One of the great unknowns that torments entrepreneurs, and those who are in the process of being so, is to understand once and for all why startups fail. It is one of the big questions for the new companies that are starting. Well, the technology platform CB Insights, has already taken a step forward to break up this puzzle a bit.
How to understand why startups fail
To understand why startups fail, CB Insights has analyzed the forensic data of 101 startups that have gone on to a better life. By analyzing each of these stories of failure, it has been possible to identify several common patterns in these companies. With this information they have prepared a list with the main reasons that can explain why startups fail.
It should be noted that in most cases, as indicated by the platform, it is rare for a startup to fail for only one reason. In this sense, this list should not be considered as a survival manual, but as a compilation of very useful lessons for anyone worth their salt in the entrepreneurial ecosystem.
The low market vision and lack of money, the two most common reasons
Without supposing any surprise, the reason most mentioned by the startups in ruin is the little market vision they have had at the time of devising their businesses. 43% of cases have commented that the inability to meet the needs of the market explains why their businesses have fallen out of favor. If nobody is interested in what you sell, it is very complicated to have customers. The study cites the case of one of the startups studied, Kolos, from which they explain that in their case they did many things well, but ignored the most important thing: finding the right product.
After the inability to understand the market, running out of resources is the second reason mentioned to understand the failure of startups, with a 29% presence in the cases studied. Money and time are finite and should be distributed wisely. This is what happened to the augmented reality firm Daqri, which closed after spending more than 200 million euros and not raising more in new rounds of investors.
The importance of the work team in startups
Having an adequate work team, each with defined skills, has also been mentioned as crucial when determining the success of a company. Some of the founders have lamented that the failure of their startups has influenced the lack of workers with specific profiles to meet different needs. As illustrated by the founder of the company Nouncer, since he indicated that one of the problems of the failure of his startup was the lack of a partner in commercial and technological decisions.
Not only that, the lack of affinity or agreement between the founders or even among team members is determined as a very big obstacle when it comes to maintaining the success of a startup.
Marketing in the success or failure of a company
Marketing is also key to determine why startups fail. The ability to attract the attention of the target audience and turn them into customers is one of the axes to define the success of a business. The inability to market an excellent product or a great service leads companies to failure.
Along the same lines, most of the founders of these startups in ruins agree that attention should be paid to the business model. Staying in a single channel, not evolving or not finding ways to optimize the product causes the hesitation of investors and the inability of the founders to make the business profitable.
The same happens when consumers are ignored, it is a way of making sure that the business will fail. It is a fatal deficiency that condemns startups to failure.
Other reasons that explain why startups fail
If the reasons above seem few, do not worry, there are more reasons to explain the breakdown of some startups.
Do not notice bad decisions
The fact of not moving away from a bad product, a bad contract or a bad decision, is one of the reasons that have caused startups to fail in 7% of the cases studied. Being anchored in an idea without realizing that it is a mistake can deplete resources and money, in addition to frustrating employees because of the lack of progress.
In any case, there are some who think that a change in decisions is not always the answer. For example, Fred Wilson of the venture capital firm Union Square Ventures believes that course changes are overvalued and sometimes it is better to let a bad idea fail. Specifically, accept it, recognize it and deal with it.
A good balance between work and family life is not something that startup founders usually have, so the risk of exhaustion is high. In this way, exhaustion is another reason that explains why startups fail. In these cases it is necessary to redirect efforts when we are in a dead end to succeed and reduce exhaustion. It is also important to have a solid and diverse team where responsibilities can be shared.
There is a widespread belief that building a successful business often involves overwork. This is what Arianna Huffington, founder of The Huffington Post, thinks, that the predominant (and erroneous) vision of the founders in Silicon Valley is that in order to succeed and build a high-growth company, they need to be burned to the fullest.
The lack of contacts
This is one of the reasons that could be considered the most obvious. Many entrepreneurs regret that their lack of contacts and investors complicates the way to make their business succeed. That is why it is not surprising that the lack of contacts is one of the reasons for failure of many startups. Entrepreneurs should not be afraid to ask for help when necessary. Sometimes you fall into the error of wanting to do everything for yourself and that can inevitably lead a company to ruin.
On the other hand, as several startup founders have commented in the report, it can also happen that the problem is in the lack of interest of the investors themselves, either at the beginning of the financing rounds or an absence of a lack of interest, whether in the series A financing round or a lack of absolute disposition.
Among all the stories that explain why startups fail, there are 13% of cases of founders who end up distracted in the project, either because of personal problems or simply because of a loss of focus. This is what happened, according to the report, to the ecommerce startup DonebyNone. While focusing on other problems that had to be resolved, they neglected the consumer experience. One of the essential points for emerging businesses. On top of that, a deviation in the approach inevitably leads to bad decisions and, therefore, to failure.
Difficulties with the product / service
Similarly, to understand why startups fail, we must assess whether the approach that is being given to the product is appropriate. Sometimes, a startup can start from a simple idea and complicate its development due to legal issues.
On the other hand, a business can also go astray when it launches its product too soon or too late and not at the right time. Especially when you ignore what customers need, either consciously or accidentally. To this we must add the difficulty of setting a price high enough to cover costs but adequately low to attract customers.
Also, the location plays an important role in the failure of a startup. If, for example, the work team performs its functions remotely, make sure to find effective remote work methods. Otherwise, the lack of a work team and above without planning, could lead the company to bankruptcy.
Lack of passion and ignore the competition
Although it is thought that new companies should not pay attention to the competition, once an idea enters the market, it will always have its commercial rivals whether we like it or not. Although it is true that obsessing with competition is not healthy, ignoring it can accelerate the ruin of a business. 19% of startups pointed to this reason as a key to their failure.
Finally, among all causes that can clarify why startups fail, it should be stressed that although the idea of startup is bright and revolutionary, lack of passion and lack of knowledge in the field can take its toll and be sufficient reason to motivate failure of your company. 9% of cases in this report corroborate it.
Also published on Medium.