Many entrepreneurs have great ideas but an idea is not enough to make a startup successful. What should founders avoid to see their business prosper beyond year one?
At a 90% failure rate, what makes a startup successful?
Building a successful business nowadays is a real challenge: the competition is fierce, the investors are demanding, and the customer is impatient. However, the startup market is still strong. With over 100 million companies launched annually worldwide, 3 new businesses are established every second.
With nearly a third of Americans being self-employed, people are willing to try and build a successful startup even in an intense competitive climate. On the other hand, 90% of businesses close within the first year for many reasons.
However, such a statistic shouldn’t discourage entrepreneurs, but rather inspire them to think and work harder. With that in mind, let’s go over the main pitfalls many business founders walk straight into, along with some tips to maximize their chances for success.
Generally speaking, there are four main reasons preventing entrepreneurs from making their startup successful:
#1: No Market Need
According to Fortune’s research a few years ago, 42% of startups fail due to the lack of market need.
Your product may be well-thought-out, user-friendly, feature-rich, and technologically flawless.
It is vain if nobody needs it.
At this, your idea does not have to be revolutionary. Just finding a way to solve a specific people’s problem is half the way to make a startup successful.
Founders often skip doing thorough market research to evaluate the competition and understand their customer’s needs. Excited about the idea, they rush into development fully confident that it’ll be a bombshell. In most cases though, it ends up with wasted money and time.
This problem is caused by two common mistakes:
Not filling the market need.
The market is overcrowded with companies copy-pasting existing solutions to fix all the same problems. On the contrary, you can always develop a unique product that fills the consumer’s needs based on:
- Location (for example, an Uber analog set up for a specific country and adapted to its specific needs);
- Pricing (you can fill the market gap by offering a solution for those unable to afford similar expensive services);
- Innovation (an improved or simplified solution with technical benefits over its competitors).
Apart from filling the market gap, you need to find clients willing to buy your product. A good example here would be Ryanair, which established its market by providing low-cost flight tickets. They offered a basic service but made it affordable for more customers.
Not having a niche market.
Another common mistake with filling the market need is not finding your niche. It’s really hard to make a fortune off of a product or service targeted at everyone.
Imagine that a company develops a universal CRM solution for both SMBs and large enterprises, not taking into account the difference in requirements and processes between them. As a result, the product only covers the consumers’ needs in part. In this case, it would be reasonable to focus on either of the client types and fine-tune the solution for their specific needs.
A niche is typically defined by the consumer:
- Location (village, town, city, country, continent);
- Finance sources (public or private);
- Company size (small, medium, big);
- Sector (healthcare, finance, education, traveling, etc).
To summarize, meeting the market need and focusing on your target niche is the first couple of steps on the way to making a startup successful.
#2: Lack of Funding
Finding investors for a project is a tough task. You need to convince people you never met that an idea backed by raw estimation is worth their money.
No wonder that 44% of all startups fail to raise enough series A funds. To make things worse, 70% of those that did succeed won’t make it past the seed stage. In general, as much as 28% of failed startups blame a lack of funding or running out of cash for their fate.
The harsh reality is that most startups that raise solid investments to fulfill an awesome idea collapse within a year.
A research carried out among 400+ early-stage startups pinpoints the key findings:
- Only 1 in 10 startups receive the amount of money requested;
- More than a half of 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.
When it comes to making a startup successful, it is crucial to determine when and how to raise the money.
Many founders rush, failing to present investors with a proper business case that will close the deal. Another far-reaching factor is the amount of money required – it is tricky to predict exactly how much a given project needs. In general, you have to properly estimate your product correctly, and investors need to balance potential success with the risks coming.
This is why the difference between funding goals and results is often that ample.
Now, what are some of the common fundraising obstacles on the way to making a startup successful?
We would highlight four:
- Not enough money. As it is tough to predict how much exactly a startup needs, founders rely on the feedback from mentors and investors which later may end up in an insufficient amount for completing a project.
- 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 of insufficient 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 potentials 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 terms like 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 over those they don’t.
Applying these principles to the investors’ potential profits and losses can help you develop an attractive fundraising strategy.
#3: No Team or Poor Leadership
Yet another crucial factor to make a startup successful is establishing and working with a well-functioning team.
Sticking with the ones that contributed to your company’s success from the very beginning is crucial, while a high staff turnover can be drastic to business performance. Your company’s goals and service quality depend on the people you work with, who can either take your business to the stars or flush it down the drain.
Startup owners often hire unqualified employees to save money. This can be detrimental over time. Instead, it makes a lot of sense to 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, show solid management skills, and listen to your employees to become a better leader. Otherwise, it can impact your sales and partnerships creating a lack of stability, financial problems, and poor reputation.
- Find a co-founder to keep a critical eye on the product. Make sure that this person shares your views and care reliable in stressful situations;
- Attract skilled employees with knowledge and experience. Determine the key expertise required to reach your goals and find or train appropriate candidates;
- Spend time to understand the team’s motivation. Motivated employees perform better, so listen to their feedback and reward for good ideas or results;
- Hire a dedicated team to build the product. It is highly time-saving and cost-effective if you do not want to run an in-house team. An outsourced development team can handle all the technical parts of a project, from preparing the documentation and writing code to testing and maintaining the final product. In this case, management is a particular value point, as all team members know and cooperate with each other well.
