Top 10 Reasons for Startup Failures

By Eric Dickmann

June 12, 2019

Business Model, Business Strategy, No Market Need, StartUp, StartUp Failures

A vast number of startup companies fail within the first 5 years. When looking at the reasons for failure, some might seem obvious. In fact, we could prevent many of these startup failures. Usually, it’s not only one reason but several reasons why businesses fail. Being aware of these common mistakes can help founders succeed by avoiding them.

In 2018, CB Insights made a study to see what caused startups to fail. The data-driven analysis came from founders courageous enough to share their stories. The result mirrored other studies when they compiled the top reasons why startups fail.

Here are the Top 10 Reasons Why Startups Fail

Startup Failure Reasons

No Market Need

The top 1 reason why companies fail is that there is little or no market for their product. A new company’s challenge is to create a great product and match it with an appropriate market need. Unfortunately, many companies become so blinded by what they’re trying to create. They fail to see if there’s even a market for it.
Jory MacKay, in his article at the Observer, suggested five questions to ask before building a product to ensure it serves a market need:
  • Are you a user?
  • Do you care about what you’re making?
  • Do other people care about what you’re making?
  • Are you solving a meaningful problem?
  • Are you solving the most important problem that your users have?
You will understand what market need the product is addressing by answering these questions. There are lots of great product ideas out there. But not all lend themselves to profitable business models. Everybody wants a business that solves a problem and does so at a price point where you can make money.

Ran Out of Cash

Another significant reason why businesses failed is that they ran out of cash. If your expenses exceed your cash, cash flow becomes a problem. To prevent this, you need to be wise about your spending. The Accountancy Cloud suggested five top tips to manage cash flow for startups:

  • Understand where the money’s coming from and where it’s going.
  • Take a look at the bigger picture.
  • Be prepare for Ebbs and Flows.
  • Stay on top of things; try not to fall behind.
  • Develop a cash flow management plan.

You might also want to check our articles on How Do You Build a Profit Plan for Your Business? and Ways to Increase Your Profit to avoid running out of cash.

Not the Right Team

Many founders tend to focus on building products but neglect the need to hire the right team. As a new company, your team matters – more than you might think. Hiring the right people should be a priority for every new venture. Their personalities, values, and actions will influence the direction of the company. So, it’s important that they fit into your organizational culture. Here are five essential tips in finding the right team for your startup:

  • Build your foundation first. A formidable team starts with its founder.
  • Find some rock-stars. Consider candidates for their hard skills. But they must have the ability to collaborate.
  • Focus on passion and potential. Aim to hire for culture fit.
  • Check your compatibility. Team rapport is essential to growing a startup.
  • Translate strategies to team building. Listen to your team to know what buttons to push to get their best performance.

Get Outcompeted

Competition is something all companies face. Competitors can be either direct or indirect. The data shows that ignoring them is a recipe for failure in 19% of startups. It’s important to know your competitors. Understand their products, services, pricing, and positioning. This information is critical for your own product development efforts and marketing strategy. Guy Sheetrit, in his article at Business.com, suggested five simple ways to beat your business competitors:
  • Identify and solve the pain points of your customers.
  • Set a standard price that has a competitive advantage. Ensure that your audience will love to pay for it.
  • Innovate with your products and services.
  • Improve your Customer Service. It’s the best way to differentiate your business from your competitors. 
  • Build your own niche to have more rooms for business. Prospects are easier to target on a specialized market.

Pricing/Cost Issues

Founders need to build a thought-out pricing plan. Price too high, and you can put your business out. Price too low, and it will hurt you in the longer term. Madhavan Ramanujam recommended three pricing strategies for startups:

  • Maximization (Revenue Growth). Calculate the fixed and variable costs a business will incur. Then, figure out how to cut these costs to maximize revenue.
  • Penetration (Market Share). Attract more buyers by offering the product at a low price. Once you penetrate the market, expand your brand to increase profit.
  • Skimming (Profit Maximization). Introduce the product to the market at a premium price. Then, decrease the price over time to attract a bigger market.

User Unfriendly Product:

There are products that may not appeal to customers. A product is friendly to users if it’s easy to use – or easy to learn how to use. The following are common attributes of a user-friendly product:

  • Simple. It should provide quick access to common features and commands.
  • Clean. The product should be well-presented and easy to operate.
  • Intuitive. Product operations should be obvious to the user.
  • Reliable. Make sure that usage errors will not affect the product’s function.

Product Without a Business Model

Business model issues resulted in the failure of 17% of startups. It’s a conceptual structure that supports the viability of a product or company. It explains how the company operates, makes money, and how it intends to achieve its goals. Sourobh Das, in his article at Feedough, suggested the following ways to develop an ideal business model:

  • Size your product value in the market.
  • Get high-value customers.
  • Ensure enough high margins.
  • See if your product is the best solution available.
  • Ensure customer satisfaction.
  • Decide on the channel and distribution strategy.
  • Maintain market position.
  • Plan funding strategy.
  • Execute a pilot rollout.

Poor Marketing

The inability to market is a common failure. Most founders like to code or focus more on product design. They didn’t relish the idea of promoting a product. To be successful, a startup needs to know its target audience. You need to get their attention and convert them into leads. Arya Bina, in his Forbes article, suggested the following strategies to market your startup:

  • Send Email.
  • Start a Blog.
  • Post on Social Media.
  • Use paid search advertising.
  • Sponsor an event.

Ignore Customers

To run a successful business, you need to be a great listener. You should listen to your customer’s problems, praises, and suggestions. The common ways to collect feedback are through live chat, email outreach, surveys, phone calls, suggestion boards, and social media. Here are the best ways to handle customer feedback:

  • Identify product improvement areas from your user.
  • Feed your product roadmap with customer feedback for market fit.
  • Find your niche. Figure out where you belong through data.
  • Prevent customer churn. Building healthy relationships goes a long way.
  • Discover potential advocates and nurture them.
  • Motivate your team. Make everyone understand the larger picture.

Product Mistimed

The timing was also a factor that determined if a startup would be successful. If your idea comes too early, the consumers may not be ready for it. If your idea comes too late, you could be facing a lot of different competitors.

Timing is difficult to manage and sometimes is a matter of sheer luck. It’s sometimes easier to see if you’re late to market than if you’re early, but both challenges can be difficult to overcome. Testing and getting feedback are good ways to reduce your marketing timing risk.

There are many reasons for the failure of a new business startup. By being aware of those mistakes, you can learn how to avoid them in your business.

About the author

Eric Dickmann is the founder of The Five Echelon Group, host of the weekly podcast - The Virtual CMO, and a CMO On Demand for a variety of small and midsize companies. An executive leader with over 30 years of experience in marketing, product development, and digital transformation, he has worked with large, global companies and small startups to develop and execute marketing strategies and bring innovative products to the market.

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