Why Does A Startup Fail? Here Are The Real Reasons

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Having your own startup is pretty cool. Facebook was a startup and look where it is now. Similarly, pretty much all of the products you use today were at some point conceptualized at some random location. The idea was followed by months, perhaps years of hard work and dedication to get the product or idea off the ground and watch it soar upwards to become the next best thing since sliced bread.

Unfortunately, that is not the case with all startups. In fact, according to Fortune, an estimated 90% or 9/10 startups actually fail. Those are indeed staggering odds. If you have an idea that you think could change or disrupt the way people do things normally, you may be thinking of having your own startup too. But how do you know that your product would be a success and not flop about like a dying fish? Well, we’ve come up with a few reasons on as to why startups fail and what you can do to make sure that yours doesn’t.

Your Startup caters to the wrong Audience

This may come as a surprise, but a major reason why startups fail is that they fail to cater to the correct audience. In this case, the audience would be your target market. They go all out in coming up with an idea they feel is brilliant and then spend all their funds on it thinking that it will be a huge hit. They then proceed to pitch said idea to investors with numbers that may or may not be accurate. When an investor scrutinizes their idea into detail, they are at a loss for words.  the tough questions, they are stuck.  In the end, the product is indeed a hit; a hit from reality because they then find out that there is little or no market for the product that they have built.

Startup Fail
Akin to how an eskimo has no use for a refrigerator, if you target the wrong audience, your product will fail
Image Credits: LinkedIn

Be it a lack of a sufficient value proposition, or the lack of it being compelling, whichever way you look at it, there is just no way what that a consumer would be interested in buying your product or service. It’s vital to ensure that you identify customers with a need and the develop a product that will satisfy that need. An example of this would be KISSmetrics, a startup launched by Hiten Shah and his partner.

“We wasted $1,000,000 on a company that never launched” – Hiten Shah, Co-Founder at KISSmetrics.

They went ahead and spent all their money on building what they thought was the best product they could, without first understanding what their customers cared about.

Your product itself is not what the market needs

Another reason that startups fail is because they do not develop a product that meets the market need. This is either because they have not carried out proper research into market trends or their idea of what the market needs is somewhat way off course. In a best case scenario, this can be overcome by a simple product revision (or a few revisions).

Fail
Image Credits: Ernest Barbaric

The worst case scenario is that the product is nowhere near to market requirements and a complete product overhaul is required. This is usually the more expensive choice between the two and also goes to show that the team that didn’t carry out proper research and development.

A big mistake from budding entrepreneurs is that they think their ideas are the “first in the world”, when in reality, out of 7 billion other people in this world, someone else, perhaps multiple people have thought of that idea. We need to come out of that stupid mentality

Take, for example, the case of Sandi MacPherson. She spent 6 months building a product that she wouldn’t use very often for a market she wasn’t familiar with and for a target user base she didn’t understand. The result? It made it quite a predicament to figure out why things weren’t working out. She is now the Editor-in-chief of Quibb.

Your product is a tad too advanced for its time

Even if you have identified a potential customer with a need, and have proceeded to develop a product that caters to that need, your efforts are futile if the customer cannot use the product or service. This could be because the solution is too complicated for him/her to use. Or it could be that there is no proper user manual to figure out exactly how the product or service works. Either way, you have a rather expensive solution that you have slaved over for months to produce, but none of your customers know how to use it.

Your Business model is all wrong

Just because you have a brilliant idea for a product, that doesn’t mean that customers would cross valleys, rivers and mountains to come use your product.

Startup
Image Credits: Amplycell

A majority of entrepreneurs even in Sri Lanka think that investors will just throw money at any idea they come up with. It may happen with the first 5-10 customers or even less, but after that it will not sustain itself. The reason? The way you’re planning to earn money is all wrong.

There are two key points to remember here. One is the cost of acquiring a customer (CAC) and the other is the lifetime value of a customer (LTV). In order to have a successful business model and build up a strong customer base, your CAC must be less than LTV. In most cases this is the opposite. The theory here is simple. You must be able to gain new customers by spending less than what they would generate in value of the lifetime of your relationship with them.

Keeping Ideas To Yourself

We get it. Your ideas may be brilliant. But that doesn’t mean that it should only be kept in the recesses of your mind and no one else’s. This is a common trait among people who want to launch their own startup; they don’t want to share their idea with others. They want to keep it to themselves and are stuck with it forever as they are scared that people will steal their idea.

