Top Reasons Why Startups Fail

Startup Failure is considered a taboo in many parts of the world. However, it is a phenomenon which is highly prevalent and cannot be avoided. Nearly 90% of startups fail within the first 3 years of operations. Top 20 reasons why start-ups fail include the following:

#1 – Building a solution looking for a problem, i.e., not targeting a “market need”

#2 – Ran out of cash

#3 – Not the right team

#4 – Get out-competed

#5 – Pricing/Cost Issues

#6 – A “User Un-Friendly” Product

#7 – I got this product. Now I just need a business model.                

#8 – Poor Marketing

#9 – Being inflexible and not actively seeking or using customer feedback

#10 – Release product at the wrong time

#11 – Lose Focus

#12 – Disharmony with Investors/Co-founders

#13 – Pivot Gone Bad

#14 – Lack Passion and Domain Expertise

#15 – Location, Location, Location

#16 – No Financing or Interested Investors

#17 – Legal Challenges

#18 – Do not use your connections or network                

#19 – Burn Out

#20 – Failure to pivot when necessary

Source: CB Insights via Seraf Investor

Learning from Failure – Scalability of the Product

One of the important features of a product/service is that it should be scaling friendly and can be replicated in different geographies and markets. A startup product which does not have this attribute will find it difficult to grow beyond a certain threshold.

37coins was a SMS based Bitcoin remittance wallet. Despite targeting a big market of around 2.5 billion underbanked adults, the startup failed to assess the reliability of SMS as a medium in many countries. This led to a bad product market fit for a large chunk of the market and hence resulted in the startup shutting down.

Advice – Assess the scaling potential of a business idea before proceeding with it. All attributes of a product must be taken into consideration to assess its scalability.

Learning from Failure – Regulation Issues Need to be Dealt With

When thinking of your business, it is important to also consider how and to what extent Govt. regulation and policies can affect the same. There can be and have been cases where a good and innovative startup idea has been curbed and has eventually failed because of regulation issues.

Flytenow was a startup which closed because of this. It was a startup which was looking to connect aviation enthusiasts with pilots and go flying together. The Federal Aviation Administration in the US banned this startup and other flight sharing websites. Flytenow had to shut down eventually.

Advice – As a startup, you would not want to get on the wrong side of regulation. Keep that in mind if it can potentially affect your startup.

Learning from Failure – An Idea Should be Explainable in 1 Sentence

If your startup idea cannot be explained in 1 sentence, it lacks focus. A few words for the business model and a few for the market targeted. If either of these are not certain, we tend to go into explanation mode which tends to make the idea statement longer and lacking focus.

Amiloom was one of those ideas which lacked focus. In an article by the founder, he acknowledges the same – “We believe that Amiloom is an extremely innovative product better than anything currently available for helping you meet the people most likely to become a part of your life. Amiloom is a connected device that forms a network of people with common friends, shared tastes, and who only need to go as far as the device was handed to meet up with each other.

The problem is that no one knows this. When you see a picture of Amiloom you have no idea what it is. In 2 lines of text there is no way to explain both why and how it works. We have built it and are telling the world, but no one can hear us, few people understand us, and the masses are not coming to us.”

Advice – Stop and write your idea statement. If it does not fit into 1 sentence, you need to think and focus further.

Learning from Failure – A Wrong Concept Spells Failure

A startup built on a wrong concept is likely to fail. By wrong concept I mean a space which is either not present, very small or is not one which can be monetized. Though a startup may be able to create some value initially, the inadequacy of the targeted space will eventually result in the startup failing.

Ratemyspeech was a startup which focused on improving presentation skills using a community based feedback platform. The startup had to be closed down due to fact that most people did not care about a service like this and would not be willing to pay any money for it. As the founder says in this article – “Most people (95+%) just don’t care enough about their presentations. So they will not take the time to prepare a draft speech, upload it, expose it to scrutiny, then take the feedback onboard and rework it. The rest, the less than 5% on the other hand takes it very seriously, and many of them have a strong network of people who they can ask. But they wouldn’t pay for some service to make this a bit easier. For them, we would not be able to deliver value.”

Advice – Research the market you are targeting time and again to ensure that it is big enough and monetizable for your startup to sustain.

Learning from Failure – Customer Retention leads to Sustainability

A lot of startups plan out their customer acquisition very well. However, a lot of them do not put in as much focus on retaining customers. A business cannot indefinitely keep acquiring new customers without having strategy to retain the existing ones, especially in a business model which thrives on repeat purchases. Retention tends to be much cheaper than acquisition and hence drives profitability and sustainability of the business.

