Why startups fail: how to join the winners circle?
Many startups have great ideas but a plain idea is not enough to make it work out. What mistakes should founders avoid not to see their business go off the stage in less than a year?
9 out of 10 failures: what turns startups into unicorns?
Building a successful startup nowadays is a real challenge: the competition is fierce, the investors are demanding and the customer needs change very quickly. However, the startup market is still going strong: over 100 million startups are being launched worldwide annually which means 3 new businesses established every second.
According to Forbes, the number of self-employed in the U.S. has increased by 150K. It proves that even under intense competitive climate there are still people willing to join and try their hand at running a startup. On the other hand, 90% of startups fail due to different reasons.
Cold statistics like this are not meant to discourage entrepreneurs, but instead, inspire them to think smarter and work harder. With that in mind, we will go over the main pitfalls many founders walk straight into and describe things you can do to maximize your chance of success.
4 key reasons why startups die
There are four fundamental reasons that explain the startup’s failure and solutions you can put on to avoid it.
Reason One: The Market Doesn‘t Need Your Product
According to the research published in Fortune a few years ago, 42% of startup downfalls happen due to the lack of market need. Your product may be well-thought, user-friendly, created by a skilled team with the use of the strong features and newest technologies but all these would mean nothing if nobody needs it. Your idea does not have to be revolutionary: most of them are not. But re-inventing something good which would solve specific people’s problems is halfway to a successful project.
Usually, startup founders do not take enough time to do market research: study the marketplace, analyze their competitors, understand what customers need. Excited about the idea, they rush into development completely sure that it would be a rocket and in most cases, it ends up with wasted money and time. This problem is generated by two reasons:
- Not filling the market gap;
- Not having a niche market.
The market is overcrowded with companies creating the same solutions fixing the same problems. You can still develop a unique product that fills the market needs based on:
- Location (for example, an Uber or Facebook analog set up for a specific country and adapted to its particular needs);
- Pricing (you can fill the gap arranging a solution for those customers who are not able to pay high prices for similar services);
- New technology (a new approach giving benefits compared to other solutions or simplifying the product).
However, filling the market gap does not guarantee your success. You should also come up with a market for this particular gap – customers willing to buy your product. A good example of a successful startup here can be Ryanair: the company established its market by providing low-cost flight tickets. They still offered flights but now affordable for ordinary customers.
Another common mistake for entrepreneurs is not having a niche market. You cannot make a fortune if you are trying to produce a product or service targeted at all customers. Let’s imagine a situation: a company created a universal CRM solution and tried to sell it to small and medium businesses, and enterprises, not taking into account different requirements and processes used by each of them. As a result, the product covered their needs only partially.
Later this startup focused on enterprises only and improved their solution for its niche market based on its specifics. A niche market is an important factor to consider for all startups: it is a particular specialized market for your product or service which can be defined by:
- Location (village, town, city, country, continent);
- Finance sources (public or private);
- Company size (small, medium, big);
- Sector (healthcare, finance, education, traveling, etc).
Thus, dealing with the market needs and fixing upon the niche you want to target, you will increase your chance of becoming a successful startup.
Reason Two: Lack of Funding
The main temptation for startup founders and their biggest mistake is spending all the investor’s money too quickly. Raising funds is very hard and you definitely faced it: first, you need to put your idea forward to a number of people and then prove that it is worth the money. Wasting the hard-earned cash because of not properly planning in advance is at least unwise.
According to statistics, 44% of all startups fail to raise seed or series A funds, and 70% of those that did get funding cannot make it further after they crossed the seed stage. On the other hand, just 28% of startups blamed in their failure a lack of funding or running out of money also setting aside factors such as a poor business model, no market need or weak technical team.
What comes in reality: you are a smart successful startup founder who raised a solid round of investments to build an awesome idea… which is most likely to collapse in just a year after.
A research carried out among 400+ early-stage startups pinpoints the key findings:
- Only 1 in 10 startups receive the exact amount of requested money;
- More than a half startups raised less than they expected;
- Almost 38% raised over 70% of the initial goal;
- 83% of tech startups aimed to raise funds within a year of the audit, and almost 44% of them failed.
It is both complex and crucial to determine how and when to raise funds. Many startups do it too early thus failing to present investors a business case that will close the deal. Another far-reaching factor is the amount of money required to reach your goal: it is very tricky to forecast how much money your idea needs. You have to correctly estimate your product and investors need to balance your future success with the risks coming – that is why the difference in goals and results of funding is that ample.
What does it all mean for startups raising funds?
