A startup is essentially an experiment in which the fundamental business idea is tested. While they begin small and meet the regulatory definitions of ‘small enterprises’, startups differ from traditional small business ventures in two ways- innovation and scalability.
However, as their model is yet to be proven successful, the chances of a startup failure are higher than those of other new businesses. According to the studies, only one out of every ten startups succeeds. Also, among the 90% that do not make the cut, 20% fail after the first year of operation.
Certain factors must come together to create a favourable environment for startups to succeed. Legal, operational, financial, management or technical issues can impede a startup's aspirations to become a unicorn. If the founders can identify the failure symptoms and the will to act on these indicators early on, they can cut their losses and avert the escalation of risks.
However, entrepreneurs can become so invested in their startup idea that they fail to recognise obvious signs of failure staring them in the face. Let us elaborate.
Startup Failure: Some Common Reasons
Let us take a closer look at some common reasons why startups fail.
1. Product-market incompatibility
According to a recent study, 34% of startup failures are caused by a mismatch between the product and the market. Startups tend to focus their efforts on product development while ignoring market research. A similar grave error is misreading their target group's demand.
As a result, these startups may end up creating a good quality product or service that no one wants to buy. Startups must be willing to pivot if their core idea is not selling.
2. Financial Issues
Fund and liquidity issues rank high on the list of causes of startup failures. Raising funds, monetising the business idea by controlling costs, setting prices, achieving profit margins, and managing cash flow are critical functions determining startup success or failure.
3. Troubles with the team
Founding members and the first hires comprise the startup’s core team. The collective experience, expertise, and motivation of its core team play an equal role in a firm’s success or failure. Lack of communication and teamwork among core employees and strategic differences between co-founders can impede a startup's growth even if its business fundamentals are strong.
4. Operational and regulatory concerns
Startup failures due to operational and regulatory issues are generally rare and limited to a particular industry or region. For example, consider the case of Koinex, an Indian cryptocurrency exchange platform. The Reserve Bank of India’s (RBI) policies concerning crypto transactions are very restrictive. Due to the RBI directives, operating the exchange platform became impossible, and Koinex had to shut down its operations in 2019, two years after it launched its business.
9 Red Flags Entrepreneurs Must Not Ignore
Entrepreneurs often play against the odds by launching startups. They cannot know which shortcomings and lack of business oversight will be stacked against them later.
However, fortunately, there are some definite signs that if paid attention at the correct time, it may prevent the company from becoming a complete failure. These include the following:
1. Unable to sense the market pulse
Many startups make the fatal error of not comprehending what the customer wants, often due to overconfidence in their ‘startup dreams’. Customer demand is the primary driving force in the market. If your company is experiencing low customer engagement despite good marketing efforts, it is a dead giveaway that things are heading to a startup failure.
2. Sales cycle lagging behind
Use the key sales cycle in your industry as a metric for your sales performance. When a startup’s sales cycle exceeds the industry average, it shows poor business performance.
3. Prolonged time-to-market
Another critical factor is the product’s time-to-market (TTM). Startups lose leverage if they take too much time to launch their product. The longer a startup's TTM, the more likely it will fail.
4. Slow execution
Innovators must be quick to execute to avoid startup failure. If your company's speed is slow compared to the competition's, it indicates that you are underperforming.
5. Consistently negative cash flow
Cash shortages are frequently caused by poor financial planning. If the startup's cash flow position remains consistently negative, it indicates that revenues are drying up.
6. Failing business network
If your startup runs into trouble, the business connections you've carefully cultivated over time, particularly for marketing and advertising purposes such as PR firms, the media, and so on), will stop cooperating with you.
7. Disputes among the core team members
It is very important to carefully choose your founding partners and hire early employees, as negative team dynamics will eventually bring the company to its knees and become a reason for startup failure.
8. High rate of attrition
A high attrition level could be an indicator of employee dissatisfaction. Frequent resignations occur probably because they are dissatisfied with the opportunity, benefits, or work environment. Retaining and empowering your workforce is critical for the survival of your startup.
9. Loss of vision and passion
No one is more invested in and enthusiastic about the startup than its founders. So, be cautious of times when you are less enthusiastic about your startup. The prudent thing to do then is to evaluate your priorities and exit the venture if you don’t want it to fail.
Statistics show that startup failures are bound to happen. So entrepreneurs must launch their startups, preparing to face failure. However, understanding these signs will help them to correct their business plans and steer the venture toward success.
Scalix is an integrated platform where founders can discuss and share their business ideas and find a creative community and business-building components at hand. Our Fundraise kit is your one-stop shop for corporate credit cards and working capital loans. This tool allows startups seeking funds to assess their readiness and receive a detailed report.
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