Why startups fail and how to stay away from those reasons

India is currently home to 24 unicorns with 28 more are set to join the club. These are inspiring numbers for all entrepreneurs in the ecosystem looking to disrupt the market.

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However, on the other side of the spectrum, estimates constantly show that eight out of 10 startups fail every year. And an increasing number of businesses are struggling to keep their shop open for at least half a decade.

Statistically speaking, you are more likely to fail than become a unicorn – a fact that can dampen the enthusiasm surrounding your brand.

Then again, entrepreneurs are well-aware that failure is an essential part of the entire process. One should be open to learning from failures, and close loopholes so that one always stay on the positive side of the fence.

Watch the Prime Knowledge series with Rajesh Sawhney by Prime Ventures, an early-stage VC fund investing in technology and product-focussed businesses.

Out of the many reasons why startups fail, these are the two major ones. Keeping legal and management issues aside, a startup will surely fail if it:

Does not have product-market fit before scaling

An obvious reason on the surface, but one that most early-stage entrepreneurs seem to be struggling with in the process of seeing their businesses grow. Product-market fit only happens if a product is seamlessly accepted by a strong market and if customers are trying 10X harder to find a brand and buy its product.

It is easy to confuse a momentary spike of growth with a successful product-market fit. Entrepreneurs tend to read into the wrong parameters while judging their product-market fit and end up scaling their business even when the market is not there.

Scaling is necessary by all counts. You will want to keep your investors happy. You will want your books to show that your business is growing. But scaling without customers is suicidal as you may very well end up with over-investment and bad debts. So, have patience to achieve product-market fit first.

Test and retest parameters to ensure that you are not exaggerating your results. Only when you see that your customer base is considerably strong, is likely to grow, and all of them are willing to pour in 10X effort to find you, that is your time to consider scaling.

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Does not time the product right for the market

In 2012, an Indian startup tried to build the Unified Payment Interface or UPI. It folded in a matter of months as no one was willing to directly transfer money online from their banks at the time.

Fast forward to 2019, that same market consisting of those same people transferred over Rs 1.15 billion in October alone, and almost all online payment applications access UPI for fund transfers today.

The 2012 startup did not have the wrong idea in any way. The management also had brilliant minds in the house to foresee the technology and its potential. Timing is the only thing that did not fall into place for them and they failed.

Take Paytm as another example. Although it opened its business back in 2010, the company aggressively marketed its services during the demonetisation phase of 2017. Timing-wise Paytm kept itself afloat for almost seven years and marketed right to become a unicorn. In short, startups fail if they are five steps ahead of the market.

Even if every other parameter is right, you will not find success if your product does not have the market. So, time your ideas and avoid jumping the gun and launching products that the market does not want yet.

Failures can humble you. Studying failures can help check your overflowing positive emotions. Missing product-market fit and wrong timing are critical reasons why most startups fail and these are areas that entrepreneurs should research minutely before launching a brand.

Of course, there are other reasons why startups shut doors but most of them are predictable and controllable if you have the right experience in the team and the heart to see them through. Timing is intuitive. And your customers decide your product-market fit.

Naturally, these two are the trickiest of the lot and that much difficult to tame and manage.

(Edited by Saheli Sen Gupta)