Why start-ups fail

At a glance, starting and building a business might seem like an easy and simple thing to do. Unfortunately, new businesses are still vulnerable and they usually fail before they even soar high. Most start-ups and new businesses fail. In fact, according to the ESM (European Start up Monitor) in 2015, the statistics based on the UE countries shown that of the founders 41% reported that they already began at least one other start-up before they started their current business. About 18% founded 2 or more start-ups before. If you have plans to build your own start-up or business soon, it is always recommended to learn from the failures of those who went for it before you and avoid getting yourself stuck in the rut. There are many mistakes to avoid, pitfalls to not fall into and warnings for first-time or long-time entrepreneurs and this is what it is going to be shown you in order to succeed.

“Don’t dismiss negative feedback and never fail to validate your idea.” – Guillame Decugis, the founder of Scoop.it, about failure advises.

An article in Fast Company, “Why Most Venture Backed Companies Fail,” asked company leadership the reason for business failure, giving a list of four main reasons for failure with sub-categories below those. They also gave a list of 12 leading management mistakes. It is worth checking out the details. I bracket the Statistic Brain finding into seven key reasons for that entrepreneurs experienced business failure:

1. Lack of focus
2. Lack of motivation, commitment and passion
3. Too much pride, resulting in an unwillingness to see or listen
4. Taking advice from the wrong people
5. Lacking good mentorship
6. Lack of general and domain-specific business knowledge: finance, operations, and marketing
7. Raising too much money too soon

All of these focus on the decision-making of the entrepreneur and general business knowledge.

In another study, CB Insights looked at the post-mortems of 101 start-ups to compile a list of the Top 20 Reasons Start-ups Fail. The focus was on company level reasons for failure. This list is instructive, but each of these reasons for failure is due to a failure in leadership at some level. The top nine most significant from this study are:
1. No market needs
2. Ran out of cash
3. Not the right team
4. Got outcompeted
5. Pricing/cost issue
6. Poor product
7. Need/lack business model
8. Poor marketing
9. Ignore customers

Notice that all of these are business- and team-related issues, even the ones that relate to the product. Issues like there are always tied to leadership and the leader’s ability to build a strong team and drive a business model and business thought process and discipline. Also, keep in mind, if running out of money is the ultimate reason for failure, there are always other factors that cause this result. The failure rate is different in depends of the start-ups sector:

Finance insurance and real estate – 42%
Education and Health – 44%
Agriculture – 44%
Services – 45%
Mining – 49%
Manufacturing – 51%
Construction – 53%
Information – 63%

To achieve success, entrepreneurs should be aware of common challenges so they don’t make the same mistakes that others have already made. We review in detail common reasons why start-ups fail and how to avoid failure and work on things that actually create value.

Good idea, bad business

The most common reason for start-up failure is an entrepreneur’s assuming a brilliant idea is enough. Some entrepreneurs sincerely believe they’ll come up with a great idea and customers will immediately beg for it and fork over their money. But actually, they don’t. Vitoto had a relevant idea to allow people to create and share videos collaboratively. But bad business decisions led to this start-up’s failure. Don’t be too optimistic about acquiring your first customers; thoroughly think out the business model instead. A business model should account for all costs, the required technology stack and team, the marketing strategy, and different methods of monetization. The essence of a business model is to allow entrepreneurs to better understand how they’ll run their business and operations and how to attract and win customers.

Guy Kawasaki, Alltop co-founder and entrepreneur said: Ideas are easy. Implementation is hard.

THE LESSON WE CAN LEARN:

It doesn’t matter how good the idea is; if it can’t be profitable or scalable in the future, the start-up eventually will fail.

Lack of market interest

About market interest we would like to start with the words of Dave Thomas, founder of Wendy’s: “What do you need to start a business? Three simple things: know your product better than anyone, know your customer, and have a burning desire to succeed.”

Unfortunately, most entrepreneurs miss one important aspect in the early stages of product development: They don’t clearly understand their product’s aim, who they’re building the product for, what problems it should solve, and what it might be able to achieve in the market.
For example, “Moped” (a free messaging application) failed due to lack of market demand. As the start-up founder Schuyler Deerman said, “We didn’t build something that enough people wanted.” Poor market research leads to misunderstanding of the target audience and, as a result, a product that no one wants.

There are some common causes of poor product-market fit:

▸ Not enough demonstrated value to make people actually use or buy the product
▸ Wrong time to release the product – A start-up can be ahead of its market by a few years and customers may just not be ready for a particular solution at the moment.
▸ The product doesn’t solve a problem for enough people.

To avoid challenges with market fit, start-ups should validate their products using pilot projects before launching. Or alternatively, they can conduct beta testing to significantly reduce the risk of failure and market rejection. One more solution is to build a minimum viable product (MVP) that allows entrepreneurs first to build the core features of a product, test it, and then develop the next version according to user feedback.

