It’s often thrown around that 90 percent of startups fail. Where does this number come from? Is it legit? And, more importantly, if it is, what can you do to avoid being one of them?
How Many Startups Fail
Sadly, this startup failure rate is accurate. Researchers from UC Berkeley & Stanford came together to create the Startup Genome Report a few years back, which revealed that 90 percent of startups do indeed fail, and it’s most often the result of “self-destruction” rather than competitive issues. While the scale may shift in that regard during difficult economic times, the data is clear. Self-awareness and education can go a long way in creating a stable and profitable company. Below, we’ll go over some of the biggest reasons for startups failure, so you can arm yourself with the tools necessary for success.
Why Startups Fail
1) Good Idea, Bad Business
Many small business owners and startup founders start out with a fantastic idea they’re sure is going to take the world by storm but what they envision people wanting during product development and what people genuinely desire aren’t always the same. After postmortems with 101 startups, CB Insights found that 19 percent of companies failed because their products were not user-friendly.
This is theoretically an easy fix if you’re actively requesting feedback from early customers and taking what they have to say to heart. However, 14 percent of failed businesses don’t hear their customers out, and seven percent don’t even try to pivot when they need to. A further ten percent don’t pivot well.
“Startups that pivot once or twice raise 2.5x more money, have 3.6x better user growth, and are 52% less likely to scale prematurely than startups that pivot more than 2 times or not at all,” say Startup Genome Report researchers.
The bottom line: Listen intently to your customers and be ready to pivot and compromise to meet their needs.
2) Expanding Too Quickly
It’s easy to think of expansion in terms of adding more shops or products, but the Startup Genome Report lists several areas in which businesses may expand too rapidly.
- Customer- Spending too much on customer acquisition and/or overcompensating on lack of demand with marketing and press.
- Product- Building a product that doesn’t solve a problem, focusing on scalability before product-market fit, and/or adding features that are desired, but not needed.
- Team- Hiring too many people, bringing in the wrong mix of people/ levels, and/or having more than one level of hierarchy to start.
- Financials- Not having enough cash on hand to handle expansion and/ or having too much cash, which can result in undisciplined spending.
- Business Model- Not having a business model, focusing on profit too early, failing to pivot, and/ or failing to examine goals and progress.
The bottom line: Map out your own business plan ahead of time with clear benchmarks and metrics to meet. Schedule regular progress audits.
3) Lack of Market Demand
It’s easier to have a disconnect between product and consumer than one might think. “We had no customers because no one was really interested in the model we were pitching. Doctors want more patients, not an efficient office,” reported a patient communicator in a CB Insights postmortem. In all, their analysts found that 42 percent of startup failures involve a lack of market demand.
The bottom line: Get to know your audience before launch and identify their pain points. Don’t ever assume you know what they are.
4) Poor Marketing
Many startups are so passionate about their product or service that they expect word-of-mouth marketing to create sales. The reality is, their audience may never even learn they exist. Others recognize the importance of marketing, but don’t have the systems and people in place to effectively handle marketing strategy, eventually hitting a wall they can’t overcome. Per CB Insights, issues like these contribute to 14 percent of startup failures.
The bottom line: Have someone with marketing expertise on your team even at the early stages to help identify your target audience and how to reach them.
5) Lack of Passion
There is no denying entrepreneurs are a passionate group, but this passion can become all-consuming and kill work-life balance. Harvard Business Review reports that virtually all entrepreneurs say they experience some degree of burnout, and a full quarter define it as “moderate burnout.” As burnout sets in, passion dies down and so does the small business.
Other times, business pivots take the startup in a direction the founder never expected. As the creator of a blog commenting system explained to CB Insights, “We didn’t really care about journalism, and weren’t even avid news readers.” This light-bulb moment occurred only after the product was launched, leaving the team to run a new business they had no interest in.
Issues like these are present in nine percent of failures, per the postmortems.
The bottom line: Pace yourself and be ready to move in new directions or bring on people who are passionate about what you do if it shifts.
6) Poor Management Team
Nearly a quarter of startups fail because they don’t have the right team, while 13 percent fail because of disharmony among the team and/ or investors, per CB Insights research. All too often, this comes down to the management—people placed in managerial roles who may not have the skills and experience to manage teams but do so because startup culture requires team members to wear many hats. Unfortunately, bad management spreads poor morale and damaging practices, which can infect the entire company.
The bottom line: Ensure your managers have the skills and experience necessary to lead a team. Invest in training if you’re promoting from within or bring on external help if your existing team is unprepared for the role.
7) Not Placing Enough Emphasis on Customers
Ignoring your customers and what they have to say is a huge contributor to startup failure. User feedback is a vital part of the startup journey and should be prioritized throughout your business journey. Whether the feedback you receive is good or bad, you should always take it seriously. Good feedback tells you what you should keep doing within your business, and bad feedback gives you insight into what needs to change within your business. By keeping an eye on what attracts customers to your business and what deters them, and adjusting your business strategy accordingly, you can improve your potential client base and create a network of loyal, repeat customers.
The importance of customers is not just about retaining and attracting new clients. Another common reason for startup failure is that business owners assume that, because they build an interesting website and have a good product or service, customers will come flocking. They forget to take into consideration the trust cost of acquiring the customer (CAC). Contrary to what many people assume, the cost of customer acquisition is actually higher than the lifetime value of that customer (LTV). You need to figure out a realistic CAC and then determine an actionable strategy to ensure that you acquire your customers for less money than they will generate.
8) Running Out of Cash
Close to one-third of businesses run out of cash, CB Insights analysts say. Some of this boils down to not having enough cash to begin with or failing to recognize the high costs of business development, but other times, it’s simply mismanagement of cash or struggling with cash flow issues, like slow-paying customers.
The bottom line: Secure the funding you need in advance and have a backup plan to bridge the gap in case cash issues emerge.
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