5 Reasons For Startup Failure And How To Survive Through Them
If you’re an aspiring entrepreneur or an early-stage startup founder with big dreams, immense ambition and grand plans then you have landed at the right place.
Whether you have started your startup journey or are still searching for that perfect idea, here is an interesting fact for you. According to an Oxford case study startup failure rate is near about 90% within the first five years. (Source)
If this sounds terrifying, that is because it is.
Startups are hard work, and every founder's journey is unique with their own challenges, but knowing the reasons why the startups before you failed and learning from their mistakes might help you avoid these pitfalls.
In this article, we have listed 5 reasons responsible for most startups' failures. Keep reading if you want to know how you can avoid these.
Failure To Find Product-Market Fit
Sometimes the initial product you launch won’t fulfill the market need. This is because most of the founders take the route of building the product first and then finding a market for it - while this may work in an economy where founders have plenty of cash to burn, they build fast and break faster - but in an economy like India, where funding doesn't come as easily, this approach does not work.
Take the example of one of the most famous startups that failed. When Google Glass was released, people were excited about its launch but soon realised that there wasn’t a large enough market for it and it swiftly died out. To prevent this from happening, it is essential to conduct an idea validation exercise and find out how relevant your product is and if there is an actual need for it in the market. Favcy VB’s validation checks aim to eliminate this risk and ensure the founder builds in the right direction, which ultimately helps achieve a Product Market Fit at a later stage.
Lack of Adequate Funding
One of the top reasons why startups fail is inadequate funding. For most founders, the initial money comes out of their own pockets or from familyor friends. But this stage is short-lived and cash runs out very fast if you don’t get outside support.
Fortunately for founders, multiple institutions are available today that can plug this gap. In between Incubators, Accelerators, Venture Capital Firms, Angel Investors or Venture Builders - a founder can pick. In order to not suffer due to lack of funding, a founder needs to decide which institution best suits its needs. A Venture Builder enables you with not just capital but heavy operational support right from an idea stage. A Venture Capital on the other hand will support you with capital once you are at an advanced stage of an MVP. To know more about how different institutions can help you, check out this blog: https://blog.favcy.com/what-is-venture-building-do-you-need-it
Hiring The Wrong People
Chances are that you are a young startup, with not a lot of cash lying around. It's instinct to hire less experienced hence less costly resources over experienced and valuable ones that cost more. As it turns out, this is one of the major reasons why startups struggle to stay afloat.
Hiring bad employees is a bad long-term financial decision. Your company has to pay for their incompetence and lack of knowledge in the long run which not only diminishes your profits but also inhibits the growth of your company. The smaller your business is, the more it hurts to hire the wrong people.
You want to hire people that will be assets to the company. The efforts of your employees determine your company’s success, today and tomorrow. Although there is always pressure to move fast in the startup world, take your timeto hire a team of people whose vision and work ethic align with that of the company. This ensures that you and your employees are on the same page and can further work harmoniously.
Failure To Find A Profitable Business Model
While building digital businesses, most first-time founders underestimate the time, effort, and cost of acquiring new customers. Sure your initial few customers will be easy to get if you have an interesting idea or product, an intriguing website, or an excellent marketing team. But the reason why 90% of startups fail in their initial 5 years is that they are too optimistic about their company’s business model.
For most of them, the cost of acquiring a customer (CAC) is actually higher than the lifetime value of that customer (LTV).
Now it's quite obvious that your startup should be able to acquire new customers for less money than what they will generate for your business, but in our experience founders often struggle with having a realistic idea about it.
This can be a complex task but there are people in the industry that can help you. Favcy as part of its validation process evaluates a business model for the idea which includes calculating the LTV: CAC ratio. This step forms an important check to understand how strong your idea’s path to profitability is.
Failure to Pitch/ Sell the Vision Correctly
As a founder, you can’t do everything on your own. But one skill that can really set you and your business apart is sales. Often aspiring entrepreneurs will have the idea, the vision, the passion, and the will to initiate their startup journey but aren’t adept at selling that vision to consumers and potential investors. Hiring good salespeople and being a good salesperson yourself can differentiate you from potential competitors in the market. Work towards building this skill from day 1 and it will pay off massively.
To know more about why sales is an important skill for every founder, check out this blog: Myth: A Founder Is Not A Salesperson (Busted!)
The bottom line is that every day numerous startups will come and go and if you don’t want to be just a name in the long list of failed startups, you can start by avoiding the above-mentioned reasons for startup failure.
If you have an idea that you feel has tremendous potential, reach out to us right away and we’ll help you build your idea into the next disruptor.