Why Do Most Startups Fail?

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People have long battled their 9-5 jobs and all their creativity has gone for a toss. Frustrated by the work environment or fear of losing their self-worth, they resort to become an entrepreneur and venture into a startup. Thus, startups are on the rise and every coworking space is filled with ample budding entrepreneurs. Every entrepreneur is a visionary and aims for getting the highest valuation for their startup. But to one’s surprise, over 90% of them fail.


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There are a lot of reasons for the failure of a business; we’ll discuss 5 key reasons why startups fail.

1) Market Failure


Founders often seize to realize the importance of getting the ground report of market acceptance and consumer preference. The product often isn’t appealing enough to the customers and also fails on providing value proposition.


  • Product built has to be compelling enough or provide enough value to the consumer that it excites the buyer to choose your product.

  • The product is futuristic or the market isn’t ready for the product yet. For e.g.: electric cars are undoubtedly the next big thing in the automotive industry but despite tax rebates and push for clean energy, electric cars still struggle the most to garner sales.  The reason being, infrastructure that is required for electric vehicles is not ready yet, long-distance travel isn’t a good idea in an electric vehicle, given the current infrastructure. Takes hours to charge and most of the households don’t have a charging port near their parking space. It’s easier to sell a $100,000 car rather than selling a $50,000 electric car.


2) Team Management


This is the primary reason many businesses shut shop. Good team management has the potential to yield results beyond expectations. 45% of the startups in their final report stated, “If it wouldn’t have been for our team management, our market wasn’t that tough to crack”. Weak management leads to many repercussions like:


  • Mismanaged teams build products that no-one wants, as they didn’t put enough effort conceptualizing the idea that it will really work.

  • Poor execution leads to products that are not developed as per the plan, or time commitment is never met, and the marketing plan is executed poorly.

  • Good team management increases 40% chances of survival of a business whereas poorly organized team slashes the lifeline by over 60%.


3) Concept Failure 


Over 70% of successful startups initiated with ‘plan A’ which they thought would work but as they went deeper into the market, understood market needs and consumer behavior, morphed their idea around their customer and eventually encompassed a lot of things which weren’t in the pit earlier.


  • A startup is built around a solution for a given problem. But often founding members become stringent and stick to their original idea only. Resistance in evolving their idea leads to market failure.

  • Most of the time, the first product introduced by a company isn’t the final product, with due feedback of the users, one has to evolve their offerings too.

  • Founding members are too busy validating their original idea to the market that they fail to actually capture any market share.


4) Poor Business Model


Venture capitalists investing in startups has become a much-lauded phenomenon and most of the startups are eyeing for a VC to fund their venture and skyrocket their valuation. Founders are too optimistic while considering customer acquisition. Creating good products or websites doesn’t mean the customers will automatically pave their way to your door. The cost of acquiring customers becomes a pain after a while, companies like FB and Google have made it very easy to advertise on a global platform but one must realize there are thousands of advertising on the same platform for the same or likewise product as yours.


Cost of acquiring a customer should always be lesser than the lifetime value of a customer, for e.g. - XYZ company spends $10,000 on a TV commercial and the inquiries that came in were 100, i.e. $100 per customer, plus add your business expenses like rent, salaries, bills, paychecks, etc. to it and then decide the total cost of acquisition per customer.

 

Google Pay stated they gave over INR 1,000 Crore in the form of cash-back to its users last year alone. Every business doesn’t have a fund corpus that size plus giving freebies doesn’t always work. Kite Cash, a money transfer app gave INR 100 as a signup bonus to every user, which resulted in bogus account signups and users withdrawing INR 100 collectively and shutting accounts thereafter. Some users stated they collected over INR 100,000 in about a week or 2 with just fake account signup. Soon after, the company collapsed and shut operations.


5) Cash Crunch


Over 82% startups initiate bootstrapped and aim to take their business to a point where they are able to attract investors but having a pool of consumers or a good team doesn’t mean you’ll get funded. A sound and scalable business model along with the aforementioned features is essential to raise money. A business needs to set milestones for its growth:

  • You are into Uber Cab like a business and hiring a senior developer for app and website development is definitely a leap to the next milestone.

  • Businesses don’t just get funded on the basis of the time elapsed from the previous funding but are funded on the basis of the milestone they are at. Eventually, every startup resorts to IPO as their final destination but how close a business is to their IPO is what matters.

  • Funding doesn’t increase with time, you have to work for it; if you’ve got funded in January 2019 doesn’t mean you’ll be ready for your next round by next year with increased valuation. But you have to increase happenings in your business.


Where does the problem step-in?

The business ran out of cash before the next milestone is achieved. 

This leads to a panic situation and in this scenario, the next VC will significantly lower the valuation and eye to acquire more stake.

Bonus Tip-

A good business manager must know when to push the pedal for speed and when to apply brakes. If the situation is sound and sales figures are moving as expected then applying brakes on spending for customer acquisition is the key. And as the market turns, spending aggressively is the smart thing to do. Like Amazon spends 1000s of Dollars at the time of festive seasons or New Year because it is a sure shot that the customers will buy more and more at this time but slows spending after the festive season as people have exhausted their spending capacities.


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