HomeJoy was a on demand home cleaning startup which faced problems owing to this fact. It started off by  acquiring customers using deep discounting on deal websites like Groupon. It was able to acquire customers but was not able to retain them. Only about a quarter of the customers usesd the service after a month and only about 10% used it after 6 months. The startup started racking up steep losses and this resulted in low investor interest in the startup, which eventually closed down.

Advice – Invest in acquiring customers but also invest in retaining them as retaining existing customers is much cheaper than acquiring new ones.

Learning from Failure – Sustaining in Businesses with Delayed Revenue

A lot of businesses have a particular characteristic associated with them, i.e. they take a lot of time to start generating revenue. One such business is the News Business. This is a business which requires a lot of investment of time, skill and money in order to build a brand and a product which can engage its users. Revenue starts once it is able to do so.

Circa News was a news startup which tried to atomize content to deliver the latest news. Its mission was to create a news company where unbiased and concise information could be found. Though the team realized that generating the first revenues would take some time, they tried to raise venture funding to last out the initial phase which they were unable to do so and hence had to close down eventually.

Advice – News startup should realize the nature of the business they are entering and should make their plans accordingly.

Learning from Failure – Avoid Being Over-Optimistic

The Optimism Bias of entrepreneurs is a common problem which can seriously affect the way the entrepreneur thinks about a startup, thereby affecting the startup as well. As the name suggests, it is a cognitive bias which impacts a person’s judgement about a particular event (startup in this case) and makes him/her feel that the chances of a negative outcome are very low.  An entrepreneur, at all times, should think about the startup without having a bias. Only then can the entrepreneur assess the startup’s progress correctly and plan accordingly.

Tale of Tales was a startup which used to create narrative based video games. It was making a video game called ‘Sunset’, which the team felt was very good and would be a success. With this bias, they ended up investing much more time and money then they had initially planned. As a team member said “Surely we can make that amount back in the first month of sales!” This did not happen though and there was barely any income to keep the company afloat.

Advice – Think reasonably and practically about your startup. Biases affect judgement and hence the business itself.

Learning from Failure – Being a Single Founder is Difficult

As the title suggests, starting a company alone is very difficult. First of all, you may not have all the skills required for running the company in the most efficient manner. You start hiring for or outsourcing some parts of your business. Then comes managing these people/vendors, ensuring that the product is built as per your vision, making a marketing plan, doing sales, managing the finances etc. It all tends to become a bit overwhelming for the entrepreneur at times. This can cause burnout in several cases. If not, the startup does tend to suffer in various areas which are not catered to in the best way.

Cusoy was a curated restaurant finder for people having food allergies. It was started by Melissa Tsang, the single founder who was solving a big pain point she faced herself. Even though she has a non-technical background, she was able to create 3 MVPs for her startup. Also she designed and conducted marketing research, in-person usability tests and also pitched to investors to raise money. Juggling between all these tasks, it became extremely difficult for her as she was just not able to find a like-minded and interested co-founder for the startup. Eventually she was mentally, physically and emotionally exhausted and this was a big reason for her closing down the startup.

Advice – Single founders often find it increasingly difficult to sustain a startup after the initial stage. Finding a co-founder who is like-minded, has the same vision and passion and has the requisite skill sets becomes key to keep the company going.

Learning from Failure – Keep an Eye on Competition

A major reason for a lot of startups failing is that they fail to keep an eye on their competition. In a highly competitive world, it is very important for a startup to identify trends, assess them and implement the promising ones before a competitor does. Startups which are not agile and don’t adapt fast enough find it difficult to survive.

My first startup Bitequest was one of the first restaurant discovery cum reservation tools in India. Being the first , we were able to get a good foothold into the market. The biggest problem we faced was within our team, we took too much time to make any decisions. There were suddenly a host of startups which entered this market. Our team, since we were the market leader at that time, paid no attention to them. Suddenly, owing to scalable business models, a couple of the new startups were able to raise money and scale up tremendously. We were still doing what we were doing earlier and eventually became a very small competitor in the restaurant space.

Advice – As important as it is to look within, it is also very important to look outside of your startup. Observing, learning and then adapting is key in sustaining your startup.

Learning from Failure – Identify a Real Audience

The first step for an entrepreneur after identifying a business idea is to identify and validate is the idea has a certain audience and target market. Having a few group discussions or surveys of potential customers is a good way to do so. Working purely on a hunch may result in an entrepreneur realizing certain facts and trends later on and facing difficulties along the way.

