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Why Startups Fail and How to Avoid This

Friday, December 10, 2021

Startup Jedi

We talk to startups and investors, you get the value.

Working on a startup is considered one of the most risky and nerve-racking occupations for a reason. Unfortunately, “Starting is the hardest part” is not very applicable here as startups face new dangers at literally every stage. If you want to save your startup, know the fatal mistakes and avoid them. We’ll dive deeper into this in today's article. 

«A wrong idea» is only half the trouble 

Not all startups survive. Y Combinator founder Paul Graham, who has seen hundreds of successes and failures over the years, cites statistics: out of 100 start-up companies, 75 shut almost immediately, another 20 have chances, but most often end up not growing, and only 5 become in-demand products.

The main reason startups fail is no product-market fit, which probably everyone who has anything to do with the startup industry is well aware of. But, unfortunately, the problems of a startup go beyond the stage of searching for an idea. Many startups fail even with the technology that people actually need, as they are unable to withstand the challenges they face at the growth stage, like conflicts in the team or competitors.

Running a startup is like the glass bridge challenge from The Squid Game, where you can face fatal danger at every step. And if it seems like an exaggeration, here is another quote about glass from Elon Musk: “Starting a company is like eating glass and staring into the abyss.” Sounds worse than the challenge from The Squid Game, doesn’t it?

But the good news is all potential mistakes and common reasons for startup failure have already been described, and you can use this experience not to take the wrong turn.

Top 5 Reasons Why Startups Fail 

Wrong idea. And yet again the statistics: 42% of startups fail because the problem that the founder considers important is not in demand in the market. It seems like a very obvious problem, but when a person is obsessed with an idea, it is very difficult for them to realize that the user may not need it.

Wrong people. It is no coincidence that for most funds and venture investors the team is a primary factor when evaluating a new project. The idea can be changed by a pivot, but a weak team can set a wrong startup trajectory from the very beginning.

Poor marketing. Many great technologies fail at the distribution stage. You have a revolutionary startup, ok, but how can you communicate this to the user who is literally bombarded by millions of other companies in social networks and search engines? Good marketing is the key to product growth, and lack of it will ruin even the most promising idea.

Bad UX-design. The market is oversaturated, meaning that poor website design, a slow chatbot or a “buy” button you can barely notice can stop users who are interested in the page from making a purchase. It is important to understand that for early adopters who, at the MVP verification stage, confirmed the demand for the product, these details and flaws may not be important, but they will be for the mass consumer.

Lack of money. At the growth stage, a startup needs constant money supply to invest in the expansion of the team, infrastructure, and advertising. Sometimes startups without proper monetary support simply do not reach the growth rates required to survive in the "valley of death."

The most important thing to remember is that at different periods of a startup's life, there are different fatal risks. Let's take a look at the main mistakes at each stage of product growth.

Idea Validation Stage

Mistake №1: moving on to product development before checking the idea. This is literally the most common startup mistake. It would seem that everyone knows about it, but, nevertheless, people keep making it. Fascinated by the idea, the team begins to work on the product and look for investments, wasting months and years of life on something their audience is simply not interested in.

What kills your startup? Lack of customers’ interest: if the audience is not ready to pay enough for your startup to constantly grow, the startup won’t survive. 

What’s the right approach? Validate an idea through problem research and user attitudes. Then move on to checking the MVP. Just like Eric Ries advised in his book Lean Startup.

Mistake №2: Trusting your intuition, not data. Very often, startups develop a product simply because they “think it’s going to work”. Instead of carefully researching and calculating unit economics, they rely on their instincts, which eventually leads to failure.

What kills your startup? Not working with data. 

What’s the right approach? Analyzing the market, calculating unit economy and business model — not trying to guess the winning combination, but doing all the boring work that is far from what you may have imagined. Entrepreneurial intuition is important, but data alone will tell if you are heading in the right direction.

Mistake №3: wrong team. If there is a conflict in the team, they do not believe in the product, or if someone only imitates work — most likely, several months (years) of work on a startup will simply be in vain.

What kills your startup? Conflicts, doubting the startup idea, bad atmosphere, lack of a leader or authority.

What’s the right approach? Instead of recruiting friends or people who "seem to fit", opt for those who are able to close the weaknesses of the founder and can lead one of the areas of work (development, management, marketing). Work with those who are motivated and believe in the product. Discuss all the details of cooperation in the very beginning, to work on the atmosphere in a team.

