12 Reasons why start-ups fail while scaling.

Introduction:

A Start-up has become the buzzword in the last decade. The Start-up becomes a mantra basis exponential windfall gains at the IPO stage for some companies. Although the valuation of a Start-up remains questionable by many when making huge losses vis-a-vis valuation of the small and medium-scale enterprises (SME), Which make a consistent profit.

Despite showing massive potential on PowerPoint presentations, and considerable returns in excel sheets, why do so many start-ups fail and end up disappointingly? What are the lessons learned to prevent it?

Many thinkers, analyst entrepreneurs, and investors have deep thoughts on this question, but very few offer data-driven informed decision-making. The main goal is to seek, identify and learn teachings on this, and the timing could not be more critical in the present times. People often get confused about start-ups with small and medium-scale enterprises (SMEs). We can consider a Start-up as an SME but not vice versa.

Let us first understand what a Start-up is?

A tech start-up is all about repeatable and scalable business models with tech-enabled technology at its core. A start-up starts with a small but big vision with the determination to bolt into a competitive industry using all the innovation it can muster. Its business model can have a significant impact on the current market. Start-up founders have the vision to disrupt the market. Grow their firm into a large, disruptive company that will rearrange an existing industry or create a new one altogether.

A start-up & traditional conventional business (Small and medium enterprises) are similar. However, the start-up is on the foundation of innovation & disruption. The goal of a start-up is first to establish a product-market fit.

There is always a comparison of start-ups with SMEs, especially on valuations. However, it is a separate debate on valuation strategies adopted by the VC and private equity (PE).

Let us now understand what SMEs are?

Small and medium enterprises entrepreneurs (SMEs) focused on gaining profits by delivering value to customers, following stable and profitable business models, and securing a financially viable position in the market for an extended period, starting with its fund at the beginning. For future business expansions, banker's business finance is readily available to fund the company's growth. Based on the detailed project report (DPR), bankers evaluate the same willingness to fund the project with 80% of the project value.

The primary differentiation between the two is that start-ups promise a pot of gold with enormous potential, high return on investment (ROI), windfall gains, and a claim to bring revolutionary changes in the industry. Although SMEs are more stable than start-ups and offer consistent returns with a significantly lower risk profile.

In a nutshell, start-ups are all about incremental cash flows, and SMEs are about making profits from day 1.

The above differentiation led us to profound insights into start-ups.

According to estimates, around 75% of Venture Capital (VC) companies provide no return to investors. A staggering 30-40% of start-ups liquidate all assets before folding completely. High-growth start-ups pose an extreme risk of cash burn as scaling also offers exciting opportunities.

Most start-ups don't succeed: over two-thirds never deliver a positive return to investors.

There are many reasons start-ups fail. Below par team and misfit product-market fit & several other factors. However, the failure of start-ups will give you significant leanings. I believe one must not waste that learning. Time is of the utmost importance & the biggest asset if used wisely. If you imply the learning concepts, thousands of hours may get saved and better used for other places.

Some of the common reasons start-ups fail and how to circumvent these problems. It would help if you learned from the same past mistakes before scaling.

1a. Product-Market fit. (Lack of?innovation around customer's money-making model)

Product-market fit is the no.1 and most important reason for the start-up failure. As per CB insights published information, 42% of the start-up

failed with no market need. In the absence of market validation, the continual building of the product will only lead to future disasters in the making.

Undeniably, the primary reason start-ups fail in India is the lack of much-needed innovation to cater to customers' problems. It is the primary reason Indian company yet to dominate the world.

Most Indian companies lack the innovation to innovate a product/service that can make people's lives easy by understanding their needs.

Many start-ups fail for the most straightforward reason–the product/service does not value customers. Companies try to sell an idea while their product does nothing new or innovative. They don't have a product-market fit when they think they do. The customers don't need its products. For some start-ups, it may take years to find a product-market fit in the market. And it's often during that time products fail. They cannot see traction in the market, and the start-up runs out of cash.

Ask the following straight questions to yourself.

??Does your product /service provide value to customers? If yes, then do you have market validation for the same.?

??Are there customers (first 1000) for your product Services?

??Is your product or service synced with the vision and mission of your company?