Startup
Image Credits: Startup 30

In reality, sharing your idea with like minded people or peers or even from an outsider’s point of view will actually make you see if your idea is feasible or not. Go out into the world. Talk to people, share your ideas. After all, it’s a learning process.

Not having an accountant or a Lawyer

Sure, you just launched your startup and everything’s all hunky dory. But, do you have a lawyer or an accountant? Well if you don’t, you might want to think of getting one ASAP. Why would you need an accountant, you ask? Well, of course you can open up an excel sheet and not down your costs, expenses, liabilities and what not. But what if you’re not that good at the number game and decide you’ll get one later on? That’s pretty much the biggest mistake you can make.

Regardless of your knowledge of accounting, it is absolutely vital to get an accountant into your business as fast as you can, simply because they can perform tasks such as reviewing your numbers,  preparing all of your necessary federal, state and local tax returns etc. This in turn also frees you up from handling these tasks and allows you to focus more on building up your business.

Similarly, when signing documents with large corporations, be it for funding, or a merge or an acquisition, it is vital to have a lawyer present. A good business attorney or lawyer will provide vital assistance in almost every aspect of your business. If you just had a breakthrough product and you want it patented as intellectual property, then you will obviously need a lawyer. Accepting a large donation from a multinational company? You better have a lawyer present to make sure all legal actions of that are carried out.

You have poor team members, thus you will fail

If a great product or service is the heart of any operation, then capable and competent team members are its blood and veins. Another primary reason for startups to fail is simply that they have an incompetent team. There are many factors that could lead to this. A weak leader, pride and arrogance of team members, personal glory or vendettas or even the fact that they literally will not work together as a team are just a few of the reasons why this happens. If a team’s strategy is weak, that can also result in a poor team. Because they haven’t done their research, they fail to validate their product and as such, build a product that no one wants.

Startup
Image Credits: Zestfor

Here we find the story of Jesse Jacobs, Founder of Samovar Tea Lounge. In running the business for 12 years, Jesse says emphasizes the importance of having the right people on your team. Be it a investor, employee or a vendor. They should believe in the mission of your company and also contribute towards it, rather than simply get their share of the profits and clock in and clock out.

You’re running low on the dough

We don’t mean dough in the baking sense (although if you were a bakery, then running low on dough would be a bad thing). Rather, a lack of funding is another reason for startups to fail. If you use up all your cash on buying a fancy car just after you launched your startup and have no money for emergency purposes, you’re pretty much done for. That’s why, if you’re running a startup, it is your sole responsibility to ensure that you know exactly what your cash flow is and the current state of your finances. If you feel that you need to get more money, then you can do one or both of the two method given below:

  • ·         Funding
  • ·         Bootstrapping

Funding

One method of funding is via an Angel Investor or a Venture capitalist would invest their own savings in your startup. In return, they would ask for convertible debt or ownership equity, or just shares in your company.

Another method would be through Incubators and Accelerators. These places offer cash, working environments and also a board of advisors to guide you through your startup life to make sure you’re making the right choices.

Crowdfunding is another practice of raising funds for a startup. This involves raising money from a large number of people. Crowdfunding today is generally based on three parties:

  • The project initiator
  • Individuals or groups who support the idea
  • A moderating organization or platform that brings the parties together to launch the idea.

Two of the most popular methods of crowdfunding are:

  • Reward-based – This is where people donate money to a project, a business or non-profit and are rewarded with a an incentive for participating (hence being called reward based crowdfunding). Examples of this are Kickstarter and Indiegogo.
  • Equity – This is where people invest in an early-stage unlisted company (not listed on the stock market) in exchange for shares in that company. A shareholder has partial ownership of a company and would also get a share of the profits made by the company.

Bootstrapping

This is essentially the opposite of funding. It essentially means that the process of funding a startup is carried out through your own savings. A Startup can grow by reinvesting profits in its own growth if its bootstrapping costs are low and return on investment (ROI) is high. This method allows the owner or CEO of the startup to maintain control of their business and also forces them to spend their money in moderation and prevents unwanted spending of finances. Because bootstrapping takes into account customer and not investors, there’s also a higher chance that you would create a profitable business.

Well, there you have it, folks.

Our take on why Startups fail, the most common mistakes they make and how to prevent them. There may be countless other reasons out there, but we felt that these are the ones worth mentioning. If you have any other reasons on as to why startups fail, please do leave a comment in the section below.

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