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Here are the 6 biggest reasons why startups fail and how you can avoid them

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startup failure

Everybody knows that starting a business is risky, but you may not know quite how risky. In fact, despite lofty ideals and best intentions, 90% of startups fail. That number shouldn’t scare you—it should alert you to the fact that there are many pitfalls and obstacles on the road to business success.   

There are a ton of reasons why startups fail, ranging from burnout and lack of passion, to failure to innovate or address legal challenges. No two startup success stories are alike, and nor are any two startup failure stories. CB Insights research shows that there are about 20 primary reasons that startups fail. However, those numbers boil down further to a few key themes, each of which should be top of mind when planning your next venture.

Here, we explore these top reasons for failure and help you figure out how to avoid making each mistake.

1. Lack of market interest

Nine of the top 20 reasons that startups fail are related to customer interest. Customers felt ignored by a company; felt that the product was too difficult to use; felt their feedback fell on deaf ears; or, most importantly, that a startup’s product did not solve a need or offer legitimate value.

The number one reason startups fail is because they don’t solve problems that the market needs solving.

The Y Combinator seed accelerator’s motto is “make something people want.” It sounds obvious but what you think people want and what they do want may be different.

When developing a product, think about it from a customer perspective. Is it nice-to-have or a must-have? The market has so many products claiming to do so few things—why is your product compelling enough to make somebody feel a need to buy it not once, but over and over again?

Also, consider the timing of your launch. Is the market ready for your product? Consider Friendster, a social network that launched in 2002, before even MySpace hit the scene. The service hit the market too early and couldn’t survive the onslaught of bigger, better-funded, more developed social networks that came after it. It’s not always about being first, it’s about creating a product that people demand, when they’re demanding it.

Rather than trying to tackle an interesting problem, your startup should aim to solve an essential one. The best startups address the most common pain points. No matter how great your technology and data, if your product doesn’t capture customers’ interest and simplify their lives, it’s doomed to fail.

2. Poor business model

Any successful business venture thrives on the strength of preparation and planning. Many founders are overly optimistic about how easy it will be to acquire customers—committing the classic mistake of overestimating market interest. At launch, many startups experience a quick boost on the strength of an interesting website or product but, as initial interest wanes, it’s difficult to retain existing customers and acquire new ones.

Having a smart, adaptable business model can help your startup weather storms and come out thriving. Two crucial questions that your business model should answer:

  • Can I find a scalable way to acquire customers?
  • Can I monetize those customers significantly more than my cost of acquiring new ones?

Thinking about your business in this way will help you develop and adapt a more nuanced approach to selling and marketing your product. Staying committed to a single marketing channel, or failing to innovate when sales plateau, is a surefire way to scare off investors and start losing money.

Scaling requires testing, which requires a business model that supports flexible operations and a willingness to adapt on the fly. If you find that customers prefer to buy a two-pack of your product, you must be ready to repackage and adjust pricing quickly to satisfy customer needs.

Your business model should focus on scaling customer acquisition while increasing the lifetime value of the customers you do acquire.

3. Ran out of money

A Fractl analysis of failed startups found that while 40% of funded ventures cited running out of money as a primary reason for failure, only 28% of startups without funding blamed running out of money for their shutdown. Meaning: While money is important, you don’t need venture capital to be successful.

Still, money is a finite asset and you should allocate it wisely. Running out is often tied to failures in other areas. For instance, social news reader Flud failed to find the right market, made several expensive product pivots, but couldn’t convince investors to give them an additional wave of funding and ran out of money trying to iron out the kinks. Launching too early can force you to tie up your money in places that aren’t conducive to growth, which can hamstring your startup for good.

If you do receive investments, remember that startup valuation is a tricky business and it’s possible you’re not worth what you think. Just because you raised money last year doesn’t mean your company is worth more this year. To reach an increase in valuation, you must achieve certain milestones that demonstrate growth, like overcoming a significant technical obstacle, gathering significant customer validation, or proving that your business model can acquire customers at a scalable rate.

Don’t assume more money is coming; be ready to prove why your startup is viable and justify another influx of investor cash. If you can’t, you may wind up throwing money at problems that are too broken to fix.

4. Poor pricing

How do you price your product? Figuring out the right price for your product can be a complicated, finicky business but it’s an important ingredient to startup success. Price your product high enough to cover costs but low enough to attract customers. Going too far in either direction for too long can be a disaster.

Finding the right price for your product requires competitor research as well as an analysis of your costs to create or provide the product or service. The right number strikes the perfect balance between your costs and what customers will pay.

5. Wrong Personnel

Building a successful business requires a remarkable amount of effort and passion. Simply put, not everybody has what it takes. Many failed startups cite a weak management team as a primary reason for failure.

Startup leadership has to be able to think about both the big picture and the day-to-day minutiae. People who are too gung-ho to get to market, aren’t willing to do the grunt work of validation, and can’t delegate well will create ineffective teams that aren’t ready to succeed.

A successful team features a diverse set of skills. If your startup is technical, don’t skimp on finding a CTO. Founders should surround themselves with self-starters, not yes people. You should create a team that does what you can’t. Identifying your team’s weaknesses and hiring to rectify them is the best way to avoid your personnel bringing you down.

6. Out-competed

Sometimes startups just get beat. It’s difficult to find a unique niche in the global digital marketplace, which means your product will almost always be up against multiple competitors. While it can be harmful to spend too much time emulating the competition, ignoring it entirely won’t work either.

To compete in a saturated marketplace, you have to know your target audience and how to convert them into loyal customers. While creating a huge marketing budget may not be an option for a cash-strapped startup, there are less expensive ways to connect with and build your audience.

Social media offers a unique channel to engage with and get to know your customers. Creative approaches to marketing like Domino’s tweet-to-order stunt are great ways to build brand awareness while making your audience feel recognized. Of course, few startups have the brand recognition of Domino’s, but the sentiment remains the same: social channels offer a free way to get to know your customers and keep them up to date with your brand.

Similarly, content marketing has emerged as a cost-effective means of building a brand. A well-executed, comprehensive content marketing strategy can improve your SEO, drive leads to your site, and attract press coverage. Those are all budget-friendly ways to raise brand awareness and increase your digital presence.

The Bottom Line

Bringing a startup to life requires a lot of risk and sacrifice. Don’t go into it blind. There are many reasons that startups fail but a few stand out among the rest. This guide should help you steer clear of some of the top pitfalls that failed startups have experienced.

Sally Lauckner is the editor-in-chief at Fundera, a marketplace for small business financial solutions. With over a decade of experience in print and online journalism, Sally has written and edited extensively on small business and personal finance. Sally has a master’s degree in journalism from New York University and a bachelor’s degree in English and history from Columbia University.

Sally Lauckner is the editor-in-chief at Fundera
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