??When surveying potential customers or allowing them to test your product/service, does some segment show they will switch to your product?

??Are some customers who have rejected similar products of your competitors willing to try yours?????????????????????????????

??When user testing, do people accurately group your product with suitable competitive offerings?

??Do users show an understanding of your product’s differentiators or unique value proposition?

??How do your underlying metrics (such as retention rates of users) measure up against those of your competitors?

??Often, start-ups attempt to develop products with no demand or expand the market for a product or service.

?Does the Big question remain how you can avoid this?

Market Research: Entrepreneurs must do thorough market research. A key component of market research involving primary and secondary research must be in place. Primary research involves qualitative and quantitative research methods. Quantitative research methods involve surveys/questionnaires /planned one-on-one interviews. Qualitative research methods explain the communications and needs for the focus groups, in-depth interviews, and observation.

You must develop an in-depth understanding of your customers and their feelings about your product.

Find new customers via word of mouth, reference, and social media digital marketing before jumping into creating expensive marketing plans for print and media. The above method and subsequent evaluation will help get deep insights into better and more informed decision-making.

I am an admirer of the lean start-up approach. But as I deep dive into case studies of failure, many entrepreneurs who claim to embrace the lean start-up wagon adopt only part of it. Specifically, they launch Minimum viable products (MVPs) and iterate with feedback. MVP testing with customer feedback helps avoid squandering time and marketing a product no one wants.

Yet by neglecting to market research on customer needs before commencing their engineering efforts in building the product, entrepreneurs waste valuable time and capital on MVPs that are likely to miss their goal.

Entrepreneurs are like sprinters: there are steps to product launch in the market. It must follow these steps. They are too eager to launch the product in the market. I believe the general rhetoric of the lean start-up movement—for example, "launch early and often" and "fail fast"—encourages skipping market validation. Do the market validation first, launch only after sizable research, fail fast, and then re-pivot.

Case Study 1 CardBack:

Nidhi Gurnani and Nikhil Wason founded the fintech platform CardBack.

Cardback address the best rewards and points on Credit Card and Debit Card. Many people have multiple credit cards and debit cards. Which one to use for your advantage with maximum rewards and points. Angel investors funded the project and raised $170k in 5 years. Cardback could not secure funds after 2014.

Reason for failure:

Cardback estimated market potential and growth on PowerPoint and MS Excel did not meet the expected projected numbers. The number of multiple debit and credit cardholders in India is much less than anticipated. Location change to Singapore in search of a bigger market also failed.

1b) Start-ups try to scale up too early.

Premature scaling is another most common problem & leading cause of start-up failures. According to a Genome report, it accounts for 70% of tech start-up failures. Overhasty scaling happens when your business expands faster than your product /service. Companies scale untimely when they bring on additional headcounts, spending money on customer acquisition before nailing down the product or service sustainable, profitable growth business model.

Most of the start-ups rely on heavy discounts and deals. The heavy discounting and deals erode the net margin(NM) significantly. The start-ups must operate an inadequate gross margin (GM) slab.

The start-up must control customer acquisition costs (CAC) in a quest for growth. Before scaling, first, know your perfect alignment between product/service & customer needs. You must have reliable, credible data about customer acquisition costs (CAC), lifetime customer value (LTV).

Gaining and keeping customers over 2 to 3 years will give the data deep insights before pumping more money into the business.

If you need to figure out who your customers are, go to market (GTM), and what they need from you, you are probably not ready to scale just yet. It is fine. You must focus on developing the core business before gaining new customers that you can't effectively serve.

Sustainable, profitable growth is core for any business. It is advisable to follow a healthy pace between the growth and the path to profitability. An entrepreneur must understand the existing customers first before reaching the new ones. They must continually improve the product or service it offers.

There is always a dilemma for a start-up to pursue other attractive opportunities. In general, it acts as a total distraction. You must establish a strong foothold in the core business before entering and venturing into other areas. Diverting resources from your primary business too soon is dangerous.

Although it is ideal for moving wholly and fast to dominate an industry, often this leads to an unsustainable pace and ultimately failure.

Case Study:1a Quikr

Founded in 2008, Quikr had a footprint in over 1000+ cities.

