A startup business is not as easy as you think.
Entrepreneurs come up with great ideas and lots of passion. They are excited to transform their ideas into a successful business, but only a few of them succeed in becoming the next Bill Gates, Warren Buffet, Jeff Bezos, and Jack Ma. The rest either struggle or fail.
According to Investopedia, the 2019 data show that 90% of startups fail. In the first year, 21.5%, second year 30%, fifth-year 50%, and 70% in the 10th year.
Another statistic from Oberlo shows that 31.7M startups launched in the US in 2020.
So if you apply the 90% failure rate on the 31.7 million, then it sounds disastrous.
When I knew this fact, I started studying why these startups are failing because I am also a small business entrepreneur and currently running a beekeeping startup in my village for the past one and half-years. My startup is still in the feasibility stage while successfully generating Rs 250,000 in profit. I want to scale it towards Rs 1,000,000/year in the next two years.
So I go through reading the postmortem of 353 failed startup businesses. And finally, I came up with the 15 most important reasons that can hold you back from success.
No market need
This factor is responsible for 42% of the startup's failure because there is no need for the product or service. Entrepreneurs do not take time to research their market to find a gap they can fill.
Instead, they start investing all their efforts applauding their product/service, and spend too much time creating stuff no one wants. You can understand it with a simple example. If you throw a stone in water and expect that fish will eat, then you are wrong. You need to throw the right food at the right time to expect any response.
You need to research and survey your market. Find whether people care about your product or service or not. If you take a survey and the potential buyers say that your idea sounds good, go with it. Then immediately understand your idea is wrong. On the other hand, if your friends and potential customers vote for your idea with their pocket, that means your idea will flourish, and the market demands what you want to sell.
Finding a hungry market is not enough. You need enough customers to support your business. If fewer hundred people are facing a specific problem, then it is a foolish decision to spend millions of dollars and hard work for the wrong business. You will be unable to generate enough revenue to survive.
Running out of cash
We all maintain some amount of cash in our pockets to meet our daily transactions need. We need to buy milk, groceries, mobile load, fuel expenses, and other living.
The businesses maintain cash for three motives that include transaction motives, speculative motives, and precautionary motives.
The other two motives can not be the need for startup businesses to hold cash in their lockers. But they need to go through daily transactions for raw material, paying bills, salaries, vendor payments, and company projects.
Ineffective money management leads to a cash shortfall, and as a result, 29% of startups fail. The solution to this problem is maintaining a cash reserve either inform of a locker, back account, or marketable securities. Still, if cash is not enough, then you can take a short-term bank loan.
Lack of financing
Business needs money for expansion and growth. But it is not easy to attract investors and venture capitalists for a startup business. If it is a company, an individual, or an angel investor, they first analyze whether your idea is feasible or not. The 8% out of 353 startups failed due to not having enough capital and investors.
Therefore, before taking action on a business idea, you need to ensure whether you have enough financial resources for running operations. When the customers start buying your products and revenue starts coming in, you can accelerate the spending for faster growth. But before that, spend your initial capital carefully.
You got a brilliant idea and did the market research, and your product is ready but, what if no one knows about you and your business.
So here come the marketing and promotional efforts hand in hand. But 14% of startups fail to do it right. They cannot communicate their offers clearly and effectively to the targeted audience. When there is poor marketing, your sales will drop, and hence the business goes down.
For a successful startup, write down a solid marketing plan. Find the best and suitable ways for how you place your brand in front of potential customers so they can’t live without buying it. Nowadays, there are many online and offline marketing channels for, brand awareness, and product selling.
Team and investors conflict
Sometimes management team and founder want to run a business in a different direction and make strategies. But investors conflict with that and want to move it differently. The clash between founders and investors leads to 13% of the startup's failure.
Another type of conflict arises when the founder sees growth in business, but investors stop believing him. As a result, investors do not give more funds, or they sell out their shares.
No viable business model
It’s a plan used to run a business that explains how the business generates revenue. It lists all the information about the products or services it sells.
The claims show that 17% of startups fail to have a solid business model that helps them scale and generate revenue. When there is no growth, the shareholders get obsessed, and the business needs to be closed down.
Ultimately the business success depends on how the team is managing it.
