Why Startups Fail: Top Number Reasons

startups fail

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Every startup begins with the idea of “bringing a change” to an existing process or problem. Despite the fact that many people have feasible and profitable ideas, only some manage to turn them into startups. And out of these startups, few become successful.

Naturally, anyone who wants to initiate their startup venture would benchmark on the successful ones. They tend to look for the answers to common questions like “What is the perfect business model?”, “How do you gain customers?”, and “What is the best marketing strategy?”. While finding the answers to these questions may contribute to a successful business launch , they are not enough to sustain a business in the long run.

And without a substantial plan on how to sustain it, your startup business is likely to peter out and die. Now, let’s dig deeper into the top reasons why startups fail.

Common Reasons Why Startups Fail

In order to develop and establish an effective roadmap for your business, you must first have a good grasp of the reasons why some startups fail. No matter how promising and profit-generating an idea might look, it will only crumble if executed poorly. Understanding the struggles that failed startups went through will help your own venture’s progress. 

The reasons why startups fail can be classified into internal or external factors.

Internal Factors

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Internal factors are the complications that exist within a startup team. The existence of even just one of these issues may result in a startup’s downfall.

1. Mismanagement

Poor management is a common issue that startups tend to overlook. This problem stems from the failure to define roles and responsibilities among members of a startup team. Needless to say, having a good plan lays the groundwork for a startup venture, but it’s always the execution that keeps the ball rolling. ⚽

If a team lacks a well-rounded strategy and implementation, the venture is like a wobbly building waiting to collapse.

2. Ran Out of Cash

Financial planning is a crucial part of the startup journey. Something most inexperienced startup teams do not realize is that it’s not enough that a team has sufficient capital to run its operations. . You need to be able to effectively budget and utilize your available funds.

In the initial stages of a business, it’s natural to have more expenditures than profit as the business is still in the period of developing and marketing products, as well as refining the business model. But you have to be wise in your spending. Some businesses fail at the initiation stage because they aren’t able to reach their milestones before their funding runs out.

3. Business Model Failed

When it comes to marketing, startup teams will spend a significant amount of resources to acquire customers. After all, they are the bread-and-butter of businesses. 

However, it is not wise to commit the majority of your resources into your marketing efforts. Yes, gaining a number of new customers is good. But not if your customer acquisition cost (CAC) becomes higher than the lifetime value (LTV). What do these mean? To put it briefly, CAC and LTV are key business metrics that are used to measure valuation.

  1. CAC refers to the overall cost required to acquire a new customer.
  2. LTV is the total revenue that a business can generate over a single customer’s period of engagement.

Any business owner should follow a simple rule: keep CAC lower than LTV. A business model that gives less or no attention to keeping customers engaged will likely break this rule, leading to an ill-fated startup experience.

4. Problems with the Product

What makes a product great is its ability to meet market needs. But even the best products can have their own issues. While it’s important to focus on the features of a product, it is equally vital to address the issues that prevent it from achieving the demands of the target market.

There are unforeseen problems that occur during the lifetime of a project. Failure to address these issues over time, no matter how trivial they may be, can deal a big blow to the business. Customers will always look for the best product or service that will meet, or even exceed their expectations.

5. Pricing Issues

Pricing or cost issues are among the most frequently cited reasons why startups fail. It can be difficult to devise a pricing plan that is high enough to cover costs, while still remaining competitive to customers. Developing a pricing strategy requires thorough market analysis. It is not simply setting a price that is more than double or triple the production cost. Several startups have failed because of this mistake.

6. Friction Among Team Members and Investors

Along the startup journey, tensions among members and investors will likely arise due to individual differences. If these are not resolved along the way, they will eventually build up and cause the business to shut down.

7. Lost Focus

Successful entrepreneurs have one thing in common, and that is unyielding focus. This is what some of the failed startups lacked. They think that once their business gets off the ground, it will grow gradually. Thus, they become less hands-on when it comes to managing their operations. This mistake can be fatal. 

8. Pivot Went Wrong

Pivoting is the process of changing a business strategy in order to adapt to the latest trends of its industry. In fact, lots of giant companies today are the products of successful pivots. Although it sounds positive, this process is actually risky. It can be the cause of a company’s sudden boost or eventual downfall.

Transitioning a business based only on a hunch and without careful planning and research is a grave mistake, which some startup founders fall into. It is better to act based on facts rather than feeling. 

You might ask, when is the right time to pivot? These are the most common factors that successful companies considered:

  • The business is unprofitable
  • The target market has not responded well to their products or services
  • One feature or component of their product or service stands out from the rest
  • They are constantly outmatched by their competitors

Of course, pivoting is more than just acknowledging these factors. It also requires in-depth market research, as well as a possible remodeling of the current business strategy.

9. Picked the Wrong Time for Product Release

Timing is everything when it comes to running a business. You may have the best product backed by a perfect team, but, if you pick the wrong time to market your product, it may all just go down the drain. As a matter of fact, lots of great ideas have not materialized because of bad timing. Some of them were too late, and some were just too ahead of their time.