Quikr has raised $424.2 million in funding over 12 rounds from investors such as Tiger Global Management, Kinnevik, Trifecta Capital Advisors, and InnoVen Capital, according to the data platform Crunchbase.

Although Funding of $400 Mn+, Quikr has reported losses of -4463 Mn$??in 2015. However, losses narrowed down to -1876 Mn$ against the revenue of 1892 Mn $ in 2019.

While its Competitors OLX focussed on its Classified business. Quikr has branched out in many other business segments (Market expansion), such as blue-collar jobs, used goods, and cars. Classifieds and real-estate sales have historically accounted for most of the revenue and continue to see growth and occupy influential positions in the respective markets. Several individual businesses operated with separate units, which further affected its cost.

?Quikr has laid off half of the workforce to become profitable with faster growth and is not dependent on funding.

It has made a few significant acquisitions in the past. In 2016, it bought Commonfloor for an all-stock deal of $200 million, followed by RealtyCompass, a real estate listings platform. It also bought HDFC RED and HDFC Realty, the listing and brokerage businesses of HDFC, for around $60 million.

Online classifieds marketplace Quikr is no longer a unicorn or a start-up valued at more than $1 billion a couple of years ago. In its year-end report, major shareholder Kinnevik, a Swedish investment firm, devalued Quikr by 45 percent, referring to the exaggerated revenue resulting from fraudulent transactions that rocked the company. They value Quikr at about $500+ million, a significant drop (greater than 40%) for the Bengaluru-based Start-up. The drop in valuation came when the company had to suffer crores of losses because of internal employee fraud.

After 12 years of Operation, Quickr is still making losses, and the path to profitability seems to be a distant dream for many investors. In the past, Quikr announced to launch IPO in 2021. Half the year has already passed. Still, it seems the IPO announcements are wait-listed positions for the future.

2) Cash Crunch (not being able to raise the equity/debt financing)

Money and time are finite (both are of utmost importance). It would help if you used to allocate judiciously. The question of how you should spend your money was a frequent conundrum and reason for failure cited by start-ups (29%).

A good business plan and working business model

?are not enough for a start-up idea. You will have bills to pay, a fixed cost, and a variable cost. Fixed cost (rent, insurance, property taxes, salaries) variable cost (Direct material, Direct labor, transaction fees, marketing, advertising cost). The list is never-ending if your business is up and running. You need money to make things happen.

If you must have sufficient funds to run the day-to-day activities of your business till you break even and generate profits, you might end up a failed start-up. It is also not wise to borrow/debt, as this will lead to colossal debt pile-ups that might force you into bankruptcy.

Case Study 2a Yumist:

?Home-cooked is an unorganized and untapped market. Yumist launched in 2014. Alok Jain and Abhimanyu Maheshwari were founders. It was serving home-cooked food daily meals segments in India. Yumist raised $3 million.

?Reason for failure:?A high burn rate that required extensive capital beyond Yumist's reach for achieving sustainable growth.

Case study 2b Doodhwala

Doodhwala was a subscription-based platform founded in 2015 by?Ebrahim Akbari and Aakash Agarwal. It delivered milk and grocery items directly to the customer's doorstep. Doodhwala claimed to complete about 30,000 deliveries in a day.

Reason for failure: Lack of funds and tough competition from the big bulls with deep pockets as BigBasket, Milkbasket, and SuprDaily caused Doodhwala to shut down.

3) Right team since the beginning.

I often cited a diverse team with unique skill sets as most critical to a company's success. You must create a highly capable, enthusiastic, energetic, and talented team to execute your plan and vision, especially in sales. Competency mapping and competence assessment will help in laughing and developing the talent. Front line sales team members of the sales team will be the face of your company to prospective customers. Your salespeople represent your brand for a front-line sales team and effectively communicate your core value proposition to customers.

You and your team must evaluate every hire in terms of fit, not simply their resume. Before hiring, you must consider attitude, team dynamics, coachability infectious enthusiasm. Industry experience can also be helpful. You need to ask yourself: Can this hire learn and execute your sales process?

