The odds are not in your favour when starting a new startup. Nine out of ten startups fail. But it’s through these failures we can gain insight to understand why they failed and become the 10%.
“You have to see failure as the beginning and the middle, but never entertain it as an end.”Jessica Herrin, founder and CEO of Stella & Dot
5 Main Reasons Why Startup Fails
1. The founding team
When starting a business with someone, it’s like being in a new relationship. You’re learning how to work together and get along. As time passes, challenges and problems takes a toll on the relationship and sometimes, it causes breakups.
Here are the main reasons for conflict within the founding team:
Undefined roles and responsibilities: When you’re running a small startup, everyone does everything. This however does not mean one person is in charge of everything. As founding members, control over which aspect of the business should be clearly defined so that no one is stepping on each other.
Misaligned expectations: You might feel like you’re working 100+ hours a week, where your co-founder is leisurely working 30. There should be clear expectations set at the beginning of the startup to make sure everyone is carrying their weight.
Unfair evaluation: You might have quit your job to start the start up, but your co-founder has only met you half way keeping their full-time job while working on your dream on the side. The difference in equity should reflect that, but there should be an implied expectation that your co-founder will and only can work so much.
Personality mismatch: I like to think that you don’t really know a person, until you spend a week on vacation with them. This is the same when working together. You might be best friends with the person you’re looking to start a business with. But the new relationship you’re entering is not the same as you had at a personal level.
Lack of collaboration: You’re a team. You’re suppose to work together. If the leadership team fails to listen and work together, it’s like trying to drive a car without a steering wheel. It’s destined for disaster.
2. Bad Product Design
You might have a brilliant solution to an everyday problem. The idea is great but it all comes down to execution. Your product might still solve the consumer problem, but the design is flawed. Here are the main characteristics of bad product design.
Product is difficult to use: I think one of the most frustrating things I’ve ever had to deal with in my life is trying to put music in iTunes 10 years ago. When connecting my iPhone to my friends laptop to charge, it can suddenly delete all my music when it suddenly syncs to my iTunes. Even worse, putting music in was a headache. Customers now have an even shorter attention span, so your products must be intuitive and self-explanatory.
Product is forgettable: Your product might work, but the design is forgettable. The best example of this is comparing tradition vacuums to Dyson. Traditional vacuums might function the same, but it’s incomparable when it comes to design. Dyson vacuums are art pieces you can proudly hang up on your wall.
Product doesn’t work: Think of the voice controls before Siri or Google Assistant. The ones you might have in your car or GPS. You have to repeat yourself 3-4 times to get it working. When it does work on the first time, it’s the best feeling in the world. It’s too bad no one tries again after the first time.
3. Not Enough Demand
Your product might be great, but the market might not be ready, or the problem isn’t big enough to see returns. Luckily, this problem is not difficult to solve, as long you do your research. And here’s how.
Google keyword planner: If you haven’t noticed, everything is digital. 81% of shoppers conduct online research before buying. And when it comes to online research, most cases it starts on Google. With Google keyword planner, you can see how often the problem you’re trying to solve is searched for. Let say you’re starting an organic dog food company, you can check how often the phrase “organic dog food” is searched for in your geographic area to gauge how much demand is there for your new product.
Industry research: The question you’re trying to answer here is how big is your industry. How many people can you realistically sell to if inventory isn’t a problem. To do this, it’s simply defining your target audience, then gathering data. Most likely, you are entering an established market, you can quickly get data using free government tools such as Census and Stats Can or premium tools such as Statista.
Talk to your customers: This I find is the best approaching when gauging if there is demand and if you’re providing a solution that interests the market. The best way to talk to your customers is to go where they hang. It could be through events on meetup or on the aisle where you want your products to be. Be brave, keep it short and explain you are thinking of launching a new product that does and ask, what do you think?
4. Failure to Pivot
A “pivot” is a popular business term to fundamentally change the direction of the business after determining that their product isn’t meeting the needs of their consumers. Failure to pivot means you’re basically burning cash with no returns. Here are the signs you want to start thinking about a pivot.
Lack of growth: Growth determines if what you’re doing is working. Once there’s no longer growth, this a sign that you have capped out on who you could sell to, or it’s becoming too competitive in the industry.
Market is changing: Market disruptions happens all the time. Look at Uber and the disruption in the transportation industry, or AirBnb in the hospitality industry. As the owner, you need to be an expert in your own industry.
Gut feeling: Your intuition is your best friend when it comes to business. Be honest to yourself. Being the expert in your own business, you should have a honest grasp if you are providing enough value to consumers to keep them interested.
5. Run out of Money
When you’re making money, it’s easy to forget how much money you’re spending. It’s very easy to narrow in on the revenue numbers but forget about net profits. Here are the main reasons why startups run out of money.
Lack of financial planning: Building the business isn’t just about making growing sales. You could be doing millions in revenue a year, but still run out of business if you forget about the costs. The best way to keep record of your financial is to do your book keeping monthly with software like Quickbooks. That will tell you the current state of your financial outlook, but you also need to think about the future. Are there costs that are growing exponentially? Are there planned developments or taxes due soon?
Unexpected expenses: When you’re earning money every dollar you put in, it’s easy to forget to keep an amount saved for rainy days. Examples of this includes unexpected maintenance fees, professional fees such as law suits, interest on debt owing, and taxes.
Underestimating the cost of acquisition: When starting a business, most people have a good grasp on cost of good sold, which is the calculation of how much it costs to run the business. What’s often forgotten is the cost of acquiring a new customer. You might read that large corporations only spend 10-15% of their revenue on marketing. But you’re a small business, marketing cost can easily eat away at 50-60% of your revenue.
Hire a professional: You might not have an educational background in business. You might be great at sales or product development, but can’t figure out the difference between credit and debit. This is time you should hire an accountant you trust to review your finances every month.
It’s a dog eat dog world in business. If you’re not competitive, you shouldn’t be in business. Everyday, your competitors are finding ways to take your business away, and if you don’t fight back, you’ll end up dead in the water. Here are the main reasons why startups get out competed.
Out innovated: Let’s go back to 2006, one year before the iPhone launch. The coolest phone at the time was Blackberry. You weren’t cool unless you had BBM. Now, I bet you can’t even name the most recent Blackberry phone. Apple has made Blackberry irrelevant.
Price wars: You might know Amazon for it’s one day delivery and endless selection of products. But the reason Amazon can out-compete with it’s competitors is because of its price advantage. On average, Amazon was 13.3% cheaper on appliances and 15.2% cheaper on electronics versus Best Buy; 18.4% cheaper on sporting goods versus Dick’s Sporting Goods; and 24.9% cheaper on furniture compared to Wayfair.
No barrier to entry: As the Wall Street Journal describes, “the real danger of going on show Shark Tank [are] copycats.” That’s the reality of business. When others see your success, and the product can be easily replicated, they will. Look at Xiaomi vs. Apple, Instagram stories vs. Snapchat, and Lego vs. Megabloks.
More Reasons Why Startups Fail
- Poor geographic location for local businesses
- Personal use of business funds
- Poor management of inventory
- Premature scaling
- Uncontrolled growth
- Lost of passion and/or focus
- Owner burnout
- Inability to learn from failures
- Mistimed launch
- Poor/lack of marketing
- Ignoring the voice of the customers
Have you experienced, worked or know a startup that failed? I’d love to hear the story from you in the comments below.