Startup failure: why do startups fail and how to avoid it

Every year startups fail, even with VC backing and support. But with each of these failures, we learn something. Most important is to test your idea before you start up. Often aspiring entrepreneurs are so in love with their idea that they fail to look at it from a 360-degree perspective and skip the tough questions they should be asking themselves.

There are multiple reasons why startups find themselves in the Valley of Death. A CB Insight report did a post-mortem on 101 startups and found out the reasons for the failure of startups.

If you feel that these reasons touch a chord then you know you are treading on a thin line and it’s time for you to take action to ensure that your labour of love sees the light at the end of the tunnel. Here are some reasons that drive startups to fail:

There is no market need

The report found out that almost 42 percent cases failed because they were solving an interesting problem, but not one which plagued the market. They didn’t resolve an important problem the market was facing. With Uber and ridesharing, commuting has become easy; Amazon changed the e-commerce game. Hence, it is important for startups to understand what the market needs, and if they are really resolving that problem. However wonderful the idea might be, if it does not address a real pain point in the right manner, it is doomed to fail.

Run out of cash

This is the second most important reason why startups fail. Almost 29 percent startups claimed that they failed due to fund crunch. This could be because of multiple reasons – the startup failed to raise funding, and/or the initial investment that was supposed to last didn’t due to poor planning of resources at one’s disposal, or poor allocation of resources based on the startup’s requirement.

“I was blindly consumed by the big picture of how successful my tech company (Sharingear) would become, and made all the classic leap-of-faith mistakes first-time entrepreneurs make. Today we parked my beloved startup in the graveyard of bad ideas. Six months ago, we simply crashed and burned due to a number of incidents and aspects…” wrote Mircea Gabriel Eftemie in a post on Medium in 2015. The reasons he cited were “crash and burn”. The company burnt out cash, and was also not able to find the right market, crashing out.

The team is not right

A good team can make or break a startup. Almost 23 percent startups claimed that they failed because of the team. In an interview, David Beaton, the Founder of Sharkius Games, a London-based company, shared that one of the reasons he had to shut down was because of the lack of a good team. “Running a team has so much more complexities than a single-person project. I made mistakes in people management, hiring too fast, firing too slow. I made mistakes in project management, and on and on! The inexperience showed at many levels. I was young and over-confident to the extent I was no longer on Planet Earth. Success had launched me far into space when I needed to keep my feet firmly on the ground.”

Get outcompeted

If a startup does not know its competition and what they are up against, then they will eventually find themselves in hot water. 19 percent of startups told CB Insights that not taking competition seriously led to their demise.

Cost issues

The CB Insights report says that, “Pricing is a dark art when it comes to startup success, and startup postmortems highlight the difficulty in pricing a product high enough to eventually cover costs but low enough to bring in customers.” 18 percent of surveyed startups claimed pricing and cost issues as the reason for their failure.

Product is not user-friendly

You build a product and realise that it’s not something the user enjoys or wants to use. That’s the death knell for your startup. In his book Alibaba’s World, author Porter Erisman – the former VP of Alibaba – talks about the ‘Jack Ma dummy test’. Any new tech product at Alibaba is first run by Jack Ma, and if he can’t (because of his non-tech background) understand it, then it’s a given that no one else will, especially people with no tech background.

That’s how you test your product. If it’s not easy for the user to understand, grasp, or use, then it is not going to be bought or used. Almost 17 percent of startups shared that this was one of the main causes for failure.

Product without a business model

A popular Israeli app launcher, EverythingMe, had to close down. Though the company raised funds and had 15 million downloads, it could not settle on a working business model, and that’s where it failed. Startups that failed because of the lack of a business model constituted almost 17 percent, out of the 101 startups whose postmortem was done.

Poor marketing

Money does not convert into good marketing. There are a lot of factors involved in good marketing, including good understanding of the market and how the product caters to the market. Knowing who your target audience is is another important factor. 14 percent of startups stated this as a cause of failure.

Ignore customers

The customer is the centre of the startup universe and 14 percent startups claimed ignoring this inescapable fact was the cause of failure. VoterTide told CB Insights, “We didn’t spend enough time talking with customers and were rolling out features that I thought were great, but we didn’t gather enough input from clients. We didn’t realize it until it was too late. It’s easy to get tricked into thinking your thing is cool. You have to pay attention to your customers and adapt to their needs.”

Customer and product are the two things a startup must focus on. The minute you turn your focus from these, things begin to change.

Product mistimed

Timing is everything. “You could do everything perfectly. You could have a few paying customers to validate your work. But if the market is not ready, it doesn’t matter. PoliMobile was ahead of the curve. We launched when mobile was in heavy use with consumers. Some enterprising campaigns had great success with mobile tools like we offer. Most campaigns today are still not ready for what we offered in 2011,” writes Curt Prins, who started PoliMobile to provide marketing tools for political campaigns.

Disharmony among team and investors

Another important reason for startup failure is losing focus, and this could happen due to a number of reasons, from losing focus on the primary goal to branching out into multiple things so that you lose sight of the main goal.

Some of the other reasons that are on the list include a pivot gone bad. Startups often pivot to capture new markets and/or diversify, but the pivot does not always work out, and almost 10 percent claim this was the reason for their failure. Then there is the lack of passion, which also counts for startup failure, and 9 percent of startups attribute their failure to it.

9 percent of the startups also claimed that expansion to new markets or new geographical areas didn’t materialize and ended up in startup failure.

According to the report, the other reasons that lead to the failure of a startup are lack of investor interest, legal challenges, and burn out.