Thousands of new companies pop up each week from motivated people who have a unique idea and the ambition to bring it to life. Many of these companies make it big, however, most of them fail in the initial 5 years. Reasons startups fail vary from industry to industry, but the important thing to note here is that ignoring even a single factor can have a severe impact on a company that has just come to life.
90% of startups fail as per the startup genome. After studying multiple reasons startups fail, it was discovered the many of these decisive factors could have been avoidable with proactive planning.
In that case, it can be inferred that proper market research can help avoid most of these failures.
Lack of demand for the product
A staggering 42% of startups fail due to a lack of adequate demand. Various studies present a lack of demand as one of the topmost reasons startups fail and end up shutting down.
If the product or service is ground breaking and no other company has explored the idea, then there is a great risk & greater reward.
This also means that preliminary market research needs to be done to understand the need for the product/service in the market.
If a similar product already exists, then it is important to punctuate the USP of the product to outperform the competition.
Treehouse Logic example
The goal of this visual configuration platform company was to help brands easily build customizable experiences.
They wanted to be the “Survey Monkey of configurators” but soon realized that there wasn’t any substantial demand for such a product. The solution here was for a problem that wasn’t very problematic in the first place.
There was no scope of scaling the product & no competitors.
Example of Kolos
They set out to make the first steering wheel for iPads. The founder of Kolos admits that he went ahead with the idea for making steering wheels for iPad because he thought it was promising & not because there was an actual demand from customers.
He later admitted that there should have been thorough research to understand requirements & there should have been a market test with an MVP (Minimum Viable Product).
Under Capitalization
Running out of cash is amongst the top 3 reasons startups fail. Both time & money are finite hence deciding the right things to spend money on is extremely important.
This doesn’t mean that all required capital should be present from the starting of a company. What this means is that there should be a strict timeline for raising money at specific intervals.
Companies in capital intensive industries should have a large cash reserve to deal with financial obstacles.
Digital companies require relatively less money to operate compared to a manufacturing or a logistics company.
The CAC/LTV Rule: – an important rule to keep in mind while spending money.
- CAC is the cost of acquiring a customer.
- LTV is the lifetime value of a customer.
CAC must be less than LTV. The cost of acquiring a customer should always remain less than the value of the customer.
In fact, according to the Capital Efficiency Rule, it is crucial to recover the cost of customer acquisition within 12 months.
This will make a business very capital-efficient.
DAQRI Example
A very promising AR headset startup had to shut down their operations because they ran out of cash. Daqri was known to have raised $275 million in funding.
They were competing with Microsoft & Magic Leap to capture the Augmented reality market, but they reportedly didn’t consider the capital strain of their activities. This is just one example of an all too common scenario.
Wrong people for the job
The success of small companies depends heavily on their employees because each individual contribution has a business impact.
Every team in a startup acts as a spider leg and one malfunction can make the whole thing rocky.
When management goes wrong, it can lead to an even more dangerous scenario. A popular analogy works best to describe the chain of command: – A+ players hire other A+ players but B players only hire C players because the B players don’t want to work for A or B players.
This produces an organizational culture that isn’t cooperative or efficient.
Example of Zirtual
Zirtualwas an online service provider that essentially served as a matchmaker between small companies & entrepreneurs.
At its height, the company employed more than 400 employees spread across 39 US states.
It shut overnight due to miscalculations and financial mistakes by the management. CEO Maren Kate Donovan later admitted that hiring more experienced operations and finance heads could have prevented the incident.
Marketing Problems
There are many technology startups that put too much emphasis on the product and too little effort into figuring out who the target audience will be & how to make the product desirable to them.
There are many organizations that fail due to inappropriate marketing, choosing the wrong medium, not connecting with the customer base, spending all their money on the product and nothing on marketing, etc.
Most of these companies fail to realize that the 21st century is the age of marketing. Even relatively inferior products can have market dominance with a focused marketing strategy.
Mobile applications are an amazing way to reach audiences & control user experience. In fact, reading into user behavior gives unparalleled insights on user persona & a medium to engage customers directly.
Small businesses benefit from android development, largely due to the enormous reach of android users & the cost efficiency of developing an app on android rather than iOS.
The best option would be to choose the medium most used by the customer base, but if customers are spread out on both platforms (Android & iOS), then it would be wise to build the more economical android app first & test success.
Example of Overto-
An auction aggregator, Overto was looking to capture the interest of buyers & sellers. Since eBay didn’t have a prominent presence, the market was still ripe.
When the product was working & ready for full use, there was a substantial gap in marketing and the management hadn’t taken this into account while creating the application. A complete step by step marketing plan starts pre-development & carries on after the application is available for the public.
By the time Overto realized their lack of market presence, there just wasn’t enough time & resources left to dedicate to marketing. This is a defining reason for the company’s closure.
Inflexible business model
Creating a product & running a company all require structure and motive. This doesn’t mean that small companies should remain inflexible when things aren’t going their way.
Many small companies put their trust in products & not in their business model. Failing to adapt counters an essential advantage of a small company – its flexibility.
Example of Aria Insights
Aria was an organization that made drone data technology. Their drones gathered data from rough environments. In 2019, they were housing enormous amounts of data, but they couldn’t convert that into actionable insights.
They didn’t have an effective business model for the product that they had masterfully created.
Example of Tutorspree
An edtech startup, Tutorspree was focused on connecting tutors & students through their platform.
There were two main reasons for their failure:-
1- Their business model didn’t have a contingency for a scenario where the tutor & student would come back to the platform. Once the connection was made, both parties could contact each other without the middleman and avoid significant charges levied by Tutorspree.
2- They were focused only on SEO to get more business. When Google’s algorithm changed, it severely impacted their business. Here, they were too dependent on a single channel for customer acquisition & didn’t invest in any other medium.
Conclusion
There are many reasons startups fail and end up being acquired by a bigger fish or being shut down, but there are some basic checks that can prevent most problems from ever happening- Conducting detailed market research before development, understanding the “money” aspect of running a business & always keeping customer feedback as the filter for success.
When the deciding body is conscious of feedback and data-driven with decisions then the scope of success increases substantially.
