The Fall of a Startup: 9 Reasons Why?

    Why Startups Fail?

  • Poor Market Positioning
    • Confusing brand image & proposition
    • Targeting the wrong audience
    • Not meeting the market expectations
    • Who are your competitors and how do you differ?
  • Cash Crunch
  • Failure of Business Model
  • Poor Management Team
  • Ignoring Customers
    • Criticism isn’t cheap
    • Lack of Feedback Management
  • Legal Challenges
  • Poor Marketing
  • The Pivot Point
  • Failed Geographical Expansion

Fail Early. Fail Fast.

Success, in its true terms, is not achieved without stumbling across a few rocks on the road. If you are an innovator, failure is something you must have faced & overcome multiple times. In fact, the startup world views the highest failure rates where according to Small Biz Trends, over 90% of the new startups fail within 5 years of their launch.

In order to rise above the lot, it is crucial not only to try, but also to be smart and proactive. Positive thinking, yet again, cannot eliminate the reality of the startup world. Markets are dynamic and being driven by a globalized world, it is crucial to be adaptive and foresee changes to survive in the startup ecosystem.

Why Startups Fail?

Every business solves a problem. Yet, a majority of these ventures fail to pick up the pace, or stray somewhere else, lost in discrepancies and unorganized operations. Eventually, they fail. Henceforth, we look into the factors which might be toxic for your startup:

Poor Market Positioning

    The worst mistake startups make is creating a product that the market doesn’t need. The flaw lies in the initial market research, where assumptions cause lack of a product/market fit. Before you build the MVP (Minimum Viable Product), try and ask yourself: are you truly solving a widespread pain point and do they really need what you are offering?

  • Confusing brand image & proposition
  • The idea alone does no good. A definitive brand building strategy must be implemented to help your startup survive. If your product/service has no unique attribute that can differentiate it against the competition, it is time to revisit your product/service development strategy. Simply put, your product/service must be distinct to attract customers.

  • Targeting the wrong audience
  • Your target audience is a group of potential customers which might be interested in your product. Most startups fail to realize what their customers might need. In fact, the best brands are the ones who build their market position on the basis of their customers.

  • Not meeting the market expectations
  • A startup grows into a brand when customers bind expectations to the product. If a product does not keep up with the consumer requirements and his growing needs, success will be a far-fetched goal.

  • Who are your competitors and how do you differ?
  • No matter what business you run, competitors exist, or they will, after a period of time. Your USP lies in how you differ from them, and what benefits are unique to your offering.

Cash Crunch

While there are multiple factors which affect the health of cash flow in an startup, and dependent on the industry in consideration, one key is crucial to all startups, irrespective of size or industry the business operates in.

If your expenses exceed your cash inflow, then you have a cash flow problem.

During the early stages of growth, it is more likely that expenses exceed your revenue. You might still be attempting to validate R&D, go-to market costs, invest on sales and marketing, contractor relationships, legal requirements, etc. The only way out is to increase your cash flow in order to bring in more than you spend.

Here are some stats that explain why startups fail due to cash crunch and some reasons behind it.
  • 82% - founders lack understanding of cash flow
  • 79% - Starting out with too little investment
  • 78% - Inefficient business plan and market research before going to the market
  • 77% - Lack of efficient pricing model
  • 73% - Building unreasonable sales targets and being over-optimistic about what has to be done to be successful
  • 70% - Not adapting as per the customer and not learning from mistakes of others

As a founder, when you start out, it is crucial to have some kind of support in terms of funds. You can opt for bank loans, get in touch with VCs, or opt for a startup incubation platform. For a stake in your venture, they can help you with the funding process. Yet again, multiple startup incubators can help you, right from funding to availing services from service providers, and connect you with mentors that can help your startup grow.

Failure of Business Model

The first and foremost reason for a failing startup is lack of an efficient and demand-generating business model. If a startup’s business model is built around a value proposition that customers don’t care about or care too less. We can call it lack of product-market fit, but it happens over & over again, leading to decay of ideas that else would lead the engine of innovation.

Most of the times, it happens because startups are driven by a stringent focus on products, features, technologies and services. Here, the “Benefit” part misses out, which quite certainly is the most crucial aspect of any offering. Before building the feature list, it is crucial to have an insight into which problems does your product/service solve for the end customer, which problem statement bothers them most, and what are they trying to achieve through your product.

When a business model’s value proposition costs greater than the revenues collected, the startup will inevitably disappear, even with the most successful value propositions. Even worse, if you fail to develop proper channels to reach and deliver value to your customers, your idea, no matter how relevant, will go in vain.

Poor Management Team

When it comes to managing a startup, inexperienced founders struggle with day-to-day tasks, which involve managing the cash flows, regulatory approvals, agreements, growth, people and a zillion other tasks.

