Solving the Mystery of Startup Failure

Starting a startup isn’t easy. Or is it? According to a study by Embroker, it only takes six days to launch a startup in the United States. But out of every five startups launched, only two will become profitable.

That’s because out of the millions of entrepreneurs, only a few know what it takes to make a business successful. Of course, there’s plenty of luck involved as well. But there’s no doubt that there are a certain set of decisions that allow some startups to be vastly more profitable than others.

Similarly, there are a specific set of factors that result in startup failure. It’s significantly harder keeping a startup running then just setting it up. Today, we’ll take a look at what the top factors for startup failure are and the steps you can take to ensure your startup doesn’t meet an untimely demise.

Misreading Market Demand

The number one factor that leads to startup failure is misreading market demand. Market demand entails understanding if a product or service has enough appeal to launch the business. Successful startups take time and effort to understand what customers actually want and need so that they can estimate market demand accurately.

A major reason for misreading market demand is conducting flawed market research where the wrong questions are asked, or not enough people were surveyed to represent a wide range of market demographics. In addition, market research may also be flawed if the researcher pressurizes respondents to modify responses for favorable outcomes. This may be done intentionally or unintentionally.

A second reason for misreading market demand is the entrepreneur’s own personal biases that distort their understanding of what customers want and need. For example, in order to avoid criticism from family members about the prospect of failure, entrepreneurs may inflate the demand for their product.

A third reason for misreading market demand is the lack of customer validation, where entrepreneurs seek feedback from customers too late in the process to make changes based on that information. Customer input must be sought early and often, not just at the last minute before launching a new product or service in order to avoid wasting resources crafting something useless. 

In addition, it may be that the market demand does exist but by the time the entrepreneur launches the startup, the market has changed and demand has diminished. That’s why the best way to ensure your startup’s success is by validating your idea before you commit to it.

Insufficient Financial Resources

The second most common reason for startup failure is underfinancing. Most small businesses are unable to generate the capital necessary to sustain operations beyond a few quarters. That’s because most small businesses can accumulate set up costs but gathering follow up financing is difficult.

A major reason for failing to procure follow up financing is that many startups are unable to articulate a clear path for generating enough revenue. Since every investor relies on a solid business plan, a lack of knowledge about the industry can lead to a failure to secure the kind of financing that guarantees longevity.

In addition, seasoned investors can spot a flawed product or business model from a while away. That’s why so many promising startups are unable to attract the financing they need because their product is either flawed or marketing research is lacking. As such, an inability to secure proper financing relates directly to the first problem: misreading market demand.

It might also be difficult to procure funding if you operate in a niche market. For instance, LGBT owned businesses might struggle to accumulate sufficient capital to sustain operations. However, instances where banks do not lend to LGBT businesses, the LGBT community comes to the aid of gay businesses.

The best way to overcome financial troubles, then, is to address them head-on before they become so severe that the company has no choice but to file for bankruptcy. That entails cutting back on unessential expenditures, getting a clear picture of market demand, and attracting new investors.

Recruiting the Wrong Team

Another common reason for startup failure is hiring wrong people. The “wrong people” aren’t necessarily those who do not have the skills, but could also include people who do not believe in the objectives of the organization. In addition, employees with an attitude problem are often a drain on resources and morale.

This is an issue not because these people are bad employees, but more often it’s a case of the company culture just being incompatible with their personalities. If you’re looking to hire for skills then that will lead to success, but if you want someone who shares your vision then they need to fit in culturally as well.

It is crucial to hire the right people for any organization. For startups, it’s doubly important because they are often starved of funds and can’t afford to have deadweight on their payroll. Yet many startups are dragged down by employees that either lack the vision or the skillset to make the vision a reality.

Do not worry if this is the case with your startup, though. There are many ways to find the right people for your company culture and skill-set without resorting to hiring a headhunter or sifting through resumes on job boards. The best way to find potential hires is by reaching out directly via social media channels like LinkedIn and Facebook, as well as hiring through recruitme nt platforms such as Indeed.

Whoever you shortlist for the position, the compatibility between them and the company culture will be a deciding factor in their success on-board. You want to make sure they’re ready for anything because startups are notorious for sudden changes, which can come from any direction depending on what stage of development your company is at.

Tough Competition

The competition in an industry is one of the main factors why startups fail to flourish.

There are many examples of successful startups that have had to face the challenges and tough competition in their industry. One such example is Slack Technologies, Inc., a business messaging service company founded by Stewart Butterfield, Eric Costello, Serguei Mourachov, and Cal Henderson in February 2014. They faced stiff competition from other big players like Google Workspace and Zimbra. However the key to overcoming stiff competition is innovation.

Slack Technologies, Inc., for example, has a distinctive edge over their competitors because they are the first to offer end-to-end encryption in messaging apps and share company knowledge with other organizations that can use it for free – something Google Workspace does not do.

As such, each new startup needs to cultivate a competitive edge that ensures their survival in the market. This is where innovation comes into play. Innovative products can help startups build authenticity and stave off competition. A good example in this case is Dropbox that raised $250 million at a $10 billion valuation in 2014 thanks to an innovative service.

Uncontrollable Market Conditions

Sometimes, it just so happens that startups fail despite having an innovative product and a sound business plan. That’s because of uncontrollable market conditions.

Let’s take Uber for example, the company has had its fair share of troubles over the past year or so when it comes to public perception and legislation. From #deleteUber trending on Twitter in response to President Trump’s travel ban to a sexual harassment scandal involving an executive at another startup that resulted in his firing – Uber has been the target of uncontrollable market conditions.

But while Uber can perhaps sustain these unpredictable market conditions, it is almost impossible for startups to sustain through such turbulence. The best way to mitigate uncontrollable market conditions is to have a long-term strategy.

This starts with understanding your market and identifying who the competitors are in that specific space. Once you know what is happening around you, it becomes easier to prepare for potential changes by proactively adjusting internal resources accordingly when necessary rather than reacting after the fact.

Conclusion

It’s no wonder that there are so many failed startups in the US. In 2015, 76% of venture-backed companies either went out of business or were acquired for a small fraction of their original value. That means only 24% survived – and they’re not doing too well either with 16% failing within the first five years. It’s therefore essential for startups to focus on establishing a strong foothold in the market and achieving product-market fit before scaling up.

It’s better that founders should start by taking a “lean” approach, which is fundamentally based on customer discovery with validation of their ideas through iterative experimentation as they build products or services around what customers need. This approach gives startups the best chance of success by focusing on satisfying customers’ needs with a minimum viable product (MVP) before scaling the business.