Why do 90% of Startups Fail

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Why do 90% of Startups Fail

Overview

Everyone has grand ideas when they set out to start their business. In most cases, the ideas themselves are grand. They feel that they have all the tips starting a business. However, more than 90% of all startups fail for various reasons. Today, about 60% of all startups dealt with emerging technologies(1).

In a market that’s getting saturated, it is easy to get lost in the noise. Apart from that, there are several other mistakes that budding startups make that can be avoided with a little careful planning. So, here are the most common mistakes that startups make and advice on how to avoid them.

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Most tech startups have individuals with some technological backgrounds steering from the mast. The way typical startups run is that the founder gets an idea to solve a problem; he then builds a solution for that problem and then tries to sell it. When nobody buys that solution, he runs out of cash, and the startup needs to close. Post mortem reports of founders who have made their journey public reveal that all of them focussed first on delivering a solution without considering the customer.

Mistake: Product First and Customer Second

The major reason behind this is that the founders look at solving the problems that they’ve faced. In many cases, the problem that they’ve encountered is a niche, and the market might not be ready to absorb the new product. Any business is as good as the efficiency of its solutions for the problems faced by others. Most forget this line and fail because they did not put the needs of others first.

Founders generally think that if they make the product rich in features and abilities, customers would want to buy it. That doesn’t happen usually. Customers know the problems they face and what will solve that problem. Since you’re playing in a buyer’s market when you’re starting, it is important to understand what customers want. Besides, most founders are still insecure about their own business.

This makes them shun criticism and only look for praise. That can have a disastrous effect on product improvement. As a result, businesses fail to take off and reach important milestones. So what is the solution for this?

Feedback lies Outside the Building:

The best criticism you can get is from outside the four walls. You need to interact with the customers a lot. You need to take feedback frequently so that you understand how your product is performing.

Often, this means that you have to do things that won’t help you scale in the short run but will improve the product performance in the long run. No product is final the moment it hits the market. You will have to keep updating your product and improving on it until your business can settle down.

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Address a Want:

No customer buys a product because it is nice to have. Every product should address a want and solve the problems that arise if the want were to go unsatisfied. A successful product is the only one that makes the customer believe it will satisfy some challenges they face. If you can’t address a challenge, you should be able to create artificial demand. That requires considerable resources. The alternative is to understand what the customers want and address that.

Stay Away from Static Plans:

No plans can ever survive the first contact with the market. Most business people eventually learn that their business model should be adapted according to the social demand and public perception. The key is to realize how to spend on drafting the first plan.

If you spend a lot of time drafting the plan without factoring in how to tackle uncertainties and dynamic situations, your planning purpose has gone in vain. Don’t spend too much time on planning because you’ll have to change the original plan eventually anyway. Spend time in outlining your idea and then account for the easiest way to implement that in a dynamic setting

The only way you’ll be able to grow your startup is by combining building with user research. By embracing feedback, you open yourself up to enormous success you’ve never seen before. But to do that, you will have to rely on performing reliable customer research. Only by understanding your market can you provide good services.

Mistake: Lack of Commitment and Focus

The problem here is really easy. Everyone has the same amount of time to work on their idea. Some ideas work better than others because they know what to work at any given time. They have a sense of direction and understand where they want to take their startup. Therefore, lack of direction, and not lack of time, is the problem here. There are several things that founders do at the beginning such as

  • Coffees and brunches with the people they perceive as potential investors and large clients
  • Networking without understanding what that’ll achieve
  • Recruiting a large board of advisers to guide on the path that the business should take
  • Entering into partnerships without any perceived benefit or added revenue
  • Drafting a social media content strategy without knowing what the expected outcome from that is
  • Spending too much time on conferences, workshops, and other such activities

There is nothing wrong with doing all of this. The problem here is that most founders do not know where to draw the line. There is a chance they go to the wrong conferences, wrong workshops, meet the wrong investors, devise the wrong content marketing strategy or network with the wrong people.