Mistake №4: Trying to make a perfect MVP. Perfectionism comes in handy in some cases, but definitely not when it comes to working on a startup MVP. This requires speed and a prototype that reflects the most important functions. After all, you may have to redo it 10 times, or even more!

What kills your startup?  Waste of time: While you are trying to bring your 1st MVP version to perfection, you are running out of money or motivation (or both).

What’s the right approach? Be mentally prepared to make not one, but 10 or 100 prototypes. And read “Lean Startup”.

First Sales

Mistake №5: doing everything yourself. At this stage, it is critical to maintain high sales growth, and it is impossible to do this with the help of one person.

What kills your startup? Not enough sales for a startup to survive, low quality of work, processes that are not efficient enough to ensure rapid growth.

What’s the right approach? Hire staff or outsource part of the work. Transfer sales and marketing, and focus on decision-making and strategic management.

Mistake №6: not investing in marketing. We already mentioned this rule. As we’re constantly fighting  for user attention, the lack of a clear marketing strategy will kill even the best idea.

What kills your startup? The product simply does not reach the audience — there are no sales.

What’s the right approach? Hire a person with solid expertise in marketing and sales. Conduct marketing research, analyze indicators, try different methods of promotion, including free marketing.

Mistake №7: not analyzing your competitors. To begin with, no startup will raise investment without a good market and competitor analysis. And also, having researched competitors, you understand your market share better and can calculate the unit economics, you can analyze which actions were effective to competitors, and which, on the contrary, did not justify themselves. A good business strategy will not work without competitor analysis.

What kills your startup? Repeating other people's mistakes, lack of a strong value proposition that becomes your competitive advantage.

What’s the right approach? Spend a  few evenings analyzing your competitors, and then do it on a regular basis; keep up with the industry news, read market research. 

Mistake №8: not calculating unit economics. This methodology will help you understand whether your product will be able to grow well enough to survive. There are many formulas and indicators in unit economics, but understanding them is invaluable as you can see in which metrics your product is "sagging" and regulate them.

What kills your startup? Cash gaps, no profit, too slow growth.

What’s the right approach? Check out good guides on calculating unit economics and calculate it for your product.

Scaling — turning your startup into a company

Mistake №9: no proper management. When a startup is made by a team of 5 people, there is no time to deal with management processes, moreover, everything can be agreed on live or in social networks. But when the structure changes, and the organization already has 50 or 500 employees, you need to set up management processes to work effectively.

What kills your startup? Chaotic management, high turnover, team scandals.

What’s the right approach? Hire managers who will help build a management system in the team, while maintaining the "startup spirit" and flexibility in decision-making.

Mistake №10: neglecting corporate culture. You don’t need to explain to co-founders and early adopters why your company is the best place to work. They've been there since the beginning and are still passionate about the idea. But an employee hired from the market is not so committed to the company and its idea, and for them to appreciate and love their job, you need a whole package of material and non-material motivation. And you also need to maintain a balance of interests between “oldies” and “newbies”, a task that requires a competent HR professional.

What kills your startup? Lack of a strong team, bad atmosphere, staff turnover — senior specialists and early employees get frustrated and start leaving.

What’s the right approach? Hire a competent HR, build corporate culture, provide decent conditions and a transparent system of bonuses for each employee. And come up with your own system of non-material motivation that will support the corporate spirit.

Mistake №11: ignoring paperwork and legal issues. The larger the company becomes, the more is at stake. Start-up entrepreneurs traditionally have a contemptuous attitude towards "bureaucracy", but it is precisely the strict adherence to the rules that helps in controversial situations and becomes the indestructible foundation of a large corporation.

What kills your startup? Chaotic management, lawsuits, violation of the law, scandals.

What’s the right approach? From the very beginning, ensure proper document flow, hire competent lawyers, and cooperate with specialists in corporate law.

Mistake №12: not being ready to change. Even a large company with a solid status, which is confidently going to an IPO, can depreciate overnight, which there are many sad examples of. Someone may release a revolutionary product, the conditions in the industry may change. COVID pandemic is the best example of how external circumstances can change the traditional market.

What kills your startup? Circumstances that hinder growth, the inability to rebuild and find a new product.

What’s the right approach? Stay flexible, quick and ready to adapt to changes. 

The CEO bears responsibility for the startup survival: it is they who need to recognize the risks in time and make decisions that they may really not want to make, but which will eventually save the product.

We hope this list will help you navigate your product across this “glass bridge” to your cherished goal!

10 Dec 2021

 

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