Top 7 Reasons Why Startups Fail?
Reaching the $1 Billion valuations is the dream of every business. However, the journey to reach unicorn status is harder than said, especially if a non-funded startup covers it. According to a report, 1 in every 5 million non-funded startups gets unicorn status. While every business chases the mark of $1 billion, they either fail or quit the journey midway.
India has currently the third-largest startup ecosystem in the world, with 21 unicorns valued at $73.2 billion, yet 80-90% of startups fail during the first five years of being opened. Wondering why startups fail? We found some major reasons why startups won’t last.
Besides market problems and poor team management, there are many other reasons why do startups fail. Most startups often fail due to poor cash flow and lack of funds. Startup failure due to competition is most likely to happen when the startup remains in the competition for three to five years.
In this post, we will elaborate on some possible reasons why do startups fail. Let’s dig deep into the subject and do a pre-failure post-mortem.
Misinterpreting The Market Demand
One of the common reasons for misinterpreting the market demand is our firm belief in statistics. The numbers cannot be right all the time. If you want to succeed in any industry, well-thought market research is a must.
With Big Data and many other data analytics tools, it has become easy to get meaningful insights to make key business decisions.
According to SBA, “the startup failure rate is almost the same across all industries and so the reason why startups fail.” The research shows, “42% of startups fail during the two and five years of being started, due to misinterpreting the market demand”.
Not Having An Innovative Business Model
The second most common reason startups fail is that entrepreneurs become too optimistic about acquiring customers and accomplishing their organizational goals. Well, assumption takes no money but overdoing it can be harmful. When preparing a business model for your startup, ask yourself;
- How would you find customers?
- Can you generate revenue from customers higher than the cost of customer acquisition?
You can do a CAC/LTV analysis to simplify the process. It shows you the cost of acquiring a customer and the lifetime value of a customer based on how l0ng the customer stays with you.
[Note: The cost of acquiring a customer must be less than LTV*]
67% of startups fail due to huge inefficiency in the capital. If you want to be in the rest of 33%, aim to recover the CAC in less than 12 months.
Lack Of Skills Or Leadership Gaps
A diverse team with different skill sets has always been at the forefront of organizational success. According to Small Business Trends, 82% of successful business owners admitted that their success lies in a qualified and experienced team.
Hire these eight key people carefully to avoid counting yourself among the “23% of startups cited team issues leading to failure.”
- Chief Executive Officer
- Product Manager
- Chief Technology Officer
- Chief Marketing Officer
- Sales Manager
- Chief Financial Officer
- Business Development Manager
- Customer Service Representative
Lack Of Capitals Or Poor Revenue Management
The major challenge why startups fail is not lack of fundraising but poor revenue management. External capitals can only push your business, but how you manage your funds and revenue is what makes startups succeed.
Poor cash flow leads to insufficient cash that leads many startups to shut down. There are many startups floating around that generate enough seed capital, but their inability to manage the revenue or raise follow-on funds is one of the key reasons why they fail.
Reid & Taylor, a well-known custom tailoring brand had to shut down due to high non-payment loans. This decline in the company’s growth was not sudden; in 2008, 24.5% of the company’s stakes were valued at US$121 million, but due to low sales and no new capital, it failed to continue its operations.
Here are few things we can learn from this failure;
- Have effective business and revenue management models
- Focus on revenue and profits along with products/services at the beginning
- Spend your funds judiciously
Having A Poor Pricing Strategy
Pricing plays a pivotal role in early-stage startups. It can either make or break your business. However, determining prices for a startup comes with its own challenges, especially for consumers in the Indian market.
The science of pricing requires understanding your competitor’s cost and market demand. It allows businesses to set a good margin based on customers’ perception of value and keep the prices in line with competitors.
Try with both buyer perspective and your value metric in the initial stage of your startup and once you figure out the market, you can start optimizing your pricing strategy.
Outdated Or Poor Marketing Strategy
Branding matters! No matter whether you have a unique product or are a recognized brand. Startupbasics says, “Recognize that personalized marketing will become important to the success of your startup.”
Let’s take a fresh example from Tata Nano. The car was indeed an innovation, it failed to set up as a brand, due to poor marketing strategy. While it comes from a brand like TATA, the manufacturers marketed it as “Cheapest Car Of The Nation” which somewhere poses a negative impact.
Relying upon an outdated marketing strategy has always been the primary reason for the failure of many startups. As a startup, you don’t primarily need a PR team, but you must have an outstanding marketing team capable of creating a buzz about your products or services on social media or among the online audience.
Founders Give Up
Most often than not, the reason behind the failure of startups is that the founder steps down. The founders give up because they don’t have money, energy, or enough power to convince investors to keep the startup alive.
According to a report, “The failures have a 20% chance of success while first-time founders have only an 18% chance of success.”
Hopefully, this post has given you better insights into why do startups fail and helped to learn things to avoid for a successful startup. In the end, we can only say that ups and downs are part of business, but you should never stop trying.