Travelll was a startup which was trying to leverage the power of social media to the travel space and ended up creating a travel inspiration portal. The team felt that this was a model which was successful in a lot of other spaces and should be replicated for travel as well. Despite a reasonable start, they realized that the audience for this space was very limited. People travelled only 1-2 times a year, as against other activities such as fashion, photography which were more engaging and regularly used by customers. The startup tried to pivot along the way, but eventually closed down.

Advice – A ‘real and substantial market’ is required to build a scalable business.

Learning from Failure – Marketing Drives Growth

A lot of entrepreneurs tend to get so focused on the product that they forget to focus on putting it in front of the target audience. No matter how great your product, it means nothing unless customers get to know about it. Right from the very beginning, an entrepreneur must plan who the product is good for and how the business can reach the target audience in the most effective way at the minimum cost. Not planning for marketing can prove disastrous for a business.

Kinly was a startup which was trying to be a ‘Facebook for your family’. Given the dislike of a lot of users for Facebook, the product got a good initial review from its earl users around and got selected into an incubator as well. The mistake made by the startup was that because of this irrational optimism, the founders decided not to take on any investment, which they required to market the product. The product eventually died a slow death.

Advice – No matter how good a product, it cannot succeed if not visible to customers. Scaling beyond a certain level requires investment in marketing.

Learning from Failure – Business is for Profit

The first rule of business is that we are in it to make a profit. If we cannot, it will not sustain. There exist a lot of areas where real problems do exist, though making money is difficult. We need to clearly analyse and research whether the sector we are entering is monetizable and to what extent.

Poliana was a startup which faced a harsh reality about the sector it was operating in, Politics. It was a political startup aiming to make the communication between political parties and the citizens easier through the use of technology. The team’s entire focus was on making Poliana a great product by solving the problem they had identified, and not on making it a business. What they realized was that owing to the nature of concept they had and the space they were operating it, it became very difficult for them to make money out of something which deserved to be free.

Advice – A startup should definitely be based on solving a problem. However, care should be taken in assessing whether the problem is in a space in which the business can generate profits.

Learning from Failure – Negative Unit Economics

Peppertap was a pioneer in the hyper-local grocery delivery space in India. By October 2015, they were one of the top 3 grocery delivery companies in India, doing slightly more than 20,000 orders per day. It just announced a few days back that it is closing down.  

One of the biggest reasons for its closure was the negative unit economics the business model faced. In India, discounting has been the most commonly used tool by startups to attract customers. Peppertap was also using the lure of cheaper prices to attract customers. Also the committed delivery time (of less than 2 hours) meant that company was having to spend money to create spare capacity in its logistics and supply chain. This too had a significant cost.

The startup was effectively bearing a big loss on every sale owing to discounts and the logistics costs. Since this loss was not visibly looking to come down drastically even in the longer term, the founders decided to close the startup.

Advice – A startup can bear negative unit economics in the short term. However in the longer term, positive unit economics are a must for the business to sustain.

Business Ideas Likely to Fail

There are certain kinds of business ideas which I feel are more likely to fail than others. These are generally not able to create substantial value which can help them sustain in the long run.

The ‘Amazon for a Niche’ idea: A lot of new entrepreneurs tend to look at ideas like this. I had a friend who was able to create a successful ecommerce store for dog food in India. Once Amazon entered this space, it’s sales was at par with this startup’s within a period of 4 months. Similar examples can be seen in other online spaces as well.

The ‘Craiglist for a City’ idea: Similar to the above, some entrepreneurs feel they can create a ‘Me-too Startup’ in their city. Unless their scaling is commendable, surviving once a big player enters is difficult.

At the end of the day, I feel the true valuation and survival chance of a startup is totally dependent on the value it is able to add to the ecosystem as a whole.

Failing vs Quitting

Consider early failures as stepping stones to success. Failures will happen in life, you don’t have control over them. But if you quit you will miss the ride and excitement of the journey. There is no point in returning to your comfort zone. It is but a safe place where there is no fear of failure, no threat, no danger.

After you fail, you should look for the reasons why you failed. You should make yourself a promise to not repeat your mistakes. You should try new things where you may fail again, but you should never quit the game.

People who quit make their decision out of fear. Fear of another failure, fear of uncertainly, fear of darkness. You should look at the bigger picture and take a conscious decision about your next step. Think about the core reasons why you started something which you eventually failedat. Don’t get distracted from your journey just because you missed the bus. You can always find another way to accomplish your mission.

(taken from http://yourstory.com/2016/03/entrepreneur-startup-fail-quit)