Why Startups Fail? Top 9 Reasons And How Entrepreneurs Can Avoid It
India has the third-largest ecosystem for startups, yet 80-90% of Indian startups fail within the first 5 years of their inception. Wondering why startups fail? We found some of the key reasons behind the same and ways in which entrepreneurs could challenge these startup failure situations.
Here are 9 reasons why startups fail & steps you can take to avoid the same:
1) Lack of innovation
According to a survey, 77% of venture capitalists think that Indian startups lack innovation or unique business models. A study conducted by IBM Institute for Business Value found that 91% of startups fail within the first five years and the most common reason is – lack of innovation.
Although India is said to have the third-largest startup ecosystem, it doesn’t have meta-level startups such as some of the big names like Google, Facebook, and Twitter. Indian startups are also known for replicating global startups, rather than creating their own startup models.
Among the most innovative Indian startups would be startups like ChaiPoint, Ola, Saathi, and Swiggy, according to a list of 50 most innovative companies in the world.
How can startups avoid this?
Innovation in business helps in numerous ways: beat the competition, stand out from the rest, helps solve problems easily and increases productivity. Here are a few points that startups must consider:
- Avoid emulating existing successful global startup ideas in India without proper research and understanding of the Indian market. Startups need expert technical and innovation talent.
- Think about the long-term sustenance of the idea before venturing into ideas that are trending.
- Find the right resources to drive the startup with innovation.
2) Lack of funds
In 2018, bike rental startup, Tazzo, shut shop. The reason, as given by one of its funding partners, was a failed product-market fit that led to drying up of funding. Even though the startup had raised a considerable amount of funds, the lack of a profitable business model led to the startup shutting down.
There are millions of startup ideas floating around. But to turn ideas into reality requires finance. Those that do procure funding need scalable and profitable models to make the startup grow. Lack of funding is one of the key reasons why startups fail.
Insufficient cash is a roadblock that leads many startups to shut down. For those startups that receive seed funding, the inability to raise follow-on funds is one of the biggest reasons why startups fail.
What are the key factors to consider?
- Startups must have effective business and revenue models.
- Startups must focus on revenue and profit as much as products/services from the beginning.
- Funds must be spent judiciously.
3) Lack of focus
When Bill Gates and Warren Buffet were asked about one factor that was responsible for their success, both replied with one word: focus. To understand how focus can help, let’s look at an example.
Grubhub is a food delivery startup. From the beginning, the company decided to focus only on food delivery. There’s a lot of other services that a company like that could offer- pick up of food, catering, and more, but the founders chose to focus on just delivery. The result? They could execute technically and operationally and grow the business successfully.
Here’s how startups could maintain focus:
- Look for feedback, both, good and bad.
- Do not go all out. Decide and focus on one thing at a time.
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4) Product Market Fit
A large number of startups fail for the simplest reason – the consumers have no need for its products. Does your product provide value to consumers? Are there consumers for your product?
Is your product aligned with the innovative ideas that your company is based on? A lot of times startups attempt to quickly develop products that have no demand or try to expand the market for a product.
How can you avoid this?
- Gain an in-depth understanding of who your customers are and what they feel about your product.
- Find new customers via word of mouth before jumping into creating expensive marketing plans.
- Establish a relationship with your customers.
- You can’t please everyone, nor should you try to.
5) Leadership gaps
Most startups are driven by the vision of its founders and core team members. However, having a good idea is far less important than knowing how to lead a brand, a company, and a team. Lack of vision and strong leadership is another common reason why startups fail.
As mentioned in the Harvard Business Review, “While a principled founding team can create a great company, an enduring company requires a system of leadership that is implemented very early in its history.” Some entrepreneurs may have leadership qualities, while others may have to develop them over time. This can be one of the reasons why startups fail.
How can you avoid this?
- If you do not have leadership skills, delegate the role to someone else who would do it better than you.
- Study leadership, practice it.
- Find a mentor to help you build leadership skills.
6) Lack of agility
Today, we live and function in an always-on culture. One needs to, always, keep up with the complexities and changes. In such a culture, agility can bring a competitive advantage to startups.
In 2015, India’s largest consumer goods producer, Hindustan Unilever Limited, decided to partner with startups. The reason they did so might surprise you. They did it to regain agility. The move helped the company imbibe agility and the adaptive mentality with which startups are known to function.
Startups can have a number of teething issues. Besides that, they constantly face challenges, to which, they need to find solutions. Change is inevitable and hence, it is most important for startups to remain adaptive and agile in order to progress.
Startups can ensure agility within the organisation by practicing the following:
- Continuous learning
- Having a fluid workforce
- Research and development
- Be willing to let your ideas change
7) Business model failure
A good product, an impressive website, and huge ad spends- a number of entrepreneurs assume that these factors are going to be enough to attract customers and business. They ignore the fact that customer acquisition and customer retention come at high costs and the startup needs a foolproof business model to sustain and profit.
Here are two questions where entrepreneurs can begin in order to build a suitable business model:
- Does your startup have a scalable way to acquire customers? Can you find one?
- Can you monetise those customers once acquired? Will the revenue from that customer outdo the cost of acquisition of that customer?
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8) Lack of talent & competency
Surprising, but 23% of startups fail due to lack of talent and skill. It is one of the most easily solvable issues, one would assume. However, it is not. The reasons?
1) Startups spend a lot of time and effort in recruiting the right candidates. In situations of bad hiring choices, startups may face the challenge of replacing the hire with a better candidate.
2) Most times startups are cash strapped and cannot afford to hire experts or experienced employees who come at a high price.
What could startups do to tackle this issue?
- Plan their hiring processes with utmost care.
- Create alternative working methods such as work on freelance-basis or on a project basis model with expert professionals.
- Make hiring processes stricter and intense by giving the candidates a real issue to solve.
9) Ignoring customers
Quite often startup founders have too much to handle – funding, recruitments, overall management of the organisation, and more. Customers may not even feature in their to-do lists. This is a big problem, which entrepreneurs fail to realise and can very well be the reason for why startups fail.
When startups are committed to being customer-centric, their decision-making becomes easy, their focus gets narrowed down and their popularity increases from word of mouth – as explained in an article in the Harvard Business Review. Moreover, customers know what they want and can help startups better their products and services.
Here’s what to do:
- Do not ignore customers.
- Address customer queries, concerns, and feedback.
Addressing your startup’s drawbacks and challenges will only help you on the path to growth. Worthy of all the efforts, then?
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