10. Legal Challenges

Along the startup venture, entrepreneurs or founders will eventually be bombarded with so many legal challenges, ranging from problems among co-founders and employees, to issues within the industry like licensing and business registrations. Setting aside and failing to resolve these issues may trigger serious consequences later on.

Even at the early stages, startup businesses should take legalities into account to ensure that they don’t end up losing their businesses just like what happened to other failed startups.

External Factors

Besides internal issues, there are also instances wherein startups fail because of external factors, factors outside of their direct control.

1. No Market Need

Another big challenge that failed businesses ran into is that the target market did not respond well to their products. Even though their products were good, their intended customers just weren’t interested in buying them. This can be due to ineffective marketing, but it could also be that the product is out of time.

Customers are more likely to buy a product if it meets their needs or provides compelling value. Otherwise, the product will only be a waste of time and money. Even great products can be useless if you don’t have the market for them. 

2. No Financing or Investor Interest

The lack of funding or investor interest is also cited by some founders as the reason for their failed startup attempts. While it’s true that there are lots of investors out there willing to finance ideas, there are also risks associated with investing, especially in businesses that are only getting started.

Investors are aware of the risks and rewards of investing in startups, and would naturally only want to bet their money on feasible and promising propositions. This is where many startups struggle as they can’t seem to find the right recipe for luring in investors.

3. Outcompeted

One thing that separates successful startups from the failed ones is their ability to adapt to the ever-evolving market. It’s what keeps them ahead of the competition. Some may say that you should solely focus on your business and not pay much attention to the competition. But in reality, knowing how your competitors perform on the market actually yields a great impact to your business.

Many startups fail because they get outcompeted by their competitors. Some of them never even bothered to learn how they fared in the market. And though others did, they were not prepared for the hypercompetitive environment.

Roadmap for Entrepreneurial Success

Having a roadmap is a great way to ensure that you won’t go astray in your venture. Consider it your master plan in achieving all your goals. In this section, we listed down the building blocks of an effective roadmap. 

1. Researching and Planning

Starting a business requires thorough research and planning. It’s not enough that you know what to sell, and who your customers are. You must be completely aware of the ins and outs of your target market. And of course, your research would be useless if you don’t know how to transform it into a business plan. Research and planning always go hand-in-hand, and the result would lay the foundation for your business.

2. Learning from Others’ Mistakes

You’ve probably heard the statement “learn from your own mistakes” countless times already. While it’s very good advice, it’s equally important to recognize the mistakes made by other founders as well. Both successful and unsuccessful entrepreneurs have faced common challenges at some point. By learning from the successes and failures of your peers in overcoming these challenges, you’ll have perfect takeaways for molding your business.

3. Creating a Better Business Model

Developing a business model is far easier said than done. Every business is unique. While it is tempting to imitate the business models of others, be cautious since doing so does not guarantee long-term success for your business. 

So, how do you create your own ideal business model? Well, it all boils down to the first item, which is in-depth researching and planning.

4. Willingness to Pivot

Always keep in mind that the industry is an ever-changing space. Those who are hesitant to pivot risk being left behind. Don’t be afraid to explore new opportunities that you think might help your business grow even further.

You Might Ask

How long before a startup becomes profitable?

In a study conducted on 500 established small businesses revealed by Kabbage, 84 percent of them said that they reached profitability within the first four years. This time frame can be the standard for most startup businesses. Nevertheless, since every business is unique, you don’t have to worry about the standard time frame as long as your business is growing at your own ideal pace.


What happens when a startup fails?

Typically, a failed business will do everything it can to pay its outstanding debts and liabilities. This includes liquidating its assets. In cases wherein the business cannot pay all its debts, then the next legal option is to file for bankruptcy and agree on a reasonable resolution with the parties it owes money to. You can also try your luck at selling it to someone else.


How do you know a startup is failing?

Although there is no telling when a startup will eventually fail, there are warning signs that you need to be aware of that will tell you if it is on the verge of going down. Losing focus is the most common red flag that unsuccessful startups fail to resolve. They were too busy doing the wrong things and ended up losing resources and revenue.


How long do startups last?

According to a recent study published on Business Data List, the average startup lasts up to 5 years before it is acquired by another company.


What happens to founders of failed startups?

The end of a startup business isn’t necessarily the end of the line for its founders. Some of them chose to start anew, while others eventually quit to try out other endeavors.


Conclusion

Getting a startup off the ground is never easy. In reality, lots of aspiring entrepreneurs have tried and failed to have their efforts pay off. Perhaps they were not prepared enough, or were stuck repeating the same mistakes over and over again. Gaining insights into how unsuccessful startups failed can help you avoid the same mistakes in the future.

 

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Do you have a minimum viable product (MVP) ready for ???? launch? If you do, then your next step would be to look for investors to fund it. Often, MVPs do not make it to the market because of the lack of funding. No matter how much potential your product or service has. Don’t be complacent as a startup. Be proactive in searching for investors. The earlier you can secure capital to fund your business, the faster you can propel your MVP to success.

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