Top 12 Reasons Why Startups Fail And How To Avoid Them

Starting up is hard, and the fact that 90% of them fail within initial three years makes it look even more dreadful. Intelligent entrepreneurs always learn from others mistakes and try to avoid them in their own startups.

Here is a list of most common reasons for startup failures and methods to avoid them from taking on your dream.

Market Problems

Every startup is driven by the market, the market has an unsolved problem or an opportunity gap which your idea can fulfill and make decent money in the process.

But identifying the correct market and problem is not easy. If you end up making a solution for a problem which nobody has or is insignificant, you risk losing all your effort and resources into failure.

The demand for a solution depends also on the timing when you are releasing it. If hotstar would launch in 2009, when both internet and smartphone penetration was very less, it would have inevitably died.

How to avoid:

Go out, talk to people before you start building your product.

Research your industry, it is easier and cheaper to make changes in the idea stage.

Business Model Failure

Business model is the skeleton of every business and dictates the commercial and economical viability of your business to make money and value. Some companies are so much involved in the solution that they tend to overlook the business model. Inefficient business model is characterised by high cost to acquire a customers [cac], low or unknown lifetime value of customers and having no scalable ways to acquire customers.

How to avoid:

Analyse if your customer acquisition strategy is scalable.

Your CAC should ideally be recovered from customer within 12 months.

Practically estimate your sales cycle and return on investment.

Poor Management Team

Management is most of the times the heart and brain of a company. Poor management can be exemplified by weak strategic decisions, communication gap between management and team, little or no work on product market fit and having bad hiring systems.

How to avoid:

Making people answerable to each other, decisions backed by data and not biased experiences.

Management should own its decisions.

Over communication within the team is always better than under-communication.

Running Out Of Cash

Cashflow keeps the business alive, no matter how passionate you are, how many users you have or how great your idea is, you still need to pay dues to your employees, marketing agencies and clear your bills.

Some entrepreneurs fail to keep a record of accounts and hence fail to take adequate measures on time.

In businesses which are funded by private equity firms and other external investors, the founders should be extremely aware of KPIs they need to show for next investment, their burn rate. Failing to achieve KPIs, and performing non-thought through expenses with low ROI can push the business down the drain.

How to avoid:

Keeping a track of accounts and how long company can run given current circumstances.

If funds are required the CEO and Management should work well in advance to explore all the funding options and secure funds before it’s too late.

Always keep track of KPIs the investors will look for in the next round of funding.

Be in touch with more than one investor to increase odds of funding and build a network soon.

Bad Product Experience

People are used to great interfaces like slack, gmail, trello etc. Great products like whatsapp, zomato have taken product development to the next level and spoiled the customers for eternity. If your product has a bad interface, takes too much time to process, or take more click than necessary than it would be very hard for you to get an upper hand in the market. Your customers should be able to differentiate your product from competition not just from its value but also the experience.

How to avoid:

Refrain from cost saving and putting amateur talent to build products.

Understand that UX and Engineering are one of the critical factors when is comes to product development.

Poor Marketing

A great product can fail if it is not backed by adequate marketing efforts, Nowadays marketing is not limited only to making more and more people aware about your product’s features but it is about creating marketing elements within the products and exploring unexplored venues like influencer marketing, retargeting etc.

How to avoid:

Marketing should not start only when the product is completed, it should began much early.

Marketing people should be involved in product development and customer experience as well.

Lose Focus

Founders are idea people, and they mostly get carried away with ideas. In serious businesses, this could lead to distraction and waste of resource. Some startups try to expand their offerings too soon or begin to focus on many of things at a time. Micro management can also be one of the reasons for lost focus.

How to avoid:

Keep the focus right and solve the most painful problem first.

Don’t get carried away with new ideas or features.

Have a “to not do” list along with a todo list.

Disharmony Among Team Members

Founders and other team members are humans too and all the humans have emotions, but when it comes to building a businessself-centered thinking and overly emotional behaviour could lead to conflicts, which finally destroys company culture, its value and hence lead to ultimate failure. Founder conflict is the last thing any startup or its investors want to see.

How to avoid:

Every team member should understand that they are part of something bigger.

The management should make sure employee conflicts are resolved and toxic elements don’t get their place in the company. While hiring any employee make sure they are a cultural fit.

In case of founder disputes, the founders agreement, the shareholder agreement should be in place in advance to deal with matter professionally.

Legal Challenges

The recent event about facebook and cambridge analytica made every business realize the value to customer privacy and data security. There are many businesses which get exposed to many legal challenges once they grow. Every area can have different governing laws and startups should at least be aware about them.

How to avoid:

Having a consultation with an experienced lawyer can save you a lot of time and money later in the process.

Keep your company and employees compliant with laws.

Bad Debts

In initial days most startups agree to work on credit and often make the conditions worse for the business. In order to show initial traction it is often difficult to avoid credit requests. In such scenarios, if the client gets mischievous or goes in a financial crunch it’s your business which suffers.

How to avoid:

Look for client reputation before issuing credit.

Take post-dated cheques and if bounce occurs follow the process to recovery money from cheque bounce.

Incorporate methods and incentives for clients to pay beforehand.

Burnouts

Doing a startup is hard and often even the most passionate people burnout in the process. Some ideas could even take as much as 2 years to even get product market fit and financial situation and work life balance could suffer to its extreme. Watching your pals making good money in corporate jobs, posting pictures of team and family outings abroad can also make you rethink about your decisions. Most founders couldn’t take these burnouts and ultimately quit.

How to avoid:

Make sure you have a work-life balance, health should be entrepreneurs first priority and bad health ultimately reflects on your decision making capability.

Understand that you are on a big mission, your startup is your dream and maybe you  are one deal away from making it.

Failure to Pivot

Founders mostly fall in love with their ideas and solutions, and hence fail to pivot on time. The one thing which founders should be dedicated is the act of solving a problem. Google is solving the problem of arranging world’s information and giving you the way to access it easily. It evolved from just a directory to an intelligent search engine to now a digital assistant.

How to avoid:

Think of pivots as obvious evolution and not threats or distractions.

Always look for better ways to serve your customers.

Don’t fall in love with your solutions, be customer centered.

While its unavoidable to fall into situations listed above, its the duty of a founder to make sure they take timely efforts to address these.

Can you think of any other reasons of business failure? Do let us know in the comments.