5 Reasons Why Startups Fail

Starting a business and guiding it to a successful stage is a huge challenge that most founders hardly appreciate before venturing into business. The statistics show many startups fail before ever returning a profit or even recouping investments. A 2019 study showed that a whopping 90% of startups fail. 21.5% fail in their first year while 30%, 50%, and 70% fail in their second, fifth, and tenth years respectively.

Market problems

Market problems encompass several issues. Key among them is poor understanding and knowledge of the market. Therefore, the startup either ends up targeting a broad market niche or wrongly estimates the potential of customer growth. If the market size of the people who have the need for the product and the funds to buy it is small, the business is bound to fail.

Another significant market problem is timing. A product could be ahead of its time where there is no supporting infrastructure around it, or people do not see the urgent need. On the other hand, it could be that you launched the product at the wrong time or in a competitive environment. Market timing is closely related to the marketing of the product. Without adequate and effective marketing then, startups cannot attract their market and it affects their sales leading to closure.

Poor management team

The management team plays a significant role in the success of a startup. Where the founders have different goals and objectives of the startup, then they will pull in different paths, and they either walk away or see the business move from one crisis to another. The early management team also needs to bring sufficient expertise in the field and people and resource management.

A poor management team will see the business struggle in essential areas like product conception, marketing, and fundraising. As a result, the business suffers from poor strategies, which then lead to failure. Products are poorly designed or get to the market late. Implementation of any strategy or marketing plan will also be compromised.

Having a poor management team also affects your business culture. Issues of integrity, quality assurance, and learning from mistakes are critical for a startup’s success, yet if you have a poor management team, they will overlook all these, and the business cannot grow as the business culture keeps sabotaging it.

The management team also impacts your recruitment plan. Startups rely heavily on attracting and retaining top talent and people with the right personalities to get through their first years and build on to future success. Without a strong management team, the teams below them are weak and tend to resemble the leadership.

Insufficient financial resources

The financial resources available to your startup will determine whether it fails or succeeds. It is a factor that impacts many areas of the business. Market research, product development, marketing campaigns, compensation for talent, and many other areas depend on regular cash flow. However, since the income generation capacity of the startup is limited, when the original capital is depleted, startups lack funding for their activities unless they find new funding sources.

Often, investors may not be ready to continue providing funds for extended periods of time unless your startup has added value or shown evidence of growth in the market. If your product or service is not selling, or you are running high costs compared to the finances you have, then you risk running into cash flow issues which eventually cripples your business.

Problems with the product

Problems around the product for your business can cause your startup to fail. The first issue is a product that does not meet a market’s need. During product development, a failure in strategy means you end up without a product and market fit. It could also be a problem of simple execution. As a result, the product ends up lacking a compelling proposition to make buyers purchase it. If you cannot rethink the product and change it with a few adjustments, the business is forced to shut down since it cannot achieve its goal.

Other product problems are pricing and costs. Your product's pricing strategy has to consider the target market, the value it is offering, the cost of production, and expected profit. If it is priced too high, then it will not be attractive to buyers, but too low, then the company can barely break even, and it will lead to cash flow problems.

A flawed business plan

Any good startup needs a solid business plan which acts as a blueprint of how the business will grow, expected challenges, how to mitigate them, the business model, and the problem or needs the startup will solve. It is in the business plan that you set up a business model identifying your target market, how you will get them, and the cost of customer acquisition. Having a product without a business model or a flawed one means you are either guessing your way through things or working on the wrong information.

As such, the product may prove too costly to make as the lifetime value of the acquired customers is low than the acquisition cost. The business also lacks a sound strategy on when to expand, how to overcome challenges existing in the market, and how to handle financing. More importantly, you cannot accurately evaluate whether the business is succeeding or failing until it is too late as you have no benchmark or plan to base the evaluation.

The fortunate news is the main reasons for these failures are now known, and entrepreneurs can plan early with these factors in mind. Addressing these key issues early on in the startup’s life makes it better placed to handle other future challenges and build resilience which is vital for its success.

Bottom line

The ultimate success of a business is based only about 10% on how great the actual idea is. The other 90% is based on how well that idea is executed. Having a well-constructed financial model is essential to raising more capital.

If you need advice on building a financial model or tips to land investors during fundraising we are here to help. Check out our services or contact us today!