Establishing a successful startup is all-consuming, both in terms of time and money. Entrepreneurs take a huge risk by going down this road of uncertainty, hoping everything will work out in the end.
A startup involves a product that they think will create waves, and yet even after all that effort, the product might never see the light of day or might be a flop, leading to failure of the startup.
Now the question is, why do startups really fail? Here are five reasons why it happens.
1. Run Out of Cash
Running out of funds or not having enough funds to begin with is one of the main reasons why startups struggle to survive and fail. But why do they run out of money in the first place? Startups are first and foremost a business; their objective is to earn a profit.
But unlike most companies, startups are relatively new to the market, and as a result, they can usually fall into money pitfalls when they are first established. There two pitfalls they fall into, and we’re going to take a look at them.
They underestimate the costs
One of the reasons why startups run out of money is that they don’t budget their costs properly. A budget gives the company a guideline on how to manage funds properly.
According to a PR Newswire article in 2011, they surveyed small businesses and found out that 32% of them underestimated their costs. Simply put, due to the lack of experience, it often is the case that they don’t know how to estimate the costs correctly. Doing adequate market research about various expenses and hiring a good accountant or financial planner will go a long way in keeping the startup alive.
Adequate funding but reckless spending
A startup may have a compelling business model to acquire adequate funding. But seeing the amount of money they receive, they tend to recklessly spend it on things like paying top executives big salaries. They should use the money to fund the business, not to line their pockets.
2. Bad Product Market Fit
Another big reason why startups fail is that the product doesn’t blend well with the market. Now it’s understandable that the company is new and is still trying to find out the needs of the market. The product could be a revolution in concept, but the timing is not right for its potential customers.
If the product isn’t user-unfriendly, you’ll need to work out the kinks through several models to make it work. This will not work if the company doesn’t put in the effort to learn what the user wants or ends up developing a product that the users don’t need.
Understanding what the market needs and listening to feedback will make sure that the company doesn’t come to an early demise.
3. Market Problems
Another reason why startups are bound to fail is when the product doesn’t have a market. No matter how great the product is in the creator’s mind, if there is no one buy it, it’s not going to last.
According to CBInsights, they analyzed 101 failed startups, and it shows that over 40% failed due to having virtually no market for the product.
Let’s say, for example, that a new startup company is trying to sell toilet paper. Now here lies the problem, the place they’re targeting uses exclusively bidets or faucets.
Is it possible that a toilet paper company would succeed in the market? Apart from a niche group of individuals, there is no way that this company will do well in this market. When looking at a market, the startup must do research on the market that they’re trying to sell in. Otherwise, the startup will fail.
4. Uncooperative Management Team
Hiring a bad management team is another one of the big reasons why startups fail. A company requires people to co-ordinate and work together towards achieving the goals, and a good management team will help the company go in the right direction.
But bad management teams are not only poor at their jobs, but they also drag the company down with them. They are damaging for the following reasons:
Not Good at Communication
A bad management team lacks communication skills. Communication is required in telling people what to do and how to do it. Bad management causes people to underperform to their potential or do things they’re not supposed to do, leading to numerous problems.
Not Having a Vision or Strategy
A good management team requires strategy on how the company should operate. Not having a vision or strategy is not a good sign. That will lead to a waste of resources, ill-advised decision making, and poor performance in the company. Strategizing about the needs of the market and building products around it is the characteristics of a good team, not a bad one.
Cannot Build Rapport with the Employees
There is no way around it bad management teams cannot build rapport with people in the company. Having good rapport makes people more receptive and motivated to perform well, important for a startup to survive. Bad teams often take deceptive tactics when dealing with employees and are not open to criticism.
5. Better Funded Competitors
The final reason why startups fail is that the startup has competitors with better funding. This happens especially when a startup wants to sell a product that already exists in the market. For example, a startup wants to offer encrypted and affordable cloud storage services.
The problem is that companies like Amazon dominate the cloud service market, and they’re one of the richest companies in the world. The point here is that for situations like these, you need to procure more funding and provide a product that has a better value proposition than the competitors. Sadly, well-funded companies are in a position to eat losses to gain market shares, leaving startups to struggle and fail.