Table of contents
- Founders didn’t make something people want
- Founders can’t stay focused
- Founders don’t measure their worth
- Startups ran out of money
- Fundraising gets harder
- Being on the wrong market
- A bad co-founder or the lack of one
- Bad marketing
- Not being aware of the competitors
- Ignoring the “burnout”
We keep on saying that starting a business is a lot harder than most people think. A business is rarely so in tune with its niche that it can fly along with little effort. According to Harvard Business Review, “More than two-thirds of startups never deliver a positive return to investors”. But why do so many startups fail? There are many reasons for this, so here is what you should know before starting your own business. If you ask former business owners, you will get a wide variety of reasons on why their businesses failed. Here are the 5 most common ones:
1. Founders didn’t make something people want
Nothing is as important as making something that people want. You may be the best at advocating, fundraising, or the best programmer the world has seen. If you don’t come up with a product that people need, you will fail.
We have an ongoing piece of advice for those searching for inspiration or startup ideas. (link to ‘Startup ideas’ article). Try and fix an issue that they already have. This way, you can be sure that you're building something that other people need as well. How do you know this will work? Because you are already a part of the targeted market and you will have lots of insights on that subject.
Next, if you want to understand what others want, you need to understand your users first. Do they like what you’ve created this far? Why? Or why not? You should spend a lot of time talking to your users. Watch them, observe them, and learn what kind of products they want you to build.
As a startup founder, you’re a doctor and the users are your patients. You should always go and talk to your patients. Listen to what they say their symptoms are and what they’re complaining about. So make sure you talk to your users and build things that people want. This way, you’ll avoid the most common way that other startups fail.
Not to forget, be willing to change your mind if it’s the right thing to do. Most good ideas change over time. You can even figure more out while having a one-day workshop for startups. But your users are your guiding point and the best way to stay on track. So again, the best way to succeed in the early stages of a startup is to build things and talk to users.
2. Founders can’t stay focused
We follow the first reason with another one about focusing on the product and users. Might sound redundant and self-evident, right? But founders should focus on their product and users to the point of being fanatics. The best entrepreneurs don’t have time to get caught up in other distracting things.
Here are a few things that distract founders by thinking they are big priorities:
- “Grabbing coffee” with investors
- Chatting with potential acquirers
- Recruiting boards of advisors
- Doing a partnership thinking it will generate more users
- Spending time on PR before creating a product desired by users
- Arguing on social media
3. Founders don’t measure their worth
If you build something people want and then stay focused, growth is a natural result. This means you can use growth as a measure to check if your startup is going in the right direction. If your growth rate is at least 10% per month, you’re on the right track. If you’re not, you’re probably missing one of the first 2 elements mentioned before. You’re either building the wrong thing or you’re not focused enough.
The guys at Y Combinator taught us a good lesson: “You make what you measure”. Pick a goal number and focus on that. One good metric for measuring your growth is good old revenue. We don’t think there’s another better test to check if you’re making it in or not.
Do you know the saying “ignorance is bliss”? Well, it should only apply to your fashion choices. You should not be in denial when it comes to your business, because it might kill your startup fast. Focusing on growth prevents you from living in the denial. A lot of problems you face in your startup might provoke this. Yes, founders tend to make mistakes and then live in denial about it. Founders may waste a lot of valuable time doing inessential stuff and be in denial about it, too. Denial is the silent killer of startups. That’s why you should have growth targets, to get yourself out of this denial. The numbers stare you right in your face this way. You can’t pretend you didn’t know about the difficulties you were having. Look at it this way, numbers may be also good in the end. What other motivation hits better than this?
We understand that some issues are hard, and you may be tired. Sometimes you feel like you’ve had enough, or you consider that focusing on growth is not a priority right now. This is the moment that denial sets in. This is also the perfect moment to not let your guard down. Set the goals, stay focused on them, and measure your growth constantly. If you feel like crawling down to cry, then do so for 2 and a half minutes and then get back to work. In the long run, you don’t want this minor setback to be the reason your startup failed.
4. Startups ran out of money
This is another major reason startups fail. Why does it happen, tho, why do startups run out of money? Simple, because they spend more than they earn. But how can a startup spend so much to run out of funds? Well, a big expense in any business is salaries. So, spending too much money = having too many employees.
Making a product nobody wants is the biggest mistake in the early phase of a startup. Overhiring is the second-biggest mistake but in the next phase of a startup. It gives you less margin for error. The amount of time you have to generate a profit decreases when you use up your cash reserves more. Yet, startups are the kind of thing that takes longer to get right than you expect. This is because they are (generally) managed by inexperienced founders. They are also building something novel and that's a lethal mix. If you start to run low on cash at this point, you will need extra funds while in the "ugly duckling" stage. You don't look good right now, even if you are on the right track. Investors generally dislike those kinds of businesses.
So, be very conservative with your money expenses. Be somehow pessimistic and assume it will take longer than you think to get things moving. It’s better to be prepared for unforeseen problems than take unnecessary risks. You don't want to gamble on your startup’s future.
Now that we saw how fast you can lose money, let’s see how hard it is to gain money.
5. Fundraising gets harder
Hope you didn't think the drama ends when you hit the “ugly duckling” phase. Startups get slammed when they have to raise money from this phase. All because the following rounds of fund raising get so much harder. This is where founders usually try to raise a series A.
Series A funding is the first round after the seed funding stage. In this round, it’s important to have a plan that will generate long-term profit. Seed investors are mostly looking for a promise of success. Series A investors on the other hand are looking for performance. They will only invest in you know if they can assess that you’re clear on the path to being a big winner. They are willing to invest a lot if they think so. But will this “ugly duckling” phase make them think you are a big winner? Probably not, so they won’t invest at all. If they don’t see progress, they don’t waste their money.
These were 5 major reasons why startups fail. Now let’s see 5 secondary reasons that you should keep an eye on at all times.
6. Being in the wrong market
Too many people try to start a business targeting everyone as their demographic. This doesn’t work out well. Next, they try to target everyone in their town. Again, too broad. The more defined your niche is, the easier it will be to market to the right audience.
7. A bad co-founder or the lack of one
This is indeed an issue. It might be a bit too hard for one person to tackle all the challenges alone. Even investors might treat you differently if you’re all alone in this process. But the solution is very simple, get a co-founder. Having a partner is necessary when starting a business. You each have particular knowledge in different fields, with one of you being an expert in each. If your ideas for the business collide, and if there is no clear solution, inner conflict develops. The majority of disagreements can be avoided before they even start. How to do so? Create a detailed company strategy that outlines each partner's responsibilities.
8. Bad marketing
Marketing and bookkeeping are also two essential components of any startup. What you are offering or selling won't matter if you are not excellent at both. The sad reality is that most business owners are only good at their job, at that's it. If you have the funds for another salary, hire an expert. If you don’t, read more and learn about how to promote your product.
9. Not being aware of the competitors
Altough competition is bad for your startup, once an idea gets hot or market validation, others may try to capitalize on the opportunity. And while obsessing over the competition is not healthy, ignoring it is also a recipe for failure.
10. Ignoring the “burnout”
Startup founders rarely experience work-life balance. Thus, there is a higher chance of burnout and 5% of the time, failure was attributed to burnout. To succeed and avoid burnout, it is necessary to have a strong, varied, and driven team. Founders also need to redirect their focus when discovering a dead-end.