- Not enough money. As it is tough to predict how much you will need exactly, startups base their opinion on the feedback of mentors and investors which later may end up in an insufficient amount for completing a project. Startups can also underestimate the cost on their own which will lead to the same results;
- Too much money. Some startups set higher costs than the product actually values trying to show investors that it is going to be the next big thing. It can bring the opposite results raising less than initially planned;
- Dilution risk. If you decide to spread your startup’s shares between a few investors, they will get less profit than expected, even if the product goes very well. To avoid this, investors can offer you more money but ask for a bigger share as well;
- Postponing the next round. If you cannot compromise or plan a few rounds of fundraising, investors can propose a lower offer than you requested. Moreover, after you received the first stage investment, putting off the next one can lead to running out of money and losing your investors.
To ward off the problem with a lack of funding, you can:
- Focus on your metrics. If at the beginning you can convince investors based on a prototype, enthusiasm, team and some early users, at later stages you will have to provide more numbers in order to get a chance for funding. Professional investors pay attention to real evidence of your potential such as CAC and LTV: without these metrics, they can just pass with “it’s too early” excuse;
- Reach out to investors. Speak at conferences, send emails, meet investors, make them listen. A good point will be offering a plan that includes a few stages of funding so that you can draw on one investor to all of them. You should also remember that many investors often hire assistants who do the job of communication for them. So even if you had a talk with someone from VC, it is very likely not reaching the investor at all ending up with a new contact in CRM. Ask the investor for advice: thus you will not only flatter but also learn what you have to achieve to raise the funding;
- Manage costs. Like a captain of the ship, you need to identify the key components that will help you get to the next round of investment cutting off other expenses. Do not let your colleagues know something went wrong: be enthusiastic and lead your team;
- Use bootstrapping. Build your startup using existing resources which will bring the risks to a minimum.
Behavioral economics has such terms as loss aversion and the endowment effect. The first one means that people care more about losing $50 than getting $50, and the other one is that they value things they already own more than those they don’t. It can be compared with shares and investments they have not made yet. Thus, make sure you know exactly what your investors want to see and if you can achieve this.
Reason Three: No Team or Bad Leadership
There is no point in doing everything alone. Building up a startup in a competitive industry is challenging and one of the things that startup founders often forget about is the support and collaboration of a well-functioning team. The people that have been with you from the very beginning and contributed to your company’s success are extremely valuable while a high staff turnover could be very damaging to the overall performance.
Your company’s goals and service quality depend on the people you work with: they are the key elements of your clock mechanism and can either help your business reach the stars or drown it down the drain. Often owners hire unqualified employees to save investment costs which within a period can end up in a crash. Instead, invest money into your workers and if they are good enough, do everything you can to make them stay with you.
This comes from good leadership: you have to establish good relationships inside your team, acquire solid management skills and listen to your employees’ feedback to become a better leader. Otherwise, it can negatively impact your sales and partnerships and bring you a lack of stability, financial problems, and bad reputation instead.
- Find a co-founder to have a critical eye and different opinions on the product. Make sure that this person shares your views and check how they perform in stressful situations;
- Attract skilled employees with knowledge and experience. Determine the key skills required to reach your goals and train candidates for this position;
- Spend some time to understand a team’s motivation: a motivated employee is performing better and helps you do the job. Listen to their feedback and reward for good results;
- Hire a dedicated team to build the product. It’s time-saving and cost-effective if you need a team for one specific project and do not want to recruit people in-house. An outsourced development team can handle all the technical parts of the project from writing the documentation to testing the final product. Particular value is management: all team members cooperate to provide a complex solution. You can also use this option for hiring specific developers your in-house team lacks.
Remember that investors usually base their decisions not only on the financial side but on other characteristics such as a company’s reputation and the executive team’s skills and experience. That is why this factor should not be underestimated and proper research of the team responsible for your idea delivery is crucial.
Reason Four: Focus and Priorities
Besides these three main reasons leading startups to failure, most often there are more factors that can also impact the overall state of things. Those are a lack of focus, a complicated business plan, not listening to clients’ feedback, no marketing and others. Let’s briefly look at each of them to highlight weak points:
- A complicated business plan. For any company, a business model is a basis that requires attention and effort. Unrealistic goals and complicated plans with unnecessary details can destroy your startup at the first stage. Use professional help to create a clear and concise strategy, show it to your investors and correct it according to their feedback. You should also review it within a period of time and improve if necessary;
- Release feedback. Some startups wait too long before releasing the product thus missing crucial customer feedback that can help them become better. Do not underestimate the value of the MVP: even if it looks pathetic, launching early gives you an ability to test the market and based on their feedback to develop exactly what your customers need. Stay open to any feedback, especially negative and analyze the complaints getting rid of the bugs;
- Lack of focus. Many startups eventually failed because they did not concentrate on reaching the goal. You should always understand the priorities for your startup: what things need to be done first and which ones can be realized later. Stay focused on two things, your product, and your customers, and do not scatter your focus on those which are not important now;
- No marketing. It would be a mistake to believe that your product doesn’t need marketing and users will find you on their own. Many owners are sure that they can easily do without it for some time and that word-of-mouth is not important. The fact is that you cannot create a major growth organically so think about traditional advertising and digital marketing to attract customers to your business;
- Scaling up too fast. After getting their first clients some startups become too self-confident, believing that they already reached the market. However, with quick growth comes bigger expenses, more employees, and more challenges. Is your startup ready for that? If not, you will just grow in size without being more efficient.
