ou've started your startup and you're doing well. You have a few customers, the product is taking off, and you feel like you will be successful. Then it all falls apart. Your customer base shrinks or disappears, your product doesn't sell as much as expected, and before long there's nothing to do but close up your business. You probably asked yourself, “what caused my business to fail?”.
According to business owners, reasons for failure include money running out, being in the wrong market, a lack of research, bad partnerships, ineffective marketing, and not being an expert in the industry. The road to success is paved with failures. This is a lesson that many entrepreneurs have learned the hard way, and it's one of the most important lessons you can learn as an entrepreneur. However, there are a lot of ways to avoid failing include setting goals, accurate research, loving the work, and not quitting. 1 in every 5 million non-funded startups reaches unicorn status, worth at least $1 billion. Check out these common reasons why startups fail and to try to pay attention about what you can do to avoid the same fate.
- Lack of Market Demand
Why would you create something that nobody needs? According to a study by CBS Insights, 95 percent of start-ups fail, and an amazing 42 percent of them fail because there is no market for the product or services that they have created.
- A company must have a compelling enough value proposition, or compelling event, to cause the buyer to actually commit to purchasing. (e.g. you must find buyers that are “in extreme pain”, “damage hair”, or “lack of supplies of soap” so people will be needing to buy your product/service.)
- Your product launch must not be too early/late to be released in public. Check on the market if the timing is wrong. You might be ahead of years and they are not ready for your particular solution at this stage.
- Make sure that the market size of people you are targeting have the pain and the funds.
This is the first reason why companies failed because the market was not yet mature or features were developed that were not relevant from the point of view of the target group and which the market therefore did not want. Therefore, NO MARKET, NO CASH.
- Business Model Failure
Business model is important because it provides the investors with knowledge about the competitive edge of the company and provides better insight into the working of the company. A strong business model leads to cash generation and future expansion. Simple way to focus on what matters in your business model is to look at these two questions: Can you find a scalable way to acquire customers? Can you then monetize those customers at a significantly higher level than your cost of acquisition?
- Insufficient Financial Resources
A major reason that startups fail is because they ran out of cash. To reach an increase in valuation, a company must achieve certain key milestones. See some of the following:
- Progress from Seed round valuation - your goal is to remove some major element of risk. It could be hiring a key team member, proving that some technical obstacle can be overcome, or building a prototype.
- Product in Beta test, and have customer validation - if the product is finished, but there is not yet any customer validation, valuation will not likely increase much. The customer validation part is far more important.
- Product/Market fit issues that are normal with a first release have been mostly eliminated.
- You should have proven your business model.
- This capital might be to expand internationally, or to accelerate expansion in a land grab market situation, or could be to fund working capital needs as the business grows.
A key job of the CEO is to understand how much cash is left and whether that will carry the company to a milestone that can lead to a successful financing, or to cash flow positive.
- Inconsistent team
A common problem that causes startups to fail is a weak management team.
- When team members are poor at execution, which leads to issues with the product not getting built correctly or on time, and the go-to market execution will be poorly implemented.
- When working on a weak strategy on a product that no-one wants to buy as they failed to do enough work to validate the ideas before and during development. This can carry through to poorly thought through go-to-market strategies.
- Cost and Pricing
Problems with many startups arise from difficulties in calculating a price that is high enough to cover costs but low enough to attract customers.
- Other factors
To further reflect and prepare onto your next startup plans, look into these guide questions:
What went wrong? Ask yourself “what could I have done differently? What might I do differently in the future? What can I learn from this? Was there anything I could have done better?” Be honest with yourself about where you made mistakes, and use those lessons going forward and remember where not to make those mistakes again.
How to fix the problem? Remember that entrepreneurs are problem solvers. Are the constraints insurmountable? Is there a way that you could constrain your project differently or expand it in another way?
What’s the future of my company? Think about the life of a company as a marathon not a sprint, and take some time to reflect on what happened.
What are your goals for your company? Set new goals. Remember there are no failures, just results of different degrees. Reflect on your old goal and decide whether or not you want to pursue it anymore. The first thing you should do before starting any new project is refuel your ambition by recalling how things were before, and remember all of the reasons that got you into it in the first place.Make sure your goals are achievable but also challenging enough to hold your interest for more than 3 months.
Do you have the right people on your team? Surround yourself with the right people. Exercise healthy habits of giving back and staying in contact with like-minded individuals – talk to people who understand what you’ve been through. Maybe even some former team members?
How do you handle your finances? Let's face the hardest part when failing a business. You’ll need money to restart a company, which will either have to come from old funds or new loans. Calculate the break-even point for how much money you need to make each year at various levels of expenses to cover salaries, rent expenses such as office space or equipment leasing. Another way would be by selling something else valuable, but this leaves less flexibility for other purposes later.
Mitigate your finances Write out a risk breakdown analysis (RBA) and calculate your expected profit and loss (P&L) statements under varying levels of success, this will help you to see where your financial weaknesses lie.
Don’t be afraid to start over! The most important thing to do when starting a business is to maintain your focus. It's not enough to have an idea or even be passionate about it, you need to know exactly what needs to happen in order for that business model to work. And if you're not careful, there are plenty of pitfalls that can keep you from succeeding.