Why do startups fail?
According to Statisticbrain, more than 50% of start-ups fail to reach their third year. Why is that such a common occurance? Why are startups unable to survive?
A research done by CBinsights found the top 20 reasons for their failure:
But these are not the only reasons. In fact, there are many other reasons why a start-up would fail. These reasons can be categorised broadly into seven categories.
An idea developed by an entrepreneur should have the capability of translating into a product or service that can be used by consumers. There has to be a need for this product in the market. The majority of start-ups fail when their idea is capable of solving a problem that consumers do not have..
Oftentimes, the idea would have already been translated into a product by competitors but start-ups failed to recognize that customers don’t need yet another company providing a similar product or service.
For example, Tulungin that provided a platform for service providers had to close last year as competitors such as Carijasa, Sejasa and Seekmi were present in market with similar business. Due to the presence of several competitors it couldn’t go beyond hundred of downloads.
Along similar lines, Lamido, an ecommerce marketplace headquartered in Singapore had to shut down due to strong local competitors.
This occurs when start-ups fail to raise adequate funds, or run out of cash despite raising adequate funds, or fail to keep track of their numbers. Allocation of funds has to be done judiciously. Most start-ups are able to raise funds initially but fail to use it carefully or fail to achieve a key milestone that allows them to go for their next round of funding.
Snapee a start-up from Japan had to shut down in May 2016 despite raising US$4 million. The reason for their closure was their inability to raise adequate additional capital for growth.
Improper marketing and the inability to appeal to their customers is another reason. It is important for a start-up to know their target audience, grab their attention towards your product and turn them in customers.
Rdio was founded by Niklas & Janus, the same people who founded Skype. The company shut down in its fifth year due to poor marketing.
Lack of mentors, disharmony among co- founders, lack of passion, not enough domain expertise, too much optimistism about their business are various reasons for which a leadership fails a start-up.
Alikolo, an e-commerce platform based in Indonesia, had to shut down due to lack of expertise of the founder Danny Taniwan. He also did the mistake of handing over majority stake to an angel investor who too lacked experience in the industry.
Lack of planning
Not having a proper business plan, not having an alternative Plan B, an entrepreneurial vacuum can also lead to the failure of a start-up
For example, Partyphile a nightlife app in Philippines had pivoted well from guestlisting app to ticket sales, but the entrepreneurial vacuum created by death of co-founder couldn’t be filled and they had to shut down.
Poor Human Resource management
It is important for a start-up to hire a right team for the business. As resources are limited, so start-ups tend to avoid hiring a diverse team having different skill sets but this can be a reason for failure. The core team of a startup should have the expertise to build the product themselves.
Zenefits had a business of providing HR solutions to Start-ups. It was valued at its peak at $4.5 million. However, Parker Conard the founder made the mistake of overlooking few important positions within its own company such as IT workers, Office manager & a receptionist.
Improper Operations Management
Start-ups sometimes encounter a failed business model failure, a business pivot going wrong, legal challenges, or a poor allocation of resources. These fall under improper operations management.
Shotpitch a start-up in India was a mobile app that enabled an entrepreneur to send his pitch to an investor at a click of a button. The company had to shut down as the Securities and Exchange Board of India issued a notice on August 30, wherein it cautioned investors that such platforms might violate the laws on private placement of equity by operating like stock exchanges.
This reason is one of the most important reasons for a business to fail. Many start-ups are formed with great idea turned into a product or service but they fail to retain customers.
Ignoring any feedback from customers, having bad customer service, lacking professionalism, not training their sale representatives sufficiently are the main reason behind having a poor retention rate.
Homejoy founded in 2010 had a novel idea of connecting people who wish to get their homes cleaned with house cleaners. It received regular funds from investors and at its peak it was servicing 31 cities in US, UK & Canada. But it was later shuttered over legal issues and poor customer retention.
For a start-up to succeed it has to continuously strive towards making their business a success by paying attention to details and ensuring no stone remains unturned. As Scott Belsky an American entrepreneur, author and early-stage investor said “It’s not about ideas, its about making ideas happen”