Unicorn tears: 5 epic failures followed by success
Failure is just a part of a business. Although more than half of all startups founders experience it, this is not always frowned upon. Saying goodbye to a business you built from scratch is never easy but the valuable lessons you learn often become the basis for your future success. Some company owners openly speak about their mistakes in public, and the more similar stories you read, the more you realize that failure is not a reason to give up.
- Jeff Bezos, CEO and Founder of Amazon. Famous today, Bezos made some huge mistakes getting his company off the ground, and one of them became quick scaling. First, after the platform’s launch, some smart users took advantage of the system bugs and made a number of free purchases. Another slip was overestimating the Christmas season demand which led to giving away over 50 million toys. It was definitely not easy, but now Amazon has developed into one of the most successful companies worldwide and it keeps growing;
- Melanie Perkins, Co-Founder of Canva. Before her startup raised funds, Melanie received over 100 rejections. She believed that the Internet would soon change the design industry and wanted to be a part of it, so she came up with an idea of an online graphic design platform and did not give up trying again and again. After three years this woman managed to produce a $3 million investment that gave her an opportunity to scale up. Now the platform is considered to be the easiest design program in the world;
- Evan Williams, Co-Founder of Twitter. Back in 2005, Williams was involved in the Odeo podcasting startup. As soon as it failed due to iTunes competition, he turned his attention to another project which later became Twitter and worked on innovative ideas for its good performance. Thus, the first failure only benefited his current success;
- Nick Woodman, Co-Founder of GoPro. You have probably never heard about Woodman’s first project named FunBug. This startup became not only a complete mess but one of Silicon Valley’s biggest failures. However, he used this experience as fuel for his next project and working 18 hours a day, reached the goal by establishing GoPro;
- Reid Hoffman, Co-Founder of LinkedIn. Starting with online dating and social networking service called SocialNet, Hoffman provided users with an opportunity for professional communication but in 1997, the market was not ready for it and the startup failed. Later he went on with this project transforming it into LinkedIn and this time it aimed to serve customers in a clearly defined value proposition.
Serial entrepreneur Steve Blank indicated “6 stages of grief” after your startup failed: shock and surprise, denial, anger, depression, acceptance and behavioral changes. Do not be afraid to fail, just use this experience to change your behavior and avoid the same mistakes in your next project.
Your path to success
Everybody wants to “do everything right”. Even though there is no universal solution for success, there are some general tips that may lower your chances to fail:
- Create a good and simple product. How would you describe your startup’s purpose in one sentence? It should be good and easy to understand so that people can share it with their friends. Remember how you found out about Facebook, Uber or Airbnb: probably someone told you about it and recommended to try;
- Distinguish real and fake trends. Real trends are better to play with because they usually mean obsessive usage. Compare iPhone release with VR: the first one can be used for hours while the latter is more discussed than actually used;
- Find a co-founder. You need to have a person in your team responsible for recruiting, selling the product, marketing and raising money. If you cannot handle it yourself, sacrifice your CEO title to another person if this benefits the overall performance;
- Build a strong team. This is probably your most important function as a founder. Create your own team or outsource developers to make sure that a technical aspect will be covered by experienced people interested in your success. The whole world will be expecting you to fail, so internal optimistic mood will boost your productivity;
- Prepare a business strategy. Dealing with investors you need to have something more than a good idea to prove your potential. You do not have to forecast everything, but at least provide a plan for how you are going to monetize it at some point;
- Choose harder tasks. Difficult problems are more meaningful to people, and solving them you have more chances for success. Many things can go wrong at some point and this should not slow you down. Just try switching to “we will figure this out” or “we are going to get this done” mode.
Every day thousands of startups emerge and fade away. Those that stay try to avoid above-listed mistakes and choose customers over early scaling, teamwork over struggling alone and success over failure. However, even if you made all these missteps, it is never too late to use this experience as the basis for your future more effective problem-solving strategy.