Updated: Apr 11, 2022
It is not an easy journey for startups to find the right customer, value proposition, and positioning in the market. While the startup economy in India is progressing at an exceptional rate and is expected to redefine India’s economic growth in near future, about 90% of Indian startups fail within the first 5 years of foundation. So why exactly do startups fail? How can you ensure your precious startup idea turns out to be the successful 10%? It is usually a combination of several factors that hinder a startup from becoming the next big thing. We have listed down the top 13 reasons, which future entrepreneurs can learn from.
1. Ideation Failure
Ideas are limitless. The success is in its implementation process. As a founder your resilience to face the problems and your endurance to your idea is going to play in the long run.
Many entrepreneurs jump to the product building stage without first matching a valid customer problem to a business idea, leading to ‘false starts’. By ignoring the ‘customer discovery' stage and MVP (Minimum Viable Product) testing, they end up creating a product that does not conform with market needs and one wasted feedback cycle means one less opportunity to pivot before the money runs out.
Understand how you can escape ideation failure here
2. Lack of Product Market Fit
There is no one "Fits in all" formula. It has deeper layers to it. This is more of a framework than a goal. Many-a-times, startups fail to validate their product ideas in the existing market scenario. In today’s competitive world, it is important to bring in a product or service that is both problem-solving and fulfils the customer's expectations in every way, be it price-related or output-related. You don’t want to be wasting your time and efforts on creating something for which there is ‘no market need’!
Apart from this, launching the right product but at the wrong time can also turn into a bootless errand. The current target market should be in need of the particular product you have created.
Your customers might never remember what you said or what you did, but they will always remember how you made them feel.
That should be the aim!
3. Not Having The Right Business Model
Having the right product but not the accurate business model established could be another obstruction for your business. Poorly constructed goals, absence of scalable ways to acquire as well as monetize the customers, and no realistic cost figuring make the model a bit of a fuss.
As per the CAC/TV rule,
Being the fundamental building block of a business, founders should pay utmost attention to framing a realistic and compelling business model.
4. Fear of Startup Failure
While this fear lives in almost every entrepreneur, some tend to simply stop taking risks. Decision-making is hindered as the key goal becomes to not make even one wrong decision at any costs, thus limiting the startup’s gamut. Such fear can not only restrain but also motivate entrepreneurs when directed in a positive way. Having a negative approach from the start can influence thoughts and behaviour badly.
5. Legal and Regulatory Challenges
Another important reason for startup failure, although not very common, is failure to comply with the required legal and regulatory formalities. These can range from not registering one’s business to fouling relevant policies to not protecting one’s intellectual property. Knowledge on the updated policies, applicable licenses, and so on.
Mobile savings app Beam met its end quickly after falling afoul of the Federal Trade Commission. Smart luggage manufacturer Bluesmart also fell victim to legal challenges. The company shut down in 2018 after most major US airlines enacted a policy requiring all airline travelers to remove lithium-ion batteries from their checked luggage.
6. Poorly Harmonised Team
Any well-to-do startup requires a wide range of expertise in its team of employees and management. It is not hard to find technically proficient people these days. However, it is very difficult to find people who know how to get along with others and can be counted on when managers are not looking over their shoulders. Skills and work approach of the founder and his/her team should complement each other efficiently. Working for a startup can create a sort of pressure for the employees too, but as a founder you need to maintain quality communication with them and exchange thoughts eagerly.
You don’t want your employees to think in your way but instead to think in their unique way, which aligns with your long-term goals.
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7. Too afraid to Pivot
It is good to have a 1-year, 2-year, or 5-year plan chalked out beforehand and it is also good to stick to the plan but this should not be done at the expense of flexibility. Entrepreneurs are often afraid to pivot and become stubborn, which is enough to sink a startup at the time. Market circumstances can always change and pivoting your business structure in accordance with that is not something they should repel. During a pivot, founders should build the plane as they fly it. Study the changing scenario carefully, learn from the mistakes, iterate, and adapt coherently. As per the Failory newsletter, “Startups that pivot 1-2 times have 3.6x better user growth and raise 2.5x more money. Startups that pivot 0 times or more than 2 times do considerably worse.”
Also read: Why Startups Should Not Be Afraid To Pivot
8. Ineffective Finance Management
It is not the lack of money that kills startups. It is when overall cost exceeds the business income. This is where finance management comes into play. Even after raising considerable funds, many Indian entrepreneurs are not sure how to manage it, how much to save, and invest, especially in the early working years of the business.
9. Ineffective Marketing
Many founders either find marketing unnecessary for their business or don’t apply the right marketing strategies. Once you have a product that the market is in need of, you need to start the process of building your brand awareness through marketing. Getting the first 10 or first 100 successfully converted leads require significant efforts. This is where most entrepreneurs lack. Don’t blindly believe that your company does not need marketing.
Be it an entertainment service-provider, or high-tech product-based startup, you are always in the marketing business!
10. Poor Learning Agility
The learning and innovation process among Indian founders is rather bogged. Some tend to replicate global startup ideas without realising the different venture space factors. Founders are not agile in researching the existing market environment, customer behaviour, competition, technology, etc. which prevents creation of a thriving startup. The ones who have successfully created a problem-solving product discard the need to learn more about the changing environments and technologies and focus on scaling alone. In addition, concepts of profitability, asset valuations, equity, working capital, cost calculations, business risks, and so on are critical for decision-making on funding, investment, business modelling and framing competitive strategies.
Hubris is one such characteristic in founders that could crush an otherwise booming startup. It lulls these founders into excessive self-confidence, gloating and arrogance, and eventually losing sight of the more important things like customer requirements, surrounding competition, insufficient marketing, and so on. The main focus should be solving customer problems effectively, while staying aware of industry players and trends.
Hubris kills businesses; humility saves them.
12. Pricing-cost Imbalance
While some startup leaders fail to price their product/service high enough to cover costs, others tend over-price, thus failing to attract customers. In an attempt to bring in customers, and generate revenues fast, entrepreneurs should not underprice, as price reflects quality and would not be a sustainable approach in the long run. Neither should they be overpriced, eventually leading to losing some potential customers.
13. Inability to Raise Funding
Even with a billion-dollar idea, a startup would not be able to succeed without adequate funding. Many entrepreneurs are unable to execute their fundraising round at the right time and with the right group of investors, which leads to yet another downfall for startups. It requires a dedicated 6 to 7 months with a good team, regular meetings, evaluations, and visits to work it out.
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A founder should know when to hit the accelerator pedal. In the early stages of a business, while the product is being developed, and the business model refined, the pedal needs to be set very lightly to conserve cash. There comes a time when it finally becomes apparent that the business model has been proven, and that is the time when the accelerator pedal should be pressed down hard; as hard as the capital resources available to the company permit. They also need to have an organized business model and pitch decks to attract investors. Having a well-structured model and list of ‘to-dos’ help startup leaders work more productively. Organization and productivity go hand-in-hand.
Fortunately, there are numerous examples of startup mistakes which serve as key lessons to learn from: