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 mis takes 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.
No Market Need
The primary reason why companies fail is that there is little or no market for their product or service. 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 that they fail to see if there’s even people who are interested with their offers.
In Jory MacKay’s article at the Observer, he 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 reason why some businesses fail is because they ran out of cash. If your expenses exceed your allocated budget, cash flow becomes a major problem. To prevent this, you need to be wise about your cash inflow and outflow. The Accountancy Cloud suggests five tips to help startups manage their cash flow:
- 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.
Not the Right Team
Many founders tend to focus on building products but neglect the need to form 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.
Be Strategic in Competing with Competitors
Competition is something all companies face. Competitors can be either direct or indirect. Data shows that 19% of startups fail because they choose to not recognize the existing competition. 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, shares 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.
Founders need to build a well-thought pricing plan. If your price too high, you can cause losses In the businesses. On the other hand, if the price too low, it will hurt your ventre 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.
There are products that may not appeal to customers. A product is friendly to users if it’s eas y to use and helpful in the long term. 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
You can’t develop products or services without a well-laid out strategic marketing plan. 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, shared 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 Strategy
The inability to market is a common failure. Most founders like to code or focus more on the product’s quality or design rather than leading the marketing and sales aspects of the business. Some don’t relish the idea of promoting a product and instead focus on a single aspect of their product or service. To be successful, a startup needs to identify its target audience, 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.
Listen to Customers
To run a successful business, you need to be a great listener. You should listen to your customer’s concerns and immediately respond to their dilemmas. 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.
Mistimed Product Launching
The timing is a factor that determines 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 highly saturated market.
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. Both challenges can be difficult to overcome especially if your are new to the business. Just like everything around, your startup needs time to grow. Be mindful that there would be times that you would need to take a step back for the mean time and remodel your products or services and wait for the perfect opportunity to relaunch and succeed in the market.