THE LESSON WE CAN LEARN:

To make a start-up prosper, provide a new solution that will be valuable for people. The goal of many start-ups is to not be a start-up anymore. They’re all in a hurry to scale. Scaling refers to hiring people, getting funded, releasing new products, entering new markets – and growing too much too soon. Unfortunately, not everything is as smooth as it may seem. In reality, up to 70 percent of start-ups scale too early and, as a result, do things out of order.

As Michael A. Jackson said:
“Premature scaling is putting the cart before the proverbial horse. The more a company grows, the further away from profitability it becomes.”

As they say, slow and steady wins the race. So, do everything step by step:
1. Get to know your target audience
2. Thoroughly consider what issues the product will solve
3. Deliver an MVP to market and get feedback
4. Add features, fix issues, and release the product again
5. Promote the product so people know it exists
6. Optimize the conversion funnel and find ways to retain more customers
7. Scale when the cost to acquire a user is lower than their lifetime value

Here are a few indicators that a business is ready to scale:

▸ There’s a clear understanding of the lifetime value of customers and the cost to acquire a new user
▸ The business model is repeating, meaning the company is acquiring customers in a similar way.
▸ Entrepreneurs work more on the business than in the business.

THE LESSON WE CAN LEARN:

Don’t get ahead of yourself. Don’t try to grab a new market when the business isn’t ready.

Challenges with the development team

“The secret to successful hiring is this: look for the people who want to change the world.” – Marc Benioff, CEO of Salesforce

An incredibly common problem that causes start-ups to fail is challenges with the development team. Statistics shows that 23 percent of start-ups fail due to the wrong team. Let’s take a look at the most common challenges start-up founders may face with a development team.

Lack of technical expertise

Usually, start-up founders are unwilling to invest much money on product development in the initial phase. Accordingly, they look for cheap solutions and don’t hire enough technical experts. As a result, developers lacking proper qualifications build a low-quality product that no one will use.

Ineffective management

One thing start-up definitely can’t afford is poor management. Poor management can mean a development team doesn’t know exactly what the company needs and isn’t 100 percent involved in the process. Delays are frequent. Due to lack of clarity, product quality deteriorates and the product development takes longer than required.

Lack of people

Needless to say, all founders are eager to hire the best specialists. Hiring locally is easy and convenient, but unfortunately, the local talent pool is usually limited. Start-up founders should be ready for the fact that not all specialists want to relocate for a job.

Poor communication

The Holmes Report shows that due to poor communication, companies lose $37 billion annually. Poor communication isn’t just about language issues; it’s about the development team not setting up a clear communication flow, ignoring meetings, and not having so-called “constant fusion.” Founders just can’t work closely with the team during the whole development process and are in the dark. This leads to the development team lacking a vision for the product and simply not getting the idea. Below, you can see some steps to prevent issues with your development team.

Poor monetization

It’s crucial for any business to have a clear monetization strategy; otherwise, the company has every chance to die.

“It’s almost always harder to raise capital than you thought it would be, and it always takes longer. So, plan for that.” – Richard Harroch, venture capitalist and author

That’s what happened to Everpix. Everpix allowed users to store their smartphone pictures on a secure server. Unfortunately, the founders never applied any monetization strategies. When it was time to pay Amazon Web Services for the servers, the budget was blown, and the company had to shut down. In order not to repeat the Everpix mistake, start-ups should clearly understand how they’ll recoup their investments and make money with the product. Let’s take a look at the biggest driver of software revenue.

THE LESSON WE CAN LEARN:

A brilliant product idea isn’t enough. For a business to flourish, it’s vital to keep your eyes on monetization strategies. Now that we’ve reviewed common reasons why start-ups fail, let’s summarize how to avoid these mistakes or overcome them.

Lack of focus

This one is really easy. If you find yourself doing one of these things without knowing they’re going to move the needle, STOP!

STOP:

▸ “Coffees,” whether that’s with potential partners, investors or acquirers.
▸ Networking. Seriously… ▸ Recruiting a board of advisors
▸ Doing partnerships without proof of extra revenue
▸ Spending time on PR and social media before knowing you’ve got the right product for the right customer
▸ Going to conferences
▸ These are the silent killers of the potential of your start-up.

“Lack of direction, not lack of time, is the problem. We all have twentyfour- hour days.” – Zig Ziglar

Basically, the only two things you need to focus on when you’re in start-up phase is:

USERS
PRODUCT

The only way to stay on track as a start-up is to develop the product and talk to users. You just don’t have time to get caught up in other things.

THE LESSON WE CAN LEARN:

Stop spending all your time doing stuff that doesn’t move the needle

Chasing Investors Not Users

Start-ups faced their demise as they are too intent in searching for investors while neglecting their users.

“Because, when things get hard, if you’re chasing just the dollars, or a random market opportunity, you’re not going to be able to have the fortitude, the passion, to stay with it.” – Chase Jarvis, co-founder of CreativeLive

If you want to fund your business, you have at least 12 creative ways to do so. But you don’t just want to chase investors. While there is nothing wrong with attracting investors, this must never distract your focus away from the more important and the sole source of funds which truly matter for your business, none other than the users or customers. Keeping your users satisfied and willing to pay for your product means that you are in business.

