Why Startups Fail

Posted by Mo Rassolli on Feb 04, 2020 07:07: AM
Mo Rassolli

Every person thinks his startup idea is brilliant, and it will be a big hit in the coming years. Unfortunately, an idea is not enough to make a startup successful. According to research, 90% of startups fail during the initial years. Only one out of ten startups manage to survive and become successful. 

There are several reasons why startups fail that range from no cash flow to poor business models. We have found the most common reasons behind the failure of startups. It can be any of these or a combination of them. Read this complete guide so that you can avoid making these mistakes in your business. 

No Market Demand 

One of the most common reasons behind a startup failure is no market demand. This aspect is usually looked into in the early stages of product development. If you have not done market research properly, there are high chances your product will be a failure. Before developing a product, determine the purpose of your product, what problem it can solve, and your target audience. 

 

A startup develops a product and introduces into a market where there is no potential customer. The major reason behind no market demand is the product is not solving an existing problem or irrelevant to the market. Sometimes, the product you have launched has advanced features, and the market is not ready to accept the solution you are providing.  

Failed Business Model 

Most startups come up with great ideas, but they don’t know how to execute it and earn profit out of it. Many entrepreneurs think it is too easy to acquire customers for their products. They believe that an attractive website, product, or service will automatically bring customers. The harsh reality is none of this happens. As a result, the cost of acquiring a customer (CAC) becomes much higher than the lifetime value of that customer (LTV).   

 

A large number of entrepreneurs don’t give a second thought to this critical point, which results in high LTV. Their business models are incomplete and fail to deliver how to acquire customers in a scalable way.   

Inefficient Management Team 

A startup cannot survive for long if there are inconsistencies and problems within the management team. Almost 23% of startups fail due to the incompetence of the management team. If you don’t recruit efficient people in the team that knows how to do the job, you will have to face the consequences.  

 

One of the main reasons behind the wrong management team is fewer resources. Every startup aims to hire a specialist, but they can’t afford it in the early stages of businesses. Thus, they opt for local options that are often weak at making strategies. They build a product with no demand in the market as they haven’t validated the idea before and after the development.  

Run Out of Cash 

Having a clear monetization strategy is important for any business, otherwise, it will shut down real soon. When the company is in its initial stages, there is hardly any follow-up financing. It is very hard to raise capital and takes a long time. 29% of the startups failed due to liquidity problems.  

 

Why Go for Angel Investment? 

If you are in the early stages of a business, you should consider taking investment from angel investors. They can take an equity share in your business and the investment can be exchanged for convertible debts. If you are developing a product, make a strategy of how you will monetize it, and pitch your angel investor. Be clear about your goals and how you are planning to scale up your business. 

 

Advantages of Angel Investment 

  • Angel investors are free to make decisions 
  • All the money is his personal asset 
  • You don’t have to repay any money or interest 
  • You can get free mentoring as most investors are entrepreneurs 
  • Excess to your investor’s knowledge and contacts 
  • Financing is less risky 

 

Disadvantages of Angel Investment 

  • It takes a long time to find angel investors 
  • You have to share equity 
  • Less structural support 

 

How to find an angel investor? 

Finding an investor for your business is not an easy job, you need to meet several people, propose your idea, and convince them to fund you. However, TrendScout can help you in this regard.  

 

What is TrendScout? 

TrendScout is a platform that connects a startup owner directly with an angel investor. The platform will help you to connect the investor in your particular niche. You can pitch your idea to several investors and work with them as well. If you think your model is not good enough, you can reach out to us and our team will be happy to assist you.  

Get Competed 

You have often heard people saying no “Don’t pay attention to your competition”, but in reality, you should look closely at your competitors. Most of the time, when you introduce a new product or service, your business competitors may improvise your product. They can introduce a better and cheaper product than yours, which will result in a massive decrease in your sales.  

 

Almost 19% of startups are outperformed by their competitors and forced to shut down. One of the examples of the company that gets competed from its competitor is Wesabe. If you are not familiar with the name, Wesabe was an online financial management service that was outperformed by its competitor Mint. Though Wesabe used to offer more functions than Mint, the only drawback was it was not very user-friendly. Mint took advantage of its weakness and develop a similar model with a user-friendly interface.  

Pricing Problems 

One more problem many startups face is pricing issues. The fundamental rule for pricing is the price of the developed products should be high enough to cover the costs while it should be low enough to attract customers. Nobody would like to buy an expensive product if there are cheaper options available. Also, you have to take out your cost and profit from the product to sustain in the market. The profitability issue is one of the most common, and 17% of startups fail due to expensive products.  

Poor Marketing 

Marketing helps you in promoting your product or service among people. It is very crucial for a startup to promote its products so that people know more about them. In the initial stages, you don’t need to hire a professional PR team to handle your marketing. Instead, you can do it on your own through various mediums. 

 

In today’s world, social media is the best platform to market your product and reach your target audience. Startups that don’t focus on their marketing and don’t create noise will eventually go down. Due to poor marketing, 14% of startups fail, so make sure you are doing your marketing right.  

FAQs 

 

How do you prevent business failure?  

By walking in the shoes of the customer, enhancing management skills, invest in freelancers instead of full-time employees in the start if possible, and effective price calculations can make your business successful. 

 

What happens if your startup fails? 

If the founders have taken an investment from crowdfunding or angel investment, they don’t need to repay the money if the startups fail.  

 

How does an angel investor make money? 

If an angel investor invests in twenty companies out of which sixteen got failed, the four will get successful. These four companies will generate enough revenue that he will recover his money. If any of the company could make a cut, the investor will get ten times more money. 

 

How do you know your startup is failing? 

You don’t know your ideal customers which result in less or no sales, you are busy doing wrong stuff, you are not focusing on monetization, etc are some of the signals that indicate your startup will collapse soon. 

 

What percentage does angel investor want? 

The investors typically want a 20 to 25 percent return on the total money they have invested in the business.  

 

What angel investor looks for in a business? 

The first thing an angel investor demands is a business plan. He takes his time to research before risking his money in the business. They search for a passionate person who is professional as well.  

References 

https://siliconcanals.com/news/common-reasons-why-startups-fail/ 

https://www.lead-innovation.com/english-blog/reasons-startups-fail 

https://rubygarage.org/blog/reasons-why-startups-fail 

https://medium.com/swlh/why-90-of-startups-fail-and-what-to-do-about-it-b0af17b65059 

https://www.entrepreneur.com/article/238606 

https://www.nibusinessinfo.co.uk/content/advantages-and-disadvantages-business-angel-funding 

 

 

 

 

 

 

Topics: tax, investment, EIS, startup, tech, impact investment, brexit