Reasons for Startup Failure and How to Avoid it
9 Min Read
Startups and tech companies are no longer just Silicon Valley things.
With new ideas and innovations blooming in every corner, startups have become synonymous with something out of the ordinary and unique.
And, isn’t that something all of us want to achieve? Something that has never been done before? Something that brings about a revolution of sorts in the industry?
Then again there is a popular statistic that 90% of new startups fail.
And of course, setting up a business, startup or not isn’t for the fainthearted. It takes loads of planning, strategizing, and constant analysis of how well your business is doing.
Moreover, it is hardly easy on the financial side too.
But before you give up on your long-cherished startup dream due to the dreadful statistics and data, we’d like to tell you there’s always a way around it.
With a deep dive into the statistics, the reasons why startups fail, and how you can avoid that as a startup, we’ll try to get you to the coveted 10% percent through this article.
How Many Startups Fail: Startup Failure Rates
Here’s what the startup spectrum looks like according to data and statistics:
- 75% of venture-backed startups don’t succeed.
- Less than 50% of the businesses stay in operation until their fifth year.
- 33% of the startups reach the 10-year mark.
- Cash flow problems are the major reason for startup failure. (Almost 82% of the startups that fail, do so because of cash flow problems.)
- The information industry has a failure rate of 63%.
Although the statistics are usually alarming, it’s always a good practice to have a look. It makes you aware of the market condition and prepares you to take the biggest challenges head-on. Moreover, a closer look also helps you understand what these numbers mean for your business. Here are a few more specific statistics on startups:
- As we’ve discussed earlier, 90% of new startups fail
- Out of which 20% fail in the first year itself.
- 34% fail in the first two years.
- And only 20% make it to the 15-year mark.
- Only 40% of the startups become profitable
- Most startups operate at a loss.
- Startups with a cofounder are 3 times more likely to succeed.
- The major hurdle for most startups is cash flow problems.
- Startup failure rates are mostly the same across different industries as the reasons for startup failures are the same across industries the rate of startup failure across industries is similar as well.
Reasons Why Startups Fail
From the wrong product-market fit to the lack of strong leadership there are several reasons for a startup’s failure, and yes the wrong time and place can be a factor too. And although you can’t control all the factors, there are a lot of aspects that you can pay attention to and prevent from becoming a reason for your startup’s failure.
Lack of Funds
As a new business that is continuously growing and expanding, lack of funds is a common problem. Be it for setting up inventory, building your team, or buying equipment, you’d need finances, and that too at the right time. One possible solution is to seek funding from a reliable source as you begin and keep a check on your cash flow, profits, and other related financial concerns.
Also, planning your finances in advance and having approximate projections of cash flow, profits, and balance sheets can help you avoid financial hassles.
Sometimes it isn’t your business, but your target market. This means: you have a good product/ service at hand but are targeting the wrong audience. In fact, according to statistics 42% of the startups that fail, do so because of the wrong product-market fit.
Hence, it is essential to do thorough market research, carry out surveys and focus groups, analyze what you find, and keep a constant check on your market’s responses. This helps you understand if you are working with the right market and in the right direction or not.
Lack of Research
From ending up in the wrong market, designing a product no one needs to overspend, or underspending on various resources, lack of research is a root cause of several problems that businesses face.
By doing your research you’ll know what you are getting yourself into, and be better prepared for challenges you might come across.
A bad partnership can be anything from a lack of equal contribution and collaboration to frequent disagreements and a lack of consensus. These things often go unnoticed and are a very common reason for startup failures.
Hence, it is essential for you to ensure that you have partners who not only have complementary skills but can also think on the same wavelength as you and can have constructive debates over various subjects instead of arguments.
Many successful businesses around the world thrive on their larger-than-life marketing strategies. So, we can safely assume that marketing strategies are an integral part of any successful startup or business.
But what could go wrong? From targeting the wrong audience, and giving out a vague or unclear message to being all over the place, several things can go wrong due to a bad marketing strategy. Hence, it is essential to pay attention to the finer details and devise a proper marketing strategy.
Lack of Expertise
Although many of us learn along the way to starting and growing our business, having a certain level of expertise is necessary to enter and make a place for yourself in any industry. Hence, you should ensure that you learn whatever you can before you get into an industry.
How to Avoid Failing
Now as we’ve discussed various reasons for startup failure, you might wonder how you can avoid failing. Although there’s not just a single right way to run a startup, there are several methods and steps that you can follow to increase your chances of success.
Some of these are as follows:
Set Realistic Goals
The first step toward having a thriving startup is to set a clear and realistic goal. Having a goal gives you a direction to work in and prevents your efforts from running astray. It also motivates you and gives you a solid reason to work for.
Thus, the first step is to have a clear and realistic goal.
Do your Research
Now as you’ve set a goal, it’s time to do your research and find out where your business would fit into the industry, is your product needed, does it have a sizable market, does this industry have good growth potential, and what are the challenges people face in the industry.
This helps you do more productive work and stay prepared for both challenges and opportunities.
Plan your Business
One of the best ways to secure loopholes in your business idea, do your research right, and formulate good strategies is to have a business plan. A business plan gives a framework for your business and helps you navigate through your business journey smoothly.
Hence, it is always a good practice to get your ideas and research about the various aspects of your business on paper before getting started.
Analyze the Risks ( And Be Prepared)
Risks are an inseparable part of doing anything new and the same holds for a startup. But that doesn’t mean that these risks would necessarily have a bad impact on your business.
If you analyze common risks associated with the industry and prepare for them well in advance you can easily avoid them or even turn them in your favor. Research can come in handy for you in this aspect as well.
Follow your passion, This is perhaps the most overused advice. But what we want to say is that trying to find your ultimate passion and wasting away your life behind it is in no way ideal, you need to pursue your startup idea with an unrelenting passion to do better and to know more about the industry.
This will not only reduce your chances of failure but also make the process of doing business better. Passion also helps you stay motivated during downsides and problems in your startup journey.
Don’t Give Up
Finally, the most important thing for business success is not to give up when you face obstacles and tough times and to work harder to overcome slumps instead of feeling demotivated.
Future of Startups
Although you might not really know what the future holds for your business, there are a few trends that you should watch out for, and possibly include in your business if you can:
- Startups are growing outside of Silicon Valley, and the majority of them would be out of it in the future.
- Subscription-based services and products are expected to grow at a high rate in the coming years.
- Personalized marketing and a customer-centric model are one of the most futuristic things you can do with a business.
- More startup entrepreneurs would be recent college graduates.
- Technology would be heavily used for bookkeeping and financial records.
- Partnerships and collaborations among businesses are expected to increase.
Overall, the future of startups is exciting and full of potential if you go about it the right way.
Above all, it is important to know the statistics, and the risks involved and to plan and strategize before you go ahead and start your business, but it is also equally important to execute your idea with precision and have faith in what you want to and can achieve.
At the end of the day, you must also keep in mind that even if the majority of startups fail, there’s still a huge chunk that succeeds and brings about innovation in the industry they are in.
So, what are you waiting for? Do your research, plan your business, and execute it with confidence.
In the meanwhile, remember that someone somewhere is rooting for your success!