Focus on meeting your users’ needs as you implement your ideas. If your users are happy and you can show traction and/or a growth curve, investors will be pleased.

THE LESSON WE CAN LEARN:

If you just talk to investors without focusing on your product and users, nobody will invest in you – no matter how many investors you meet.

Wrong Time to Market

Regardless of the type of start-up you have, timing is everything. So, if you fail to market at the right time, you will surely end up shutting down your start-up in the long run. Start-up owners should remember that timing can make a difference in marketing their products and services. Wrong time to market your services or products might just cause you loss of investment. For example, if your start-up is a clothing line and you offer winter clothes on a hot summer season, expect that your target customers will ignore you. No matter how cheap your winter clothes are, they won’t buy them because people will look for something that would fit in for their summer goals. This can sound like a silly example and you probably wonder: who would do such a thing but I can ensure you this happens. Bad timing will take you nowhere but failure.

THE LESSON WE CAN LEARN:

So, decide on the perfect time to market and you will see the difference.

No Networking

Many start-ups don’t think of networking as an important component of their business model. They believe it’s a waste of time.

“I’ve actually heard this from more than one person, including bestselling authors, Drew Houston of Dropbox, and many others who are icons of Silicon Valley. It’s something I re-read every morning. It’s also said that ‘your network is your net worth.’ These two works well together.” – Tim Ferriss

Even for big companies, networking is a crucial part of their marketing strategies. With start-ups, having no networking will just lead you to the path of failure. Networking is essential in a way that it can help you connect with people whom you can be your potential investors or clients in the end. You can also connect with fellow entrepreneurs who might become partners, co-founders, mentors or friends who will help you when needed. If you know how to connect with people, it’s easy for you to market your start-up, enabling you to reach your target audience easily and without exerting too much effort and money on some marketing tools.

THE LESSON WE CAN LEARN:

Networking is not that hard, even if you are shy: just go to people, introduce yourself, ask them what they do in life, exchange a business card or a LinkedIn profile and done: you’ve networked.

 

After those general examples we can sup with a question:
Are the reasons for success the opposite of those for failure?
There are things that you must possess to be a successful entrepreneur, but they won’t guarantee success. That said, it stands to reason that if you fixed the reasons for business failure, you would at least improve your chances of success.

If you look at both the reasons for failure and the factors for success, it is clear that commitment to a plan is key. This, of course, implies having a plan. This does not mean that you are completely inflexible, but you can stay the course. This is why the most successful companies have one or two pivots. I do not think that every little business adjustment or fine-tuning as a pivot. A true pivot is a change in course of direction that results in a material change in the product-market strategy.

Successful start-ups are businesses. It therefore stands to reason that you need to establish and implement solid fundamental business principles and practices to improve your chances of success. Many technical founders fall in love with their product idea and consciously or unconsciously believe that if they build a better mousetrap, the world will beat a path to their door. However, both the success and failure studies show that you need leadership in the company with general and domain-specific business knowledge to be successful. Of course, you also need to have strong technical expertise in your chosen product development area.

Does this mean that a technical founder cannot be successful as a CEO?
No, it doesn’t. Look at Dr. Irwin Jacobs, the co-founder and founding CEO of Qualcomm, as a classic example. Dr. Jacobs is a brilliant engineer and former professor at MIT. However, he also has a brilliant business mind and a lot of business knowledge. Prior to Qualcomm, Dr. Jacobs ran another company, MACom, so he had experience running a company. He also surrounded himself with a strong management team. There are many other examples of this success formula, but there are far more where there is a seasoned businessperson who has domain expertise leading the company, and a strong technical team driving product development. Steve Jobs (Apple, NeXT, and Pixar) is the classic example as a business-oriented founder. Meg Whitman (eBay) and Eric Schmidt (Google) are great examples of CEOs who were brought into companies at an early stage to complement an exceptional team of technical founders.

Finally, having a clear and realistic idea of how long things take, setting intermediate milestones for every 12 to 18 months, and raising just enough money it to get to the next set of key milestones, is not only important to capital efficiency, it is also important for success.

In Conclusion

Many start-ups don’t think of networking as an important component of their business model. They believe it’s a waste of time.

“All I Want to Know Is Where I’m Going to Die So I’ll Never Go There.“ – Charlie Munger

▸ 90% of start-ups will fail yearly stage or later.
▸ The entrepreneurs behind them will continue fighting huge wars for average results.
▸ Average results at best.
▸ That doesn’t have to be you.
▸ You can reach way higher. The road there is free and open.
▸ Choose success over failure.
▸ Choose customers over products.
▸ Choose focus over external validation.
▸ Choose a balanced team over going at it alone.
▸ Choose predictable growth over “too much, too soon”
▸ If you’re able to prevent these mistakes, then you’re setting yourself up for major success.