Startup failure is common – 90% of startups fail. For a startup, failure is the most likely outcome. In this article we will discuss why startups fail.
We have also identified the top 9 reasons for failure of startups.
But, what does failure mean?
Failure of your startup means that the outcome is less than what you expected. For instance, if you launched your own business or a new product and the actual result is less than what you had planned for, that’s failure!
Why Startups Fail – Top 9 Reasons
The top 9 reasons why startups fail are:
- No Market Demand
- Cash Flow Problem
- Lack of Passion
- Wrong Positioning
- Lack of Flexibility
- Co-Founder Problems
- Competition
- Wrong Team
- Poor Marketing
We have briefly explained each of the top 9 reasons why startups fail.
1. No Market Demand
Your startup will fail if you are not addressing a market demand. If your startup has the wrong product or service, it is likely to fail irrespective of how well you execute.
How do you know that you are building the right product or service? The right product/service:
- solves a real user problem
- is something that users want and are willing to pay for
- solves a problem that is big and has a large market
- if competently executed, is likely to succeed in the market
Revenue is a good measure of market demand. If your startup has revenue, it means that you are solving a real problem and your customers are willing to pay for your product or service.
2. Cash Flow Problem
One of the top reasons why startups fail is they run out of cash and fail to raise new capital.
You need to have a tight control over your spending – both fixed and variable costs.
You can use the following approaches to control your expenses:
- Minimize your overhead expenses: For instance, you can work with a remote team instead of setting up an office space.
- Hire only when you need: You should plan your team members based entirely on your revenue and growth plans. You can initially work with freelancers on a project mode.
- Don’t invest in expensive technology: In the initial stages, focus on handling operations manually to the extent possible. Do not invest in expensive technology that you will need when you scale up.
If you wish to raise new capital, give yourself at least 6 months.
3. Lack of Passion
Startup is difficult business. You are likely to need 7-10 years before your startup becomes truly successful. It is easy to lose your passion.
Very often, startup founders get discouraged or lose interest in their initial idea. Sometimes, they move onto a different idea. Cases of burnout among startup founders are also common.
In order to avoid failure, it is necessary for startup founders to remain passionate about their business. Founders need to persist.
You need to believe in your product/service. You must be convinced that you are solving a significant problem.
4. Wrong Positioning
Positioning is vital for your startup’s success or failure. This is how your customers identify your brand.
Positioning is the single greatest influence on your customers buying decision.
A proper positioning exercise for your startup will help you to identify the following:
- Customers: who care a lot about the value that you are delivering
- Markets: that you can win
For a detailed analysis of how to position your brand, you can read a case study here.
5. Lack of Flexibility
This refers to a startup’s inability to learn from customers and the market. Startups need to make adjustments and evolve.
As a startup, you will need to adapt and change your course. Your success will sometimes depend upon the number of experiments you are able to make before you run out of money.
Your startup might need to pivot. A pivot is a change in business strategy in response to changes in market conditions including customer demand. It is a fundamental change in the direction of your business when your current products and services are not meeting market demands.
6. Co-Founder Problems
Discord between co-founders can be a reason for the failure of a startup. This is particularly true for seed stage startups with multiple co-founders.
Working in a startup is a high pressure job. Co-founders must maintain quality communication among themselves to avoid misunderstanding.
Disagreement between co-founders can be a serious problem for startups. Startups are generally short of resources. If your co-founders are not totally aligned, decision making and progress of your startup will be severely hurt.
7. Competition
According to a CB Insights study, around 20% of startups fail due to competition.
Once your startups idea is validated and product-market fit established, you should be prepared for other bigger players to enter this market and capitalize on the opportunity.
Competition will force you to lower your prices and your profit margins.
8. Wrong Team
Not having the right team can be a key reason for the failure of your startup. You need to select the right team based on their skills as well as attitude.
The first 5 employees will make or break your startup. A diverse team with different skill sets is critical for the success of your startup.
9. Poor Marketing
Not knowing your market or how to promote your product or service can be one of the top reasons why startups fail.
Sales is the Holy Grail for businesses. It is vital for survival and business growth. And marketing is the catalyst that drives sales.
In addition to a business plan, your startup must have a strong marketing plan. Your marketing plan will define your marketing goals and how you plan to reach your target customers.
We will next answer some of the frequently asked questions on the topic of why startups fail.
Frequently Asked Questions (FAQ)
a) How long do most startups last?
Most startups last for 3 years on an average.
b) How do you prevent startup failure?
You can prevent startup failure in the following ways:
- Thorough market research prior to launch – ensuring you have the right product/service
- Solid business and marketing plan
- Building a great team including the right co-founders and investors
- Strong financial management
- Flexibility and willingness to change and adapt
- Better marketing
c) Are startups profitable?
Yes, startups can be profitable. It is estimated that on an average startups require around 3 years for becoming profitable.
According to data shared by data analytics firm Tracxn Technologies, only 23 of the 100 unicorns are profitable. A unicorn is a startup valued at $1 billion or more.
d) Which country has the most startups?
The US has the most startups, followed by India and the UK.
e) What happens if a startup fails?
If a startup fails, investors lose the money that they have invested. If it is possible to sell the startup to another investor, the original investors will be able to recover part of their investment.
How Can Your Marketing List Help You?
Your Marketing List can help you with the digital marketing requirements for your startup. We have started Your Marketing List specifically to address the following challenges of businesses:
- What digital marketing services do I need?
- How can I find the right resources for this?
- How do I ensure that I get quality work in time and within my budget?
If you are interested to learn more about how we can help you, do connect with us.
To learn more about topics on business strategy and digital marketing, you can read some excellent articles in our blogs section.