While entrepreneurial activity has increased by over 25% in the last few years, only 75% of startups will last longer than one year. Over 70% will have failed by their 10th year in business. Why the high failure rate? Why do startups fail more often than not?
As the Pakistani startup community sees an increase in startups – left-right-and-center – many of these startups disappear in just a few months, with many vanishing by year two. We’ve done some research to highlight the major issues startups face, and the reason they fail.
Three major things can cause startup failure: the product/market fit, the team, and the resources available.
If you interview 10 fast growing startups, 9 out of 10 will say their biggest challenge is attracting top talent. It starts with the founders, is driven by vision and culture and great companies NEVER compromise in maintaining high technical and cultural bars. – Michael W Ellison
1/3rd of companies fail because the management was unable to handle issues like hiring, finances, and marketing.
When kids straight out of college start creating products and raising capital there is always the risk that the lack of business experience will become a hindrance. Innovation might come naturally to younger people, but we need to ask if these innovative young minds are ready to take on the tough task of handling a company.
Anyone working for a startup needs to be ok with a changing role in the workplace. As the company grows, responsibilities will increase, new people will come in, and roles will be re-shuffled. If the team working on the startup is inflexible, the company will not be able to change according to market requirements, and go under.
Problems With Resources
Whether it’s bank loans or venture capital, the process of raising money is draining, miserable, and distracting from the process of actually building something. Not just your business, but you, are constantly on trial. It has the same effect on the psyche as a lawsuit. – Michael O. Church
Too little funding
Bootstrapping might sound like fun, but it can do a serious number on organizational growth. A lack of money is the biggest reason why startups don’t hire the “best” people for their team in the first place, causing a snowball effect in quality of service and product.
Too much funding
Raising too much money can make the team lazy, lead to too much expense on “nice-to-haves” (like retreats and new laptops), all of which shows no return on investment. Eventually the money runs out, but the sales don’t match the amount of money spent.
It can be very difficult to convince investors, in 1-2 meetings, why your product is the right one to invest in. Often finding investors is a simple game of numbers: having the numbers you want to show them (forecasts) and meeting enough investors to find 1-2 that stick.
One of the key lessons I learned is that great startups have a blindingly obvious, ideally really large and painful problem that the company is trying to solve. Solving this problem should drive almost every decision in the startup. – Vinay on Vitoto’s Failure
Market too small
An important factor in the profitability of a startup is whether or not the market is big enough to sustain growth. An amazing idea for a product that only has a 10,000 person market means you’ve already set a ceiling of 10,000 customers. How are you going to grow beyond that?
A wonderful product with the perfect team backing it won’t sell unless it’s marketed well. Most startups don’t think that far ahead, and are scared to spend money on marketing their product. It isn’t necessary to spend a lot of money – you can go a long way with PPC – but you do need to be prepared to spend on advertising.
Product doesn’t fill a growing need
Investors are always looking for a product that offers a solution to a growing need. If you can’t provide this, you’re going to have trouble, not just raising funds, but also attracting customers. When it comes down to monetizing, if the product isn’t filling a gap in the consumer’s life, they aren’t going to be willing to pay for it.
Too much competition
Having too much competition, even before you launch, can be a bad thing. Yes, it obviously shows there is a market for the product, but it also means customers have a lot of choice when it comes down to who they buy from. You need to be able to differentiate your product from the rest. It needs to solve a problem none of the other products are able to address, or do it better.
We also asked Saad Hamid, who works with new startups every day as a part of i2i, about his views on why startups fail or succeed.
Honestly I think there are many reasons to why startups fail but I will summarise a few points for you.
Founders Dilemma: There are multiple variants to this but usually the founders lose interest in their startup because they get excited about another idea. Or perhaps if there are multiple founders they would go into a disagreement because of their vision and eventually decide to split ways.
Failed Market: The market will changes during the process and therefore in some cases the product/service does not manage to get any traction from the consumers.
Lack of Funding: Self explanatory.
Leave a comment about the reason you think startups fail or succeed – or if you have any personal experience in a startup that failed.