Why do so many startups fail?
Updated 7th February 2019
The recent decline of Blippar, the AI startup that once claimed an eye-watering valuation of $1.5 billion, is a high-profile reminder of how precarious starting a business can be.
We only tend to hear about entrepreneurial success stories, as they’re the ones that usually hit the headlines. But in fact, an astonishing 90% of startups fail within their first couple of years. That’s a lot of hard work, big dreams and investment cash down the drain.
Every business story is different of course, but there are some all-too-common reasons why startups hit the bucket. And if you’re in the process of starting your own new venture, it’s worth getting acquainted with them… so you can try your darndest to avoid the same fate.
- Inexperience: OK, most of us are inexperienced when we start out. And we all make mistakes while we’re finding our feet. That’s only human and something that founders have to get used to. However, there are ways and means of ensuring that those mistakes don’t cost you your business. Investing time in research, for example, will save you from blowing your budget on the wrong inventory, or from operating without the right licence. Even better is to seek advice from those who’ve been there and done it before. Many of the most successful startups work with mentors and regularly seek advice from others within their industry. Consider building an advisor network to help you avoid the perils of inexperience.
- Misdirected focus: Any new business owner understandably wants to spend time working on their business model. But here’s the thing: first and foremost, every business needs a market. It doesn’t matter how much work you’ve put into your team, your investors, your marketing and everything else, your business is going nowhere if people don’t want to buy your product. And according to CBInsights, 42% of startups fail for this reason; they simply didn’t register that their product was not offering any value to their potential customers. So, while it’s important to have confidence in your vision, always temper this with a realistic idea of what people actually need.
- Running out of money: This is the bottom-line reason behind most startup failures. It usually happens as a result of the other reasons mentioned here, but poor budgeting and a failure to get investment also commonly play a part. So, don’t spend more than you have, always think about what funding you need way in advance, and do make sure that you can sell your product!
- Internal conflict: According to early-stage VC, Concentric, 62% of startup failures are due to conflict within the founding team. Launching a startup is inherently stressful, and the pressure can cause fatal fractures, particularly if the team doesn’t have the right blend of skills and traits needed to work together effectively. Concentric’s research found that a strong startup requires a well-tempered mix of seven key characteristics: resilience, motivation, persuasiveness, vision, humility, curiosity and the ability to manage stakeholders honestly. Of course, it would be unusual for any one person to have all of these qualities, which is why co-founders and founding teams are usually a safer bet than single founders. Get the personalities and the dynamics right, and your team will have a much greater chance of success.
- Personal issues: Founder burnout is, sadly, very common. It takes a particular kind of person to be a CEO, requiring an unusual blend of vision, resilience, creativity and pragmatism - not to mention the ability to graft like a workhorse for years on end. It’s not for everyone and founders need to take care of themselves. So, if you’re feeling the pressure, but remain dedicated to your business, be sure to prioritise your mental health and well-being. Your startup can’t thrive if you’re not thriving.
- Fear of failure: In an age when internet reviews can make or break you, any business fears negative criticism. But negative criticism is actually the most helpful criticism you can have. If you’re shying away from people pointing out the flaws in your business model, nothing will ever improve, and you could end up floating a seriously problematic product on the market. Similarly, taking every failure as a death knell denies you the opportunity to find innovative solutions. Successful startups are built on multiple failures – and the lessons learned along the way.
- Scaling too early: We get it, you want to grow. You want to play in the big leagues. And, if you can access the capital to expand, why shouldn’t you? Well, crashing out of the starting gates too soon can be deadly for fledgling ventures. According to the Startup Genome Project, 70% of startups scale too early, and it rarely ends well. Trying to compete against more experienced brands before you’ve learned enough about your product, your customers, and how you work best, is a bad idea. Giving yourself time to learn and develop is crucial to your success, so don’t be in too much of a hurry to move on from those early stages.
At the end of the day, there are three really important things your startup should be focusing on:
Of course, your bank balance comes in at a close fourth. But if you’re focused and driven enough about the top three, that should – should – take care of itself.
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