Why Do Startups Fail?
Most entrepreneurs believe their business will be the next big thing, but the truth is that more than 90% of startups don’t go past the startup period.
In today’s post, we will examine the major reasons why most startups fail.
Let’s delve in.
Market Problems
Lack of enough market is one of the major reasons why startups fail. Some of the symptoms that go with this problem include:
A Less Than Appealing Value Proposition, Or Event to Make the Buyer Want to Purchase the Product.
Good sales representatives know that for you to get a buyer during these tough times, you have to find people who are in desperately painful situations or those with their hair on fire.
Poorly Timed Marketing
Your startup might be solving a problem that people are not interested in a solution to, at least not for now. Unless your business has enough funding to keep it going through the early years, it will not make it past the startup stage.
Your Market Is Not Large Enough
You might have found a market that is looking for solutions to their pains but it too small to help your business move forward.
Financial Constraints
Running out of cash is another reason why startups fail. The CEO has the duty to find out how much money his/her company has left and determine whether or not it is enough to carry the company to a cash flow positive or the next potentially successful milestone.
What causes a problem is the managing team failing to realize the next milestone before the company runs out of funds. Although it might still be a chance to raise some cash, the valuation will be way lower.
A CEO should be well versed with controlling the accelerator pedal. They should be able to set the pedal lightly so as to conserve cash in the early stages of the business. This is because during this stage, the product has not yet been fully developed, the business model is also not yet refined.
Startups should not spend money on many sales representatives before the business product is refined to the point of meeting a need in the market. This mistake is very common and it often results in frustrations and burns.
Conversely, when the business model is refined and proven, it’s time to press the accelerator pedal as hard as the business capital resources allow.
A refined business model is one for which there is conclusive data to show that you can maintain the customer acquisition cost and that these customers can be monetized at a rate that is considerably higher than the cost of acquiring customers. A refined business model should also show that the customer acquisition cost can be recovered in a period of one year.
First time CEO’s can find it tough to make a decision when they get to this point. Since the business started, they have been guarding every penny of the company’s finances and avoiding spending. Now, they suddenly need to switch to aggressive marketing ahead of revenue. This move can be quite counterintuitive.
Product Problems
Another reason why startups fail to achieve any success is that they offer products that do not meet the market need. This can be caused by execution problems or strategic problems which involve failure to achieve a product/market fit.
Most of the time, a startups new product will not meet the market need. In best case scenarios, it will undergo several revisions before they can fit perfectly into the market. In some situations, however, the product is so off base that a complete re-think is required. This happen a lot when the team did not validate their ideas with their intended customers before and during the development.
Poor Management Team
A weak management team is a common problem that leads to startup failure. With a proper management team, problems such as business model failure, running out of cash and launching a product that does not fit in the market can be avoided.
A weak management team will make mistakes in several areas:
- They have weak strategies, they fail to validate ideas before and during the product development period therefore coming up with products that are not needed in the market.
- They are poor at execution. Their products are not built correctly and on time. Their go to market plan is also likely to be poorly implemented.
- A poor managerial team will build weaker teams below them. A great management team will hire great team members. A poor one will only hire team members who are way worse than them. The company will therefore continue to be weak, and poor execution will become an everyday activity.
Business Model Failure
Another common reason why startups fail is that businesses owners are too optimistic about how easily they will acquire customers. They seem to be under the impre4ssion that all it takes is an interesting website, product or service and customers will be attracted to them like bees to flowers. While this might be possible with the first few customers, it will prove to be an expensive task as time goes by. In most cases, the cost of accruing a customer I usually higher than their lifetime value.
It is obvious that you have to find a way to acquire customers for less money than the total they will generate in your business throughout their relationship with your business. It is therefore surprising that many entrepreneurs still don’t pay a lot of attention to figuring out a realistic CAC.
Most entrepreneurs only realize that their business model may not work after someone like a venture capitalist helps them see that that their cost of customer acquisition will be way higher than the od long term value of the customer.
Final Word
A great management ream is among the important requirements for business success. other factors that greatly affect your chances of success include your business model, product-market fit, cost of acquiring vs the lifetime value of your customers.
With a great management team, you can successfully prevent and overcome these problems and launch a successful business.
What is your take on startup failure? Share with us in the comments section below.
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Your Personal Branding Coach
Hannah Muchuki Githuki
Insideout Development ltd
