The number of startups launched around the world, every year, is truly mesmerising. You name an industry, or a sector, and they will have at least a few hundred startups registered each year. Yet we don’t hear about most of them. Why? Is it because they are working on a secret mission? Absolutely not! It is simply because they do not survive as long as it takes to be heard of. In short, most startups fail. And most of them have common reasons among them, which are responsible for their early exits from their respective markets.
In this article, we are going to explore the common issues that cause startups to fail.
Launching a startup requires an immense amount of planning and preparation. Hours of meticulous strategizing, and of course developing the intended product or service. But isn’t this something all startups would do before their commencement? The reasons for failure start in the early phases.
- Business Model
Ask any successful entrepreneur, the importance of a Business Model, and notice the smile on their face before they answer you. That smile exists because they know how hard they worked on developing their business model, testing it, redefining it and then, and only then, going ahead with their product or service.
A business model is a building block – a foundation, in a sort –of your startup. It allows you to check what type of a market you could cater to, what is its scalability and thus determine potential profitability.
Most startups undermine the importance of preparing a business model. Without it, they have no specific market to segment their customers from. It is like shooting in the dark and hoping to hit the bull’s eye. Hence, scalability is tough to estimate, and forget answering the question of profits.
Business Models are an excellent way for investors to understand how your business would perform in the short and long run. Imagine sitting with investors and explaining to them all about your product or service but going blank when they ask about how you intend on making profit! Quite painful, wouldn’t you say?
2. Business Plan
Business Plan is another important document to prepare when you decide on starting a venture. Not only does it entail what your product or service is, but also includes details about your current developments, your intended modifications (according to market testing), your finances (current and required), and a roadmap of your short- and long-term goals and strategies.
It is rather surprising to see so many startups try to enter a market without a business plan. They not only have risked their current product/service, but also their initial finances.
Furthermore, if your startup needs funding, any investor is going to demand to see a business plan, mostly to see what your short- and long-term strategies are. This gives them faith in your objectives and assurance that their investment will grow with your performance. It has been noticed that a lack of business plan, almost always is one of the primary reasons as to why startups fail.
3. Market Issues
In these modern times, we do not order food unless we see the rating and reviews of the restaurants. This is research. Yet, shockingly, more than 90% of the startups do not conduct market research before finalising their offerings. Market research gives you the necessary insights into consumer preferences, which allows you to adapt your product/service accordingly and give it a chance at maximising output.
Market research is important for the following reasons:
- To find out consumer preferences
- Understand current trends
- To determine whether your product/service is right for the intended market
- Alter or modify your offered product/service according to research findings
- Establish your competition and analyse potential threats to entry
- Identify hot and cold markets
No matter how good your product or service is, if it enters a market where the customers do not have a demand for it, it will not perform. Additionally, you will end up exhausting your funding with a sunk cost fallacy.
4. Financial Management
Would you be surprised to hear that 70% startups fail because they run out of funds? Not really, isn’t it? We all know how crucial it is to manage finances in daily lives. Managing finances for an entity like a startup, is no different. Firstly, knowing how much cash reserve is available is a good step to begin with. Include that on your business plan as well. Next would be to calculate how much is the cost you bear to acquire customers, and what is the net total (estimate) they would bring in over the year. If your cost to acquire customers is higher than the value they will be adding to your balance sheet, then you’re doing something wrong.
Furthermore, managing finances gives you a fair idea of the required funding at various stages of your venture.
It is important for startup founders to equip themselves with basic finance knowledge at the inception phase of their startup. Being the decision maker, it is always easier to take a call when you know your current standing. Hiring the right amount of people when you have a rise in cash flow, or braking on the pedal when factors are unfavourable, are all decisions related to finances.
5. Poor Management
Leadership impacts the growth of any organisation – new and established, alike. The key stakeholders, decision-makers in a company, give direction to its operations. Their competence and ability to cope with uncertainties, can be the make-or-break point for their company.
In case of a startup, the stakes are higher. The uncertainties and risks are higher too. It means that the calibre of decision-making must be equally high, as well. When this is not the case, the startup can experience a downgrade, first in the form of small steps, which quickly transforms into a slide.
Structuring the organisation well (and according to its needs and the stage it is in), can very well lead to a surge in its growth.
6. Product or Service Issues
Products are generally categorised as a ‘want’ or a ‘need’ for a customer.
Unless they fulfil what the consumer desires, the product is of no value to them. Well-desired products have the characteristics and features that fit the consumers in that market. If there is a fault in the product or service you provide, it needs to be corrected. For this you need actionable feedback.
Many startups make the mistake of thinking that their product /service is destined to be liked and bought, just because it was made. Not solving a purpose for a consumer, or for a lack of demand for the product (with respect to wrong market or wrong timing), a large number of startups face an early exit.
It is advised that you must always test your product in a small market, gain feedback, and then plan a course of action for the future of the product. Who knows, you might just decide to scrap the initial product and develop something altogether new.
7. Lone Wolf
Playing cricket, running a government, designing a spaceship, and operating a startup – what do they have in common? Neither of them can be done alone.
In the beginning, it may seem alright to work alone in a startup, but once the workload increases, the founder will have to choose between giving time to cater to clients, and matters concerning the functioning of the startup itself. Though it may seem a petty issue to many, this is a reason as to why startups fail.
There are various aspects of a startup where one needs help – product/service analysis, roadmapping strategy, managing finances, marketing, sales, hiring, and so on.
Where most founders attempt going solo at these Herculean set of tasks, only 5% of them use the services of a Business Coach or mentor.
Of these 5%, only about half approach professional consultants to help roadmap their strategies and to guide them with effective hiring.
Just like the saying goes, “If you want to walk fast, walk alone. If you want to walk far, walk together.”
Now that we have had a look at the major reasons for failure of startups, it is not so difficult to avoid them, one step at a time.
- Get a mentor/coach
- Prepare a business model
- Create a business plan
- Learn about Finances, and how to manage them
- Conduct market research
- Analyse your product (professionally)
- Structure your startup’s management well
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And he actually ordered me dinner simply because
I discovered it for him… lol. So allow me to reword this….
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