Why Most Startups Fail?

Category
💻Tech
Date published
May 1, 2021
Last updated
Apr 28, 2021 5:59 AM
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Around 20% of startups fail in the first year. 34% of startups close within their first two years. And just over 50% of businesses make it to their fifth year.

Below are the top-5 reasons based on the CB Insights report.

1. No market need

42% of the startups failed because there was no market need for their product or service, as their founders reported.

They either didn't create something that people wanted or they were targeting the wrong users. Alternatively, their acquisition strategy was not right.

Regardless of the key reason, as a founder, you need to understand that unless you've invented free money, users usually don't just magically appear.

Key questions to ask yourself:

  • Does my product solve a significant problem/pain? What kind? Whom does this problem relate?
  • Who would find the most value in my product?
  • How do I reach those people in the most optimal way?

The best product doesn't always win. What wins? It's a product that satisfies the right market.

2. Running out of cash

Your technology may be cutting edge, but it will make no difference without seeing the market. Many entrepreneurs are too focused on day-to-day operations and often fail to see the long-term financial picture.

As a founder, you need to understand that initial investment isn't endless. You have to consider your burn rate, sales projections and consistently reassess if you have enough fuel in your bank account.

In startups, everything changes quickly, and new discoveries can cause delays by months, if not years.

Key questions to ask yourself:

  • When do we plan to enter the market? How many people are we hiring? How much funding do we need? How long will our cash last?
  • What are our expected sales for the first month, quarter, year? How confident are we in the estimate? Do we have a backup plan?

Often, raising more cash is not a problem. Raising cash when it's too late is a problem.

3. Not the right team

Organizations, even small startups, have great performers as well as people who aren't so great.

Big companies are notorious for having mediocre people. Startups can't afford this.

With a small team, it's critical to get only the very best players, the rock stars, and lead them towards the shared vision.

Key questions to ask yourself:

  • What are the key hires we need to get to success? What are the key traits of those hires?
  • Do we foster a culture of learning and inclusion? Do we create the right atmosphere for growth?

A team of doers who believe in what you believe is the key ingredient to a thriving startup.

4. Outcompeted

One of the biggest mistakes for early startups is to enter saturated markets without a clear differentiation plan.

On the contrary to the conventional belief that to succeed in the market, you must outlast your competitors. What you should really do is avoid the competition by building monopolies on yet uncaptured markets.

Key questions to ask yourself:

  • What is the total addressable market (TAM)? What market share do we expect to get?
  • How many competitors are there already on the market? How many are yet to come?
  • What do we need to stand out amongst the competition? Do we have enough resources for that?
All happy companies are different: each one earns a monopoly by solving a unique problem. All failed companies are the same: they failed to escape competition.

Conclusion

Only 1 in 10 startups will end up successful. By following a few basic rules, you can avoid the biggest challenges faced by modern startups:

  • Make sure you are addressing the right people with your product
  • Keep an eye on the amount of cash left in your bank account
  • Be highly selective in people you take on board
  • Don't compete — explore yet uncaptured market opportunities