When you’re starting, you only need to focus on two things — the user and your product. Most information you need will anyway be available online like this article here. You don’t need to concern yourself until after you’re sure that there is a market for your product, and you have a customer base to appeal to.

Choosing the Right People

Many times the founders believe that they have the manpower to run a successful business. They believe that the business will be done justice even if only the founders run it. They don’t believe in hiring a team. When the business doesn’t scale up as they wanted, they realize that they should have hired a team to do things more efficiently than they could have done on their own. As Mark Suster said, for his entrepreneur tips, “Individuals don’t build great companies, teams do.”

If you have to summarize everything about a startup, it can be done so in three bullets

  • Create something that people want
  • Hire people who can build that something
  • Spend as little money as commercially feasible while building that.

Only if you can put bullet #1 can you achieve the other two points efficiently. A research posted on Medium shows that startups that work as a team have about 400% more growth than those with its founders as solo riders. Ideally, every startup should have a designer, a technologically competent individual, and a professional who understands the market that the product caters to.

Colloquially, they may be called a hipster, a hacker, and a hustler. When you’re good with your employee relations, it is easier to manage your client expectations because you would have manned so many more ports than you could have done alone. Besides, with another mind applied to a perspective or opinion, the long hours get shorter, and the idea becomes more foolproof.

Scaling too Early

The main goal of any startup is to stop being a startup. When the founders start getting funding, when they hire the right employees, achieve a level of commercial feasibility, they try to scale up. Like most post mortem reports read, scaling up too early was the mistake that most led to most startups’ demise. Once you’ve reached a certain level of commercial feasibility, you’ve recovered your fixed costs.

After that, the goal is supposed to be recovering your other costs. That means the possibility of higher returns on the same cost structure becomes easier. That is what you should be aiming for. Once you reach a certain level, that way, your business model also acquires certain stability. This confidence will allow you to acquire more customers and create a sound employee base that can proactively and dynamically react to employee requirements. So, a startup that is ready to scale has the following features.

  • You’ve established your customer’s lifetime and the economic shelf life of your product — how many customers come back for the purchase, how many customers report satisfaction, or any other such metric
  • You have established a tried and tested method that you can suitably and scalably employ for acquiring customers over a period.
  • You’re spending more time expanding the business or any other such activity that works on the business instead of working in the business, trying to maintain stability to the process

Until you’ve achieved these milestones, you can’t rely on scaling your business reliably. Even if you do that, there is a good chance that your business will collapse on itself. So how do you address these issues?

Identifying Who Needs the Solution

This is a no-brainer. The first thing that any startup should do is identify the problem and how many people experience it. The next step is identifying how you commercially solve the problem while monetizing your solution. That means you should have a problem that a large enough audience is facing and a way to solve the problem so people will be willing to pay for it. Once you’ve managed to find a way to accomplish these, you’ve crossed the first phase of the method to scale the problem.

Perfect Your Product

Even products that cater to the luxury market know who and what they are competing against. The important thing here is that you should identify a vacuum for which a product would be in demand. You should then identify what your products need and test, validate, and determine the final core features that go into your product. At this phase, you should be able to make a Unique Selling Point (USP) for your product.

However, it doesn’t end there. You should also follow up on how the product is performing in the market. As mentioned already, a product is not ready if it can’t adapt to initial public perception. Even then, you should be ready to add to the product without changing your USP. That means while the product can undergo changes, updates, and modifications, it can’t change the USP for which it was created.

Improving Your Margins

After some time, you should be able to streamline your process and lower your acquisition costs. This should manage your conversion funnel’s efficiency and reduce the overhead costs you incur on the products. Your focus should then be on retaining the existing customers. Once you’re sure that the cost of acquiring a new customer is lower than the cost that you incur for maintaining the economic shelf life of your product as discussed above, you will be ready to scale your product.

Conclusion

In these times, it is important to maintain focus over external validation. Until the point of breaking even, several similar businesses will be competing for average results at best. If you continue to choose customers over products, and a balanced team to accomplish that, you will have achieved an entry towards stepping out of the name of a startup.