Case study 3: Russsh

Bharat Ahirwar founded Russsh in 2012. Russsh offered first and last-mile on-demand delivery services to B2C and B2B. Customers. Russsh claimed to have a customers database of over 50,000 loyal clients. It claimed to complete 500,000 transactions. On June 3rd, 2019, the company closed down.

?Reason for failure:

?The primary reason for failure. It was self-funded, and in the absence of enough funds, it has to be closed down due to lack of funds Russsh also could not ?ustain intense competition in the market. Founder Bharat Ahirwar also admitted that being a single founder and the absence of a strong team were equally responsible for Russsh's shutdown.

4) Get -Outcompeted.

It would help if you watched out for your competitors for the next disruption -wave. As per the CB Insights report, Around 19% of start-ups fail because another company outpaced them in the space. You must avoid obsessing over the competition. It is not healthy. Although ignoring them was also a recipe for failure in start-ups.

Despite the common belief that start-ups shouldn't pay attention to the competition. Although once an idea gets hot or gets market validation, there may be many entrants in a space.

?First mover advantage and competing on price are the options. However, both have one inherent disadvantage. When you are first to the market, this might lead to a high risk of overhasty scaling. Competing on price is also another option, but usually not effective for generating long-term profits.

You can create a product or service that provides a brilliant customer experience &?excellent features. Over time, the best-in-class product or service is likely to win over in the market if good management and sales teams are in place.

?Case study 4: Dial-A-Celeb

Everyone wishes to talk to a celebrity. Dial-A-Celeb, yet exciting concept founded in 2016 by Gaurav Chopra and Ranjan Agarwal, fulfills this wish. Besides video chats with actors and celebs, celeb autographed items as toys, photos, and diaries. Within a year, the Start-up closed down.

Reason for failure: The primary reason for Dial-A-Celeb's failure was that celebrities were coming up with their apps and social media channels to interact with fans. This trend resulted in intense competition for Dial-A-Celeb and directly impacted profitability. Dial-A-Celeb shut down in 2017.

Key lessons: Know your rivals well and brace yourself for competition that may arise in the future.

5) Pricing /Cost issues & User-in friendly product

Pricing is a dark art for start-up success, and start-up post-mortems highlight the difficulty in pricing a product high enough to cover costs but low enough to bring in customers. The following info must be on the pricing and cost items.

Consistently selling the goods and prices at low prices will negatively affect the NWC networking capital.

In his book romancing eye on the bottom line, Anil Lamba says no connection between profit and money. It is possible to make lots of profit and have no money. It is equally possible that it has a large bank balance and still does not profit.

Does the question arise before are you in business to make a profit, or are you in business to make money?

Successful businesses stand on two pillars:

á?Ability to generate profit

á?Ability to effectively manage cash flows.

Of course, the objective of any business, whether it starts up or conventional business to make profits in the mid longer term. From Starts point of view, effectively managing the cash flow will enhance profitability in the longer-term viewpoints.

Going in Too low and undercutting -Going in too low all the time might be great for your top-line (TL), but it wreaks havoc on the bottom line (BL)-the one you will need to survive. You need to balance the top line (TL) and Bottom line (BL).

The same Margin for all products will not be applicable. -slower-moving products need higher profit margins. You may consider a small Net margin for higher sales volume depending on market competition. Incremental small increases over time will make a big difference in the bottom line.

Understanding the difference between Margin and Markup - Sales price (SP) is margin based & cost price is Markup based.

Take all costs into the costing structure: to price correctly. Your team must consider every cost. Even "little" things like credit card processing fees—which add 1 to 2 percent on every transaction—add up.

Unpleasant things happen when you ignore what a customer wants and needs, whether or. Usability, a multidimensional construct, comprises five elements.

v?Learnability: How easy for customers to accomplish basic tasks (e.g., change security settings) the first time they use the product?

v?Efficiency: Once users have learned how a product works, how quickly can they perform routine tasks?

v?Memorability: Can users pick up where they left off after time away from the product? Do interruptions, or momentary distractions force users to start over?

v?Errors: How often do users make mistakes, how severe are the mistakes, and how easily can users recover from or correct mistakes?

v?Satisfaction: Overall, how engaging is the product to use, according to its users?

?6.) Business model

A business model is a revenue-generation plan. In the absence of a good business model organization, you may face financial -difficulties.

