10 Reasons Why Startups Fail [Infographic]
Post-mortems are never nice but sometimes it becomes imperative to witness them to learn from others’ mistakes and avoid them in your own journey. When you have invested so much time and effort in your company, right from ideation to customer validation to scouting for funds, you would want to make sure that your efforts bear fruit. 90% of startups fail within the first 5 years of their existence and if you want to avoid the same fate for your company, you must know why. Here are the top 10 reasons why most startups fail. Make sure you dodge them for your own good.
Table of Contents
Why do Startups Fail?
No Market for your Product
Make sure you make the right product for the right market. Most startups fail as there is little to no market for their product. Your product needs a compelling value proposition as well as the right market timing. You might have a stellar product but it might be a few years ahead of its time, which might lead to its untimely demise. Know the pulse of your target market before you decide to jump in.
Companies fail when they run out of cash before they achieve their set objectives. One of the most important responsibilities of a CEO is to understand cash flows and how to get more of it for the company. If your company is dependent on investors for funding, you must ensure that the investors are interested enough till you start getting sufficient revenues from your customers.
Wrong Team or Management
With the wrong top management at the helm of affairs, chances are your company will fail sooner than later. If there is no coordination between the founders of a startup, it seeps down to the lower levels too. A good management will ensure that the other problems on this list are avoided or at least mitigated and the company runs as smoothly as possible. A poor management will neither strategize well nor execute efficiently.
Unviable Business Model
The cost of acquiring a customer (CAC) must be less than the lifetime value of that customer (LTV). The right business model will take care of finding a scalable way to acquire customers, especially for a capital efficient business, which will look to recover the CAC in under a year’s time. Startups with unviable business models have an unbelievably high CAC and a low-to-average LTV that will not be sufficient to cover the CAC. Such companies, in all probability, will fail in a few months or years.
No one or nothing can save a poor product from failing. If the main focus is not on the product, you will never gain customers. Prototyping helps in fine-tuning your product. Make your product as customer-friendly as possible. Customer centricity is what keeps great companies going year after year. Your product will succeed only if and when it truly solves a customer pain-point no one else has.
People do not give enough credit to poor marketing for a startup’s failure when it is actually a major culprit. A great product does not and cannot always advertise itself. If you market to the wrong audience or use the wrong channels, your product and consequently, your company shall be doomed soon.
There are many legal challenges that arise in a company’s journey, right from branding issues to when a company starts expanding into new markets. Some of these legal challenges can be so serious that they can put an immature end to the company.
Loss of Passion or Focus
If you think a startup is your ticket to quick money and you do not truly believe in your idea, then you will soon lose traction. Your lack of passion or focus will start showing. All your actions will be motivated by money, not by the desire to solve the customer’s problem and that is the quickest way to fail majestically as a company.
Overconfidence or Arrogance
Overconfidence or arrogance makes you so sure of yourself and your product that you do not even bother to test your ideas in the market. You end up spending tons on your idea that ultimately ends up bombing. This reason is the base on which most of the reasons in this list exist. Entrepreneurs often suffer from overconfidence and while this helps in certain cases, it ruins everything in most others.
Your competitors might be huge and can kill you with the might of money and scale. If you are a grocer in the US and want to expand, chances are giants like Walmart will gobble you up for lunch. In today’s world, scale and funding are very important and the situation might be different in different countries, case in point being when even big companies like Uber could not compete with Didi in China.
Startups also fail due to a variety of reasons outside of this list but this should not deter you from starting up. No one said this would be easy. But if you do not want to perish like 90% of startups, you better avoid these common pitfalls. You will need lots of perseverance to succeed as a startup. You need to constantly plan, execute, track the results and learn from your mistakes. Plan well, don’t be short-sighted, keep your ego aside and be flexible to ever-changing market dynamics.
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