has made a single sale. A team like this needs to be able to deliver results extremely fast to compensate for the huge amounts of money being spent on hiring them.
PROBLEMS WITH PRODUCT/MARKET FIT
One of the key lessons I learned is that great startups have a blindingly obvious, ideally really large and painful problem that the company is trying to solve. Solving this problem should drive almost every decision in the startup. – Vinay on Vitoto’s Failure
- Market isn’t big enough to sustain high growth; Ever had a great idea for a product, but then realized you have no idea who’d buy it? This is a common problem with startups where they get ahead of themselves, do not research the market (and potential for market growth) and end up spending too much on a product that cannot find enough consumers to sustain growth. When the total market for a product has a natural ceiling on it (let’s say 10,000 people), how can you hope to sustain growth?
- Enough people do not know about the product; Great product, excellent team behind it, but no one knows (and therefore buys) it. This is a common problem with startups that don’t know how to budget properly for marketing (since it can be expensive) and are not able to take advantage of social media channels to spread the word. All marketing need not be in the form of paid advertisements, since the cost for these can go through the roof at times. But inexperienced team members can often face the problem of not knowing how to spread the word about the product to the right people, and thus market.
- Product doesn’t fill a growing need; The first things investors want to know is the problem your product will solve. If you can’t answer this, you’re going to have trouble, not just raising funds, but also attracting customers. Why do products need to solve a problem? Because eventually you are going to be interested in monetizing, and if the product isn’t filling a gap in the consumer’s life, they aren’t going to be willing to pay for it. Investors need to ensure a future return on investment, so they are very interested in products that have a big market/monetization potential.
- Too much competition; As bad as it is to launch a product that doesn’t have a market, it can be tougher to launch one that has a market but it is already saturated with the same kind of product. When you launch a product with a lot of competition, you need to be able to differentiate it from the rest. It needs to solve a problem none of the other products are able to address, or do it better.
PROBLEMS WITH RESOURCES
Whether it’s bank loans or venture capital, the process of raising money is draining, miserable, and distracting from the process of actually building something. Not just your business, but you, are constantly on trial. It has the same effect on the psyche as a lawsuit. – Michael O. Church
- Not enough funding; While bootstrapping a startup is common nowadays, a lack of funds is a serious detriment to success. A lack of funds is the biggest reason behind why startups cannot hire the right people for the initial team, since they cannot provide enough incentives to attract them. The startup also needs funds to be able to market, and also spend on equipment for product development.
- Too much funding; Who would have thought too much money was a bad thing? Startups that raise a huge amount of money right off the bat, but are not strategic about spending it, will often end up hiring too many people (or people that are too expensive) before they can support them as a company. Money also gets wasted on nice-to-haves that have no return on investment – like company retreats and perks like laptops or smart phones. Raising too much money also makes the team lazy, and they might not realize that the funds will run out if the startup cannot start showing returns on the initial investment.
- Poor management of resources; Having a great leadership team can prevent this, but an issue that strikes both startups with over and under funding is poor management of those resources. Resources like money are limited. If a company is flush with cash, it needs to manage it to ensure the money is used over a period of time – strategically. If it has too little money, it obviously needs to be able to prioritize funding.
- Not being able to convince investors of the value of the product; Raising funds is one of the biggest challenges a founder faces. Investors are looking for a few specific things from startups that they want to invest in, but there often isn’t enough time available to show them the value of the product in one meeting. Unfortunately, one meeting is often all you will get. Just because you are passionate about a product does not mean the potential investor will be just as passionate. Issues like poor presentation skills, lack of detail, poor appearance or even poor timing can be factors in why an investor walks away from a meeting.
HOW TO AVOID STARTUP FAILURES
It’s probably obvious by now, but a great idea isn’t all you need for a successful startup. There are many things that can lead the startup to failure. What can you do to avoid making these mistakes?
RESEARCH THE MARKET
Market research is the first thing you must do before starting up. You research might lead you to believe your product can be tweaked to match the market requirements, or be presented in a different way, or even marketed in a specific manner. Market research prior to launch, or even launch planning, is a crucial step that can help you avoid many mistakes.
Take your time with research, look at different competing products, and analyze market growth. How much would the average customer be willing to pay? Can you build a sales funnel by offering free features up-front, and providing an option to upgrade their account later?
This is also the only way you can avoid entering a marketing which has no, or little, potential for growth. For founders who come across this problem in their market research, the best thing to do is re-assess the product, and re-vamp is for a different market.
HAVE A CLEAR VISION FOR YOUR STARTUP
What is your goal for your startup? Where will it be in 5 years? 10 years? What future improvements can you see in it?
You need a clear vision for where your startup is going, because you are going to need it to convince:
- Investors to invest
- Team members to truly commit
- Customers to buy
A startup that cannot convince these three groups has no hope of succeeding. So make sure you sit down and think hard about how you are going to convince each of these groups to sign on. You can visualize your vision using words, pictures, video, or any other media you can think of, but it must be easy to explain to another person.
HIRE PASSIONATE PEOPLE
A team that is passionate about their jobs will always give you 100%. There is no better way of ensuring your people are on-point with sales, marketing, and even product development. Hiring your first few team members based on their passion for the product (while keeping expertise and personality fit with the remainder of the team) is a great way to make sure your team will be off to a great start.
FOCUS ON THE PRODUCT AND CUSTOMERS
A passionate team will find it very easy to focus on two core things: the product, and the customer. But as a founder you must be willing to drive this attitude down from the top. Your team will look to you for guidance, and if you aren’t passionate about the product, or truly motivated to help your customers, you will soon see the same lack of enthusiasm in your team.
You should also keep this in mind while researching your market. If you are truly passionate about solving a growing problem, you will do well to hear what your customer – or potential customers – have to say about how it can be solved. Get involved in A/B testing with your product development team. Take out the time to answer customer support tickets. Both these things will help you connect better with your core focuses.
FIND GOOD MENTORS
A great mentor is like a light on a dark stormy night. As a founder, you will have a lot of days where you won’t know up from down, want to quit and move to a desert island. A great mentor will be able to guide you through the toughest parts of starting up a new company: raising funds and finding the right team. Don’t think you can go it alone, and start looking for people in the same industry who might be interested in advising you as you go along the road.
HAVE THE RIGHT PERSON PRESENT THE RIGHT THINGS TO INVESTORS
The best startup teams (yes, teams!) have two kinds of people. The people who are passionate about product development, and the ones who can sell it to others. This second group is just as important as the first one, and ideally your co-founder (if not you) is great at schmoozing with the investors.
Investors want to be able to visualize success and growth. They want to see charts that show them they will get a great return on their investment. Be ready to show this to them. Help them visualize the product in the way you see it. Learn how to transfer your passion for the product to them early on and you will have no trouble fund-raising.
Convincing investors to part with their money in one short meeting is an art, and while founders do get better over time, they need to be able to get a few key things right
Include the following things when presenting to potential investors:
- Product Demand
- Business Growth
With careful planning and organization you can make sure that your business does not fail. Be prepared for things to change in your company as it grows. As your company expands your employees must be prepared to change the original goals, plans, cost, duties and obligations to support your new company. This is the same for you – you cannot build a business and expect your employees or partners to run the show for you.
As an entrepreneur you cannot just flip a coin and hope that luck is on your side. You have to make it happen.
Here is some additional great video that you can watch learn more about why startup fail.
In Palo Alto (CA), we meet Founder & CEO of Altiscale, Raymie Stata. Raymie talks about his story …