Poor management team leads to 23% startup failure. Startup entrepreneurs make the mistake of hiring an inexperienced and incompetent team that can’t manage the venture effectively and efficiently. They don’t know when to implement a particular strategy to ensure higher growth.
Poor management leads to low growth and revenue. The monetary resources get waste on wrong decisions. Investors also disagree and avoid giving more funds for accelerating growth.
The solution is to hire competent professionals for managing each important function of the business. Hire experts for each area of business like finance, marketing, operations, and HR. These departments are the pillars of any business.
Competition is present everywhere in the business world. And for startups, it is another annoying hurdle that either gets them to success or shut them down.
19% of startups fail by getting outcompeted. When you have a brand-new idea and start selling, other businesses imitate your idea and start doing it better than you. Whether it is a large company doing the same or lots of smaller ones making it cheaper than you, it sucks.
So what you do is maintain a high quality and deliver more than the customer expects. It gives your buyers a reason to buy your stuff instead of competitors. Try to minimize your price to stay competitive against others and invest in publicity to communicate your brand message to the potential audience.
We all need to live and follow the rules and regulations (whether they’re national, religious, or societal). The same case is with business, which needs to be, operated within the legal boundaries.
Entrepreneurs come up with great ideas and start their business with a passion, but the law regulations often hit them down. It can be the conflict of their business model with the law, or their operations are not according to legal rules. As a result, 8% of startups fail.
According to Forbes:
Pivoting is fundamentally changing the direction of your business when you realize the current products or services aren’t meeting the needs of the market.
Pivoting refers to changing the existing business model to survive in the market. If the current model is not working well, the entrepreneurs change it to another.
But 7% of failed startup founders claim that they were unable to pivot at the right time. Not pivoting at the right time mostly results in the loss of financial resources on the wrong business model and, there is no money left for spending after adopting a new plan. And investors also don’t agree to give more money.
So that’s why failing fast is necessary. Instead of getting stick to a business model that doesn’t work, you as an entrepreneur need to change it at the right time and implement a different model. So you become able to save resources and time like Instagram, and Groupon did.
For building relationships with investors, it is important to have a network with them. Most entrepreneurs make the mistake of not having enough networks and relationships with people to get funds. As a result, it becomes difficult for them to get financing when needed, and so 8% of the startups fail.
Lack of passion
While considering money, an entrepreneur needs a passion for their idea. The tragedy is some entrepreneurs have great ideas, do market research, generate funds for operations, but lose interest and passion for that idea.
What happens is they don’t increase their knowledge about that subject. Finally, they lose interest in pursuing that idea effectively, so their business will suffer, and eventually, 9% of startups shut down.
As I early mentioned pivoting helps you make your business adopt another business model in the hope of getting a fortune. Unlike Instagram and Groupon, where pivoting played a role in making them successful.
In startups, when entrepreneurs take the stance of pivoting then, it doesn’t work at all. Instead, the business situation goes worst and worst, which results in 10% of the startup's failure.
Startup businesses are hard to establish. They need full attention from the founder and its team. You need to do marketing while keeping an eye on the financial affairs and projects within the company. And after years of hard work and effort finally pays off.
But 13% of the startups fail due to losing focus of founders and their teams. Reasons are several, including personal issues, family issues, or distracted due to other side projects.
Price and cost are the two pillars of a business model. A balance between price and cost helps your business to cover costs and grow faster.
In 18% of the startups, the price/cost was not as right as it needs to be. Startups can’t set a competitive price that helps them enter the market while beating their competition, covering the business cost, and earning profit.
Having an entrepreneurial spirit is good, but it is compulsory to pay attention to different factors that make a business successful.
With things that make a business successful, there are other variables that shut it down. That’s why founders need to pay attention to both positive and negative sides.
Let’s revise all the 15 reasons that fall down the startup business.
- No need in the market.
- Running out of cash
- Lack of financing
- Poor marketing
- Team and investor conflict
- No viable business model
- Weak management
- Get outcompete
- Legal challenges
- Not pivoting
- Not networking
- Lack of passion
- Unfavorable pivoting
- Losing attention
- Price/cost issues
Some of these factors apply both to offline and online businesses. So it’s is necessary to first tick-mark the factors that apply to your startup before taking action.