According to a report by Chartered Management Institute (CMI), 44% of the Companies founded in the UK in 2011 had failed by 2014, where the incompetence of poor business management was to blame for about 56% of the cases. In fact, just 2 in 5 entrepreneurs had any kind of management training, against over 89% trained business leaders in large, established businesses.

For a startup, optimization is the key to scale. When you start a business, you can easily get carried away, doing everything yourself, firefighting. Yet, when your startup grows & scales, the founders have to work on the business, not just in the business. This might mean delegating work to employees, building processes, and having a strategy to plan and being able to deal with change.

Ignoring Customers

Customers can make or break any business. Be it the dawn of Apple Inc., or the decline of Nokia, one thing gets stark clear: if your brand fails to infer customer’s needs and innovate accordingly, it is destined to fail and suffer at the hands of its competitors.

Customer service again, is crucial to retain existing customers. In fact, according to a report by Peopleocity, 50% of customers give a business only one week to respond before they stop doing business with them, while 89% opted for the competitor’s solution after a poor customer experience.

    Here are 3 factors which might lead you to lose business and shrink your growth:

  • Criticism isn’t cheap
  • Startups tend to ignore when customers criticize them. They might turn defensive, because ultimately, they care about their idea. Yet, they fail to identify criticism as an opportunity and fail to scale.

  • Lack of Feedback Management
  • Managing your customer’s response, grievance or query is the key to retaining them. Yet, many startups make this fatal mistake of not being available for their customers’ queries. While it deprives the startup of crucial feedback, the customer is lost too, due to presence of multiple options & your competitors.

Legal Challenges

Starting a business always comes with its own set of legal issues. Even before you incorporate your Company, there are multiple legal proceedings which must be fulfilled before your idea takes the centrestage and grows into a solution.

If you fail to deal with legalities from the start, it might be a large mistake. While the concept of an “oral agreement” is still binding in some nations, it is generally not applicable across the world. Hence, it is recommended to clear out existing issues in order to prevent any long-term repercussions.

Most founders fall into the trap of exposing their intellectual property by communicating confidential information to multiple people, without non-disclosure agreements or other clauses. As a result, they risk losing their hard work and original thinking to miscreants which in turn might affect the brand image adversely. Moreover, failure to comply with licensing norms might result in fines, expensive legal suits and eventually, a painful cash-strapped closure for your business.

Poor Marketing

Marketing fuels a startup and enables customers to connect with the offering. Most of the products, no matter how innovative or novel, stand to be ignored in absence of effective marketing.

A majority of founders get this part all wrong. A general belief, that digital ad spends will get the inbound traffic and help with sales, is disastrous. The first few customers you acquire or the supplier contacts you build offline, will help you a long way into growing your startup exponentially.

Simply put, your outbound efforts during the initial stage, define your startup’s cash inflow stability in the years to come. Not only does it help build a constant sales cycle, with a recurring revenue, but also creates a benchmark for feedbacks and optimization before you scale up and serve a wider customer base.

For example, Airbnb, the pioneer is bed & breakfast rentals, leveraged Craigslist’s extensive outreach to fuel the initial growth. By May 2017, Airbnb was a leader in the online rentals industry with net market capitalization of over $31 billion.

Poor Marketing

Expanding into a foreign nation opens up a new pool of opportunities for your startup. It comes with an equal share of efforts to set things up, though. Startups that face revenue crunches at home, are lured by the bright prospects of international expansion, following the vision of vast untapped markets overseas.

If you are not sure of your first steps into a foreign market, it’s time to rethink your strategy. Most of the startups, in order to tap into new revenue streams, forget that additional revenue implies more resources’ consumption.

It might involve hiring a new team, setting up a new office, new supply routes, and worst of all, bite a chunk of a well-established competitor in the particular market, to cater distribution.

Costs surge at an initial stage, while the revenue stream takes shape. Most of the startups that are bootstrapped at this stage, or limited in terms of their financial strength, succumb to cash crunch, and eventually, fail. It is recommended to look for funding solutions - you have the options to opt for a bank loan or funding from VCs.

The process is usually cumbersome and involves a lot of regulatory approvals, agreements, contracts and can last from at least 3 months to over a year. On the other hand, iPRONTO can connect you with investors; you can avail services for your startup right there on the platform. With a blockchain-based infrastructure and smart contracts-enabled transactions, you never have to worry about cash crunches anymore!!

A short note

When a startup goes down, the founder of the Company, pens down an essay that tells the community, stakeholders and customers of what went wrong. Since 9 out of 10 startups fail, the failure post-mortem has become a common trend. Some of these stories are honest, enlightening and brave, while others point out fingers or issue non-apologies. The preferred medium is the free-to-publish platform, Medium. Keep an eye out for our next blog that dives into stories of some startups that failed when they were destined to be a success.