Business models align with the planning of business operations and revenue generation strategies. It also helps to utilize your resources to maximize your income and reduce expenses.

?A business model also plays a vital role for investors for your Start-up. Investors are interested in the profits they stand to make when your Start-up becomes successful and starts generating profits. You will build investor faith in your idea if you can show them how market-ready your product is and how you can bring in profits.

Retaining vital regular customers helps in recurring revenue. It will boost the repeatability and scalability of the business. New Customer acquisition is always costly vis-a-vis retaining the existing

?customers. You can not ignore existing customers. It will impact revenue inflow and, consequently, the company's operating margin (OM).

As a founder, you need to think of the business model of a complete ecosystem. Facebook, YouTube, Amazon, and Google are examples of building a massive ecosystem. It is a platform to converge all stakeholders and customers on a single platform that could disrupt the market. You must identify the reasons for your debacle, correct it and streamline it.

7.) Poor Marketing / The company lacks expertise in marketing.

You must know your target customers, get their attention, and convert them to leads and customers. The founder's inability to market was a common failure, who liked to code or build products but did not market the product well.

Your market plan must be in place. In the beginning, you need a clear plan of effective customer acquisition. You must focus on organic reach and word-of-mouth marketing before venturing into other marketing channels. Founders don't know how to position their products in the market

Who is your ideal customer? You must do due diligence before launching your product/service. Segmentation of customers positions your product based on its price, values for the customer, features, and reliability. Your Product differentiation will depend on the proper market segmentation & the positioning of your product or service.

8.) Ignore customers.

Ignoring users is a tried-and-correct way to fail. You must consider the customer's feedback

in a positive, rational way. Your big tunnel vision will help bring appropriate changes to your product or service. If you ignore their feedback and complaints, customers will switch to your competitors. It would help if you converted feedback to feed-forward.

9.) Measuring product engagement & customer happiness metric

Understanding how much your customers use and depend on your product is the best indicator of happiness. It would help if you were engaged customers who are more likely to become repeat customers, which helps keep your retention numbers steady.

?Engaged customers will share their experience with your product, which improves top-line growth. You must have a system in place to measure retention and churn rate. It will help to understand diagnosing potential problems. Benchmarking against similar businesses can be helpful. Trending metrics is the best way to see how your performance improves or deteriorates.

10.) Product/Service launch time to the market.

Time for the product's launch plays the most crucial part in initial success.

The delay in a product launch may impact its market share. If your product is released too early, users may write it off as a negative first impression. And if your product releases too late, you may have missed your window of opportunity in the market.

Follow the sun (FTS), model! A funded Start-up can spread out its team across multiple time zones. It would enable a start-up to hand over the work to the next time zone for continuous development. Also, it will decrease the time taken to headway from conceptualization to execution.

The FTS model ensures increased productivity and a faster time-to-market! The offshore team in India also prevents employee burnout by taking off the burden from the onsite team. The key lies in handover efficiency and choosing the correct time zone! If hand-off from one-time zone to the next correctly, following the sun method helps use the limited time a start-up has to go to the market.

Case study 09: StayZila.com

With a dream of becoming the largest homestay network in India, Stayzilla is reminiscent of a riches-to-rags story. $33.5 million in funding and established itself in the hotel-rental segment, founders?Rupal Yogendra?Yogendra Vasupal and Sachit Singhi started going down after it failed to repay vendors. The troubles aggregated, and in February 2017, Yogendra Vasupal proclaimed the closure of Stayzilla's operations in India.

Reason for failure: Time of the launch. It is way ahead of its time since its launch. Customers were not ready for such Hi-Fi technology. However, the company somehow managed to float the funding for some time. After some time, people started becoming familiar with online booking, and new competitors emerged with better discounts and deals. Stayzilla could not provide the same because of the unavailability of funds. Legal disputes and an unclear focus on growing the business in other segments and geographical regions destroyed Stayzilla.

11.) Lose focus

Paul Graham, the co-founder of Y Combinator, has graduated from over 630 start-ups, including Dropbox, Airbnb, and Stripe.

The most important thing for start-ups is to focus on other things you could be doing. One of them is the most important. You should do that. And not any of the others."

