This article will tell you why startups fail and how to avoid making the same mistakes.
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There is a lot of hype around startups these days. From Uber to Twitter to Airbnb, startup success stories inspire a new generation of entrepreneurs. What we don’t hear often, however, are the stories of startup failure. According to Fortune, 90% of startups fail. Here we will outline the main reasons why startups fail and provide some case studies that draw on an extensive study by CB Insights. If you want to build a successful start, make sure you avoid these mistakes.
1. Lack of market demand
According to CB Insights, the main reason startups failed was the lack of demand for the startup’s product. Of 101 startups analyzed by CB Insights, 42% cited “no market need” as the reason for failure. Certainly the product can be well made and some customers may look for it. However, if there isn’t enough demand, it limits the extent to which the startup can grow and meet investor expectations.
Case study: patient communicator
An example of a failure to measure market demand is Patient Communicator. This was a startup for a product that gave patients access to their doctors through an online portal. Although the startup was supported by Blueprint Health, a well-known health technology incubator, it was unable to raise money from investors to expand production. This was because there was a lack of demand for the product in the healthcare sector. Doctors weren’t really interested in a high-tech, efficient office. What they wanted were more patients, which this technology didn’t necessarily guarantee. In addition, doctors generally stuck to the traditional way of running their office and were generally resistant to the introduction of new technology. Despite numerous meetings with stakeholders and money for marketing, the startup was unable to attract enough interested parties. Ultimately, the startup decided not to continue producing and closed the business.
Moral of the story: Study your market and carefully consider whether there is sufficient demand for your product.
2. Bad team composition
23 percent of the startups named “Not the right team” as the reason for their failure in the CB Insights study. A team without the right balance between skills and experience can lead to poor leadership and bad decisions. With many first-time entrepreneurs creating startups, it can be especially difficult to put together the right team.
Case Study: Zirtual
A major example of this failure to form the right team is Zirtual. CEO Maren Donovan was founded in 2011 and raised $ 5.5 million through heavyweight investors like Tony Hsieh and the Mayfield Fund for his virtual support business for professionals. Within 4 years the company grew exponentially with 500 employees and a run rate of 11 million US dollars. However, all of this crashed due to fundamental shortcomings in the composition of the management team.
For one, Zirtual did not have a full-time CFO on its board. You have outsourced the CFO to another company. Second, it only had two people on the board. These factors led to short-sightedness in the decision-making ability of directors and misunderstandings between the board of directors and the outsourced CFO. Ultimately, errors in the burn rate projections were discovered, meaning the company was spending more money than it was making. This resulted in the company laying off 400 employees and being taken over by Startups.co under a different CEO.
Moral of the story: Make sure your startup has a diverse team made up of people with significant experience and expertise.
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Nineteen percent of startups gave the reason for their failure to be outperformed by other companies in their market. This can be due to the fact that startups do not take away customers from similar companies and upgrade products that are already on the market.
Case study: sidecar
Sidecar is an example of a startup that couldn’t outperform its competitors. While it was the first startup in the ride-sharing market, Uber and Lyft soon overtook it. Failure to beat its competitors was due to poor business strategy. First, Sidecar was unable to raise as much capital ($ 35 million) as its competitors Uber ($ 6.61 billion) and Lyft ($ 1.26 billion). Second, the widespread adoption and use of carpooling depends on both drivers and members of the public knowing and downloading the app. Uber realized this and spent nearly $ 1 million on aggressive marketing in the first six months. Sidecar didn’t put that much emphasis on marketing. It also had little to offer to customers who were different from Uber. The sidecar was increasingly sidelined as Uber took off and dominated the market. Ultimately, funding for Sidecar dried up and General Motors acquired it.
Moral of the story: Have a strong business strategy to outperform and differentiate yourself from your competitors
4. No more money
For a combination of the above and other reasons, many startups fail because they simply run out of money. 29 percent of the startups cited this as the reason for their failure in the CB Insights study. Lack of demand for the product or failure to beat its competitors can result in a lack of funds to continue doing business and difficulties in attracting additional rounds of funding. There are other factors that should also be considered.
Failure to control spending
Startups may run out of funds if they don’t strategically control and manage their spending. As entrepreneur and venture capitalist David Skok notes, one serious mistake startups make is not to hit milestones before they run out of money.
For example, after raising capital through first-round investments, founders can become too eager to grow quickly. They may then hire a large number of employees or pursue risky ventures because they think they have enough money to do it. However, this is problematic if it is done before the product has been adequately tested in the market to measure viability and demand and to solve any technical or design problem. As a result, rapidly growing the company can consume too much money before profit is guaranteed. This can then make it harder for startups to attract further investment, resulting in the company running out of money.
As a result, spending could be capped initially while the product is thoroughly tested and its scalability is demonstrated. After that, startups can win a second round of investment and spend more money growing their business.
The CAC LTV balance
As David Skok also notes, companies may run out of money if the cost of acquiring a customer (CAC) is higher than a customer’s lifetime value (LTV). For example, a lot of money may be spent on marketing to get a new customer. However, the customer can only be a one-time customer by purchasing your product once. In this case, the CAC is higher than the LTV. If such numbers are not projected, the business can run out of money.
Case study: WOW air
An example of this failure to strategically spend money is WOW Air. This was a low-cost Icelandic airline founded in 2011 by Skuli Mogensen. As economics professor Kerry Tan put it, the startup’s problem was that they were “trying to grow a little too fast.” WOW Air had around 10 planes flying to 30 destinations in the US and Europe, which already required a small fleet of planes. The airline then decided to add 15 destinations to Asia and purchased high-priced wide-body aircraft to serve those routes. When it failed to make a profit due to intense competition in the low-cost airline market and high oil prices, it gave back the planes and went into massive debt. The airline was unable to make any further investments to keep them afloat. In 2019, WOW Air went bankrupt.
Moral of the story: Don’t go beyond yourself and expand the business too quickly. Make sure you have entered all the numbers and strategically expanded them.
Despite the success stories, startups are a tricky business. Make sure you understand these main reasons why startups fail and heed the warning messages. If you take the right steps, your startup can well prosper. You can start by establishing the legal bases of your startup.