You can also hire specific developers to extend your in-house team’s expertise or cover the workload.
Remember that investors usually consider not only the financial side but other factors such as a company’s reputation and the executive team’s skills and experience. So, hiring the right people to help you make your startup successful should not be underestimated.
#4: Focus and Priorities
Another big obstacle on your way to making a startup successful is properly setting up priorities, which can reflect in a lack of focus, complicated business plan, not listening to clients’ feedback, poor marketing, etc.
Let’s look at each of these things to highlight weak points:
- A complicated business plan. A well-thought-out business model is the backbone of every company. At that, unrealistic goals and complicated plans can destroy your startup at the first stage. Use professional help to develop a clear and concise strategy, show it to your investors, and correct it according to their feedback. You should also review it once in a while and adjust if necessary;
- Early feedback. Some startups wait too long before releasing the product, missing crucial customer feedback. Do not underestimate the power of the MVP: even if it looks imperfect, launching early gives you an opportunity to test the market and precisely meet the customer needs. Stay open to any feedback, especially negative, and fix your product accordingly;
- Lack of focus. Many startups eventually failed because they did not concentrate on reaching the goal. You should always understand the priorities for your business. Stay focused on two things – your product and your customers, and waste no time on secondary goals;
- No marketing. Apart from Apple-like gems, most businesses need to invest in marketing to ensure their customer finds them. Many owners underestimate this and rely on a “bombshell” effect. And while organic reach has a lot of potential, it’s worthwhile to think about traditional advertising and digital marketing to attract customers to your business;
- Scaling up too fast. After getting their first clients, many entrepreneurs relax, believing that the job is done. However, business growth comes with a growth in expenses, employees, and challenges. Is your startup ready to play the bigger game? Make sure it is, otherwise you will just grow in size without being more efficient.
Unicorn tears: 5 epic startup comebacks.
Failure is just a stage on the way to success.
Although more than half of all startup founders experience it, saying goodbye to a business you built from scratch provides valuable lessons that often become the basis for your future success. Some company owners openly speak about their mistakes in public, and the more such stories you read, the more you realize that failure is not a reason to give up.
Here are several inspirational stories of epic failure followed by grandiose success.
Jeff Bezos, CEO and Founder of Amazon.
The richest man alive today, Bezos made some huge mistakes getting Amazon off the ground. Just to scratch the surface, we know about a number of cunning users who took advantage of the platform’s post-launch bugs and made free purchases. Then, after overestimating the Christmas season demand the company ended up giving away over 50 million toys.
Here’s how the company’s road to success looked like:
It was definitely not easy, but made Amazon one of the most successful companies worldwide and growing;
Melanie Perkins, Co-Founder of Canva.
Melanie believed that the Internet would soon change the design industry and wanted to be a part of it, inventing an online graphic design platform.
Before her startup received funding, Melanie got over 100 rejections. After three years of attempts, she managed to gather a $3 million investment that allowed her to scale up. Today, the platform is perhaps the most popular easy design program in the world;
Evan Williams, Co-Founder of Twitter.
Back in 2005, Williams was involved in the Odeo podcasting startup. After Odeo failed due to iTunes competition, he turned his attention to another project and worked on innovative ideas for its performance. That product was Twitter.
Like that, the first failure only benefited Evan’s current success;
Nick Woodman, Co-Founder of GoPro.
You have probably never heard about Nick Woodman’s first project – 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, worked 18 hours a day, and reached the goal by establishing GoPro;
Reid Hoffman, Co-Founder of LinkedIn.
Starting with online dating and a social networking service called SocialNet, Hoffman provided users with an opportunity for professional communication.
However, the market was not ready for it back in 1997, and so the startup failed. Years later, Hoffman went on with his project and focused on attracting customers with a clearly defined value proposition, creating LinkedIn.
Moral of the story?
Do not be afraid to fail. Use your experience to change the approach and see how you can make your next startup successful.
Making your startup successful
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:
1. Create a good and simple product. How would you describe your startup’s purpose in one sentence? If it’s good and easy to understand – people will share it. Remember how you found out about Facebook, Uber or Airbnb – most probably, you heard about it from a friend;
2. Distinguish real trends from fake. 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 discussed more than it’s actually used;
3. 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 it benefits the overall performance;
4. 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 the technical aspects will be covered by experts.
5. 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 a general monetization plan is a must;
6. Choose harder tasks. Difficult problems are more meaningful to people, and by solving them you have more chances for success. Many things can go wrong but this shouldn’t slow you down. Just switch to a “we will figure this out” mode and don’t stop until you do.
Thousands of startups emerge and fade away every day. Those that stay focus on avoiding the above-listed mistakes and choose customers over early scaling, teamwork over struggling alone, and success over failure.
And even if you slipped at any point, it is never too late to use this experience as the basis for a new, more effective strategy.