A tech start-up is an exciting journey for entrepreneurs. Although it is inherently risky, it offers potential for exponential gains disruption of the existing market. You must create in your product and service that solves multiple problems is an admirable yet misguided mission, especially for beginning entrepreneurs.Getting side-tracked by distracting projects, personal issues, and general loss of focus was 13% of stories contributing to failure.

Steps to be taken:

??Choose one business model.

??You must focus on your core area of focus for a couple of years before branching and expanding in other areas.

??Build a flat Organization at the beginning

??Avoid multitasking if possible.

??Prioritize or focus on the things that contribute to long-term growth, not just the most urgent tasks.

Case Study 10: Over-Craft

Overcart was the first Indian Fintech platform for purchasing refurbished, renovated, overstocked, and used items. In 2012 OverCraft was founded. Overdraft platform, used for buying and selling their electronic devices. Overcart received angel investment; however, the company failed to capitalize on it.

Reason for failure: Overcart did not focus on core business. Unsatisfactory services such as late delivery, poor quality of purchased items, and poor customer services led to customer rebuke, causing Overcart to shut down in 2017.

12.) Disharmony among team members /Founders and investors have incongruent visions about the company.

Many founders are so anxious at the prospect of VC investment that they imperfect evaluate investor fit without enough rigor. You must not align investors whose vision can ultimately be detrimental to a company.

Founders' & investors' partnerships are like a marriage. But it doesn't always work. Or perhaps it does — if a few marriages are successful unions and few go down the rocks. There are some flashpoints between investors and Entrepreneurs.

??Entrepreneurs. Investors want a partnership. -Money is not free. It comes at a price. Entrepreneurs seek funding but realize that money comes with strings attached. Investors want to say decision making.

???Investors will have a say during the scaling process. In case of a difference in the original vision for your company, business scaling with success is impossible.

??Goal Incompatibility: - Investors' pre-set target may not be reachable market dynamics. Start-ups often thrive amid challenges and external changes.

??Differing agenda: From Business Model, valuations, exit time horizon, any misalignment of expectations can lead to conflict.

??Entrepreneurial passion vs. Investors Numbers. -Entrepreneurs typically emotional rarely appreciate the importance of financial targets

??investor/founder misalignment, to avoid this, you must evaluate investors thoroughly before agreeing. It is Investor's experience in the same industry that will be helpful. Investors' understanding of your vision will be helpful in your execution plans. Investors may have valuable ideas, but it's probably not helpful to partner with investors who want to change the entire vision and DNA of the company.

??Chemistry matters: Initially, spending time with each other sets the right expectations and values. Both need to be aligned.

??Look Beyond valuations Investor's strategic strength; reputation will play an important key role.

??Communication: Communication between Investors and entrepreneurs must be constant and periodical. There must not be any surprises. It is periodically & transparently shared.

??Like-minded investors: In the case of multiple funding rounds, there must be a cordial relationship between new investors and past investors.

???Start-up can't pivot when needed—or it tries to pivot without a good plan and path forward

Pivoting is helpful. If the business model isn't working as planned, it is worth considering making significant tweaks.

Pivoting just for the sake of pivoting will be fatal. A successful pivot requires an accurate and in-depth understanding of why the original business plan is not working and an informed hypothesis about addressing the problem.

?It is good if all your team members understand the rationale behind the pivot. Create a draft blueprint for the pivot and constantly evaluate how well the pivoting is working. Empirical historical data will help in informed decision-making.

Final Thoughts:

As a founder, it would be best to have a profitable, sustainable momentous growth strategy through customer-centric transformation, operational excellence, and open innovation.

Failure is challenging and uncertain—a failed venture wastes resources. You can better utilize existing resources from the learning of past failures. And it may act as a deterrent to future founders and entrepreneurs who wish to take risks, have financial obligations that make it hard to forgo a paycheck, or face barriers when raising capital.

Doing something new with limited resources is inherently risky. But by recognizing that many failures are avoidable and follow the same trajectory, you can reduce their number and frequency. The payoff will be a more productive, fruitful, and less bruising entrepreneurial economy.

Many obstacles plague a start-up during the high-growth period. You can avert these potentially fatal problems.

Focus is the key—do it.

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