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November 15, 2018

Why Do Startups Fail?

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Photo Credit: Victor1558 via flickr

“Failure is not the opposite of success, it’s part of success” – Arianna Huffington, Huffingtonpost

Of course, failure is inevitable, but as Arianna has perfectly put it- it’s part of success.

But then we never get to hear about failures. All we read about ever is how successful so and so is; or how his startup is growing, making millions from day one.

To prove my point- Think of the first few words that come to your mind from articles related to startup and entrepreneurship on the internet. 

The first 5 to come to my mind are funding, success, youngsters, millionaires and innovation.

Not failure for sure. For Failure is the orphaned kid of the startup world dictionary, rarely getting any attention.

Even the media has shied away from discussing the failures, keeping the positivity alive in the world of startups. 

Only until they realized the success stories were way less than the failures.

As per research, 8 out of 10 startups fail. Which means the failure rate in the world of startups is as high as 80%.

In fact, you’ll be amazed to know that more than 50% of small businesses fail in the first year of operations. Only 4% of the total make it to the next year. And by the 5th year, only 3% survive. (source : https://smallbiztrends.com/2016/11/start)

By now you must be baffled, wondering why and how.

Well! Startups don’t fail just like that. There are always good reasons (yes, reasons and not a reason) for it.

Having been part of a few startups myself, let me give you a few pointers.

As per an analysis by CB Insights, the top 3 reasons for startup failures are:

  • No Market Need
  • Ran Out of Cash:
  • Not the right Team

I will analyse all of them one by one:

a. No Market Need:

I am as surprised as you are – to see “no market need” as a reason above “ran out of cash or funding issues” as a reason for startup failures.

So, why do startups fail because of no market need?

I see a lot of startups start because of the trust their founders have in an idea. 

Ideas are good – they are the stepping stone to the long journey of startups. The next obvious step is market research.

A step where you try and validate the idea as much as possible. 

Unfortunately, I rarely see startup owners spend enough time validating their idea. Thereby, launching their startups without understanding the need of a startup in market.

I have been a part of a startup which launched an online marketplace for party planners in a small city in India.

We started the project based on our business instincts which was backed by the growing usage of the internet in India. Sadly, we did no market research. 

Mid-way through our marketing and sales campaign we realized that there was no market need because parties were a personal affair and people rarely trusted the internet to use such a service (back then).

Why don’t startup founders do market research to identify the need for a startup in the market?

The majority of the time, entrepreneurs are disrupting markets they are new to. They identify a gap in the market and work on an innovative solution to fill the gap.

Now Market studies are expensive and exhausting. It’s a pain to spend days studying what your perspective customer wants – especially, when all of them might have a different opinion to the startups products/service.

Hence, the aversion of startup owners to validate their idea.

A startup with a product/service no one wants will see no sales and is bound to fail.

No wonder, it is the top reason for startup failures.

b. Ran out of Cash:

Startups founders are always in a hurry to grow at a fast pace.

And I don’t blame them. 

We live in an era where the mantra of the young generation is “Fail Fast, Succeed Faster”.

Add to the above, the pressure from VCs for a fast profitable exit. They need to reach that “magical sales” goal for that exit. 

There are glaring examples of startups splurging VC money to start T.V and Newspaper campaigns to spread the word. 

The idea is to succeed faster or outpace competitors.

Alas! In pursuit of succeeding faster (quite predictable), they fail fast.

Bad financial planning is a common trait amongst all failed startups. 

It’s not only advertisement and promotions where startup founders unnecessarily splurge money, but they also overspend (most of the times) on high employee salaries and stuff like office furniture, office rent, etc.

In 2017, car startup beepi was shut down because it ran out of cash.

There was a time they were burning close to $7 million per month paying 300 employees on payroll and it wasn’t just payroll that burned a big hole in their pocket – there were unwanted expenses like a $ 10,000 sofa (to name a few).

Now, that’s one comfortable sofa for a startup that was a long way from breaking even 😊.

You get the point!

c. Not the right Team:

Most of the time, Startup founders are a work in progress. 

They are either college students who have never been a part of the professional world or are working professionals who have excelled in their jobs in their specific area of expertise.

To make up for their weak areas, they hire teams. Teams that can help them grow.

Getting the right team for startup founders is easier said than done.

As a matter of fact, it is one of the most difficult parts of running a startup. 

Hiring a team is not easy for startups. 

First, there are very few good people who want to join a bootstrapped startup for obvious reasons like an inability to offer a salary at par with established companies and the risks of your startup failing at any time (do not forget the golden line “8 out of 10 startups fail”).

It all comes down to “Why would someone join such a business and put their career at risk?”.

I am not saying you do not get good people. 

You do get them, only to see them leave for Google, Microsoft as soon as they learn to work at your startup.

Finding the right team and then convincing the team to stick around is a big challenge faced by startups.

And then there is the challenge of creating a balance between experience and skill set. 

You hire a resource with less years of experience (budget constraints) and you end up spending hours teaching them – Only to train them and watch them leave for a better job.

Then, you hire a resource with a lot of experience in an area where you do not have much, only to struggle in managing the resource.

Finding the right team is difficult. Startups need to find the right mix of experience, passion, drive to succeed and trust in the team they hire for the job.

To sum it up, there is no one specific reason a startup will fail. There is always a mix of reasons for the failure of startups.

Most successful startups are run by entrepreneurs who have their ears to the ground.

They know how the market is changing, how teams are delivering, how and when to raise funds and are smart with their decision making.

Most importantly, they know how to plan and execute their vision.


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Entrepreneur, Avid reader, Startup consultant, and A Reluctant blogger at lessonsatstartup.com.

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