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

Options After A Failed Startup

So if a startup fails, what are the options available for its founders? The answer to this question depends on a couple of factors like their monetary situation, their mindset, a cost benefit analysis of the different options available and so on.

I was in a similar situation recently and after pondering about it, I arrived at the following options.

Join a Startup – The biggest earning from a startup is the experience you get. This is highly valued and will most definitely help you get a job in the same Industry you were operating in. Since the experience of a startup teaches a lot of general management as well, you can look at working in startups operating in different spaces.

Do a Course – This is what I chose and is an option if you are searching for stability. Doing a course is a strategy which in most cases has one motive – getting a corporate job after. Some entrepreneurs do look at honing their skills which may help them in their future startups. I chose to do an MBA (my second) so that I could get a regular corporate job.

Startup Again – The startup journey, though very exhausting physically and mentally, is a very exciting one. A lot of entrepreneurs, like myself, get ‘addicted’ and tend to start searching for the next idea. However, your monetary situation has a role to play. Only if you have some money in the bank to sustain yourself can you look at this option.

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 – Don't Put All Eggs In One Basket

Dine In was a restaurant delivery app whose founder was very focused on getting acquired by a larger player. An incident with an investor led to their downfall.

The founder Evan Graj says in an article - “We knew acquisition was the best course of action,” says Graj. That eventually led to Dine In being approached in February by a major Internet company active in the online food space, and it’s my understanding that by April — and significant legal fees later — a sale had been agreed. Then at the eleventh hour the deal unexpectedly fell through, leaving the restaurant delivery startup “high and dry” and its unnamed acquirer a “no-show”. Adds Graj: “They backed out leaving us with a huge legal bill both for Dine In and myself personally, a huge debt to note holders, and no VCs to turn to. A hard lesson to learn and one I’ll be taking into my next venture.”

Advice – The startup and its growth should be the prime focus on an entrepreneur at all times. Ignoring this for things like funding, getting acquired etc. is a bad practice and must be avoided at all costs.

Learnings from Failure – Infographic

A study was conducted by CB Insights by analyzing more than 101 startup failure postmortems to find out the top reasons for startup failure.

The top 3 reasons found to be a part of failing startups were – The Absence of a Market, Running out of Cash & a Wrong Team. These indeed are the 3 most important components of running and growing a startup (along with having a Business Model, which ranks at no. 6).

Learning from Failure – Decisions Should be Data Driven

Although gut definitely has a role to play in startups, data should always be the driving factor in decisions. In the early stage of the startup when data volume is low, intuition plays a more significant role. But as the startup grows and we have more and more data at our disposal, the data should be utilized well to make any further decisions for the company.

Emjoyment was a startup looking to be the Tinder for jobs. The founder says – “The Lean Startup tells us to be data-driven, and so we werewith our initial sample size of 100 homogeneous Penn friends. Not smart.”

Advice – Data driven decisions should drive a startup. Also ensure that the source of the data is accurate and relevant for your startup.

Learning from Failure – Have a Plan

Having a plan helps the team move forward in a proper manner. Not having one results in different members of the team putting energies in different directions, thereby resulting in a loss of time, effort and money.

Boo.com was an ecommerce company which went bust despite launching on a big scale, in multiple countries. Besides the other challenges they faced, the biggest factor for their failure was the lack of a project plan which resulted in a complete lack of communication within the team. As was said after it went bust, Boo did not fail as an ecommerce company, it failed as a company in general.

Advice – Do not start investing time and money without having a plan.

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 – Early Hiring Burns Cash

Timing your first hiring for your startup is very important for an entrepreneur. Hiring too early leads to wastages which can prove very crucial if you need to bootstrap your venture. Identifying the gaps in your startup, making a list of the precise skill sets you require and then finding the right profiles to match the requirements is the primary task and responsibility of the entrepreneur. The more the inaccuracy or deviation in this, the more the wastage of money and time.

Wishareit is a social gifting platform which made this very mistake. On receiving a positive feedback from its initial users and being overly optimistic, the startup hired too many people too soon which cost them months of runway.

Advice – Identifying the gaps in your startup and filling them with the right people is the right way to approach hiring.

Learning from Failure – Co Founder Disagreement Harms The Startup

Building a startup is a long and difficult task. In order to do so, the team must be aligned in the same direction and must have a common vision for the startup. If there are any conflicts within the team itself, growth is not possible. It is similar to pulling any object. If 2 people do not pull it in the same direction, it does not move at the rate if can if both pull in the same direction.

This is what happened to my first startup Bitequest. We were a team of 3 co-founders. I believed that an online restaurant discovery tool was the right way to build the company while the other 2 felt that building an offline restaurant call center was the right way to move. Due to internal conflict, we noticed that our startup had stagnated for a period of more than 8 months. Eventually, I exited the company.

Advice – Founders are the parents of a startup. Having a similar vision and understanding is a MUST to raise the startup in a uniform and optimum way.

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 – Pricing is Key

As important as it is to build a good product, pricing it well is key in the long term. Being in a competitive world, young entrepreneurs feel wary of asking customers ‘too much’ for their product. The rule of pricing is – Price the product not based on how much you have worked for it, you price it at what it is worth to the customer. Pricing right becomes critical in a product’s sales. Under-pricing directly hits at your revenue and brand, over-pricing can result in lower sales.

BitShuva was a Pandora like music service for niche genres. The startup built such music services for a host of music niches. When they were approached by their first clients, they had no idea how much to charge. They charged a very nominal fee for offering the service initially. On realizing that the charge was very low, they did try to increase their fee from time to time. However, the startup eventually closed down due to the low revenues of the company, when compared with the opportunity costs of the founders.

Advice – Spend time on pricing your product right. Pricing should be based on the value the product is able to create for a customer.

Learning from Failure – Passion Drives a Startup

You must realize that starting a company is a long and tiring process. You start a company, face obstacles, pivot, then scale, then fail, pivot and so on. So with some many challenges along the way, what drives you? Passion & the excitement you feel when you talk about your startup. The day this passion starts going down, you are bound to give up.

Jeanette Cajide is a great example of an entrepreneur burning out. She started Blurtt, an app for creating and sharing digital expressions through photos. She started the app on 2009 with a very different concept, curated photography for creating and sending out postcards from your phone. On not being able to scale up, she pivoted to another model in 2010, and another one in 2011 and finally the final model in 2012. She was trying to reach a model which was scalable and which was ‘investor friendly’. She then realized that she was probably not doing what she had set out to do and was feeling burnt out as a result of this roller coaster journey. She finally closed down the startup in February 2014.

Advice – An entrepreneur’s passion is the energy which drives a startup. This energy helps you find the right path and keeps you going. The day you feel the energy is going down, it might be time to close down.

Learning from Failure – Plan your Cash Requirement

Running out of money is a common cause of startups failing. You may be building a great product, but money in the bank is what can keep you going. Planning your cash requirements accurately upfront itself ensures that you do not get into a position where money, or the lack of it, blocks the path to reach your goals.

Drawquest was a startup looking to create a drawing community online. The product got great traction. It was downloaded more than 1.4 million times in a year and had more than 25,000 people using it on a daily basis. What the business was not able to do was to monetize this traffic.  The startup could not raise investment as well and eventually ran out of cash.

Advice – Financial planning is crucial for any startup. Planning out a requirement of cash helps the entrepreneur thinking about arranging the same, without having to run out of money.

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.