Top 5 Reasons Why Startups Fail
Every second three new startups are launched worldwide. This means every hour 11,000 and daily 259,200 startups come into existence. But do they all manage to acquire the unicorn status? And if not that, how many of these stand the test of time in the next couple of years of their inception?
A recent study by CBI Insights depicted that almost 90% of new startups fail. When asked about the possible reasons behind their failure, over 70% of the poll participants revealed that their intellectual property lacked any competitive advantage once they began running their businesses. Also, around 40% participants blamed no market demand for their business. What makes the situation even graver is that these are just two of the many reasons highlighted in the study.
Well, there is no denying the fact that the stats above are truly disappointing and may deter both investors and budding entrepreneurs from taking the plunge. However, being proactive can help you make a huge difference. Before you embark on your entrepreneurial journey or make any investment, you should prepare well in advance for any hurdle that might come your way.
Keeping that in mind, here we discuss the top five reasons why startups fail to help you make informed and right business decisions:
- Market Issues: This is by far the most common reason behind startup failures. Most early-stage companies, especially tech startups, experience the problem of having little or no market at all for their product. Below are three common symptoms of this phenomenon:
- Lack of a potentially appealing value proposition or event that may compel buyers to actually make a purchase.
- Wrong timing can be really catastrophic! You may be several years ahead of the market and the market itself may not be ready to embrace your solution.
- The market size of your prospective buyers, with pain and ample money to buy your product, is not large enough to help you keep your business running.
- Failure of Business Models: Another major reason why startups fail is because most investors and entrepreneurs tend to be unrealistically hopeful about how easy customer acquisition is. They often presume that their customers will readily welcome their offering(s) if they develop a seemingly interesting product, website, or service.
Nevertheless, this could be the case with the first few ones, but it gradually becomes tougher as well as more expensive to attract and convert potential buyers. In the worst case, the cost of acquiring a customer tends to be higher than the lifetime value of that particular customer.
- Weak Management: A poor management team is a common reason behind many startup failures. An efficient management team should be capable of warding off the first two reasons before they actually put your business at risk. The incapacity of a management team reflects in the following areas:
- Weak strategy, resulting in a product that people are less likely to purchase due to the team's failure to do enough homework to substantiate the idea prior to and during the product development phase.
- Poor execution, leading to the development of a wrong or an untimely product.
- Creation of inefficient teams that would work under them. This may weaken the structure of the organisation, causing the overall execution to go haywire.
- Cash Crunch: Running out of cash is one major reason why startups fail. The prime responsibility of an investor is to appropriately estimate and keep track of how much fund is left after the initial investment and whether that amount is enough to help the company set the first milestone.
- Product Issues: Failure to develop a product that is not capable of addressing or fulfilling market needs. This may happen either because of the simple nature of the execution or due to a complex underlying strategic issue.
Usually, the first product that a startup introduces to a market fails to meet the market demand. And it essentially undergoes several revisions to become the right fit for that market. However, in some cases, the product can be completely wrong and require reconsideration altogether. Such a situation arises when the concerned team avoids understanding consumer needs or validating their product idea with the potential customers prior to, during and after the product development phase.