Why do Startups fail? & How to AVoid it?

"Learn from the mistakes of others. You can never live long enough to make them all yourself."

Most entrepreneurs think they are creating the next big thing.

But the reality is that a full of 92% startups fail in the first three years.

A study showed that the one major reason for the failure of almost 75% of the startups is premature scaling. Premature Scaling refers to a startup’s effort to grow its business at a rate that is faster than it can afford to sustain. And as we have discussed in the previous articles, failing to nail down the key financial metrics like CAC & LTV, forecasts, etc. can facilitate premature scaling.

Along with premature scaling, there are various other reasons for the failure of a startup.

But failure is not inevitable.

Here is a list of reasons startups fail and what they should do to avoid it.

• Product: "Any product that needs a manual to work is broken."

Startups usually make the mistake of trying to create a product which they think is the solution for an existing problem. But in reality, the demand for the solution needs to be created first because the problem is small and may already have an alternative solution. There are numerous examples of companies that have had to shut down because their product was not well received by customers. 

What startups should be doing infact is the exact opposite i.e., find a solution to a problem with a large amount of pre-existing demand. The product should be able to tackle problems of a good number of people. A great way to test whether you have a product that you can be proud of is to note whether your own team are openly advocating your product without your involvement.

• Marketing: “Social media is about sociology and psychology more than technology”

In an era like this, where marketing can make or break any business, startup founders need to keep in mind that marketing their products without putting proper thoughts and efforts in it, is going to lead to the failure of their company in no time.

Thankfully we live in an era of social media where large number of people can be reached at the click of a button. To effectively market the company and its offerings, every social media platform should be used to its full potential in order to reach and engage potential customers. Videos and posts can be used to spread the word about the products to have a wider reach.

• Team: "The first five employees will make or break your start-up."

Unfortunately, examples of ineffective teams ruining a company can be found in abundance. An unbalanced team composition of the team with regard to their competencies hampers the success of a company. Also, an employee, contributing strongly to the success of the company, may look for other job opportunities if they are not satisfied with their role.

Companies should find ways to maximize employee engagement. The employees should be given responsibilities and tasks which help them learn and grow. This will make the employee realize the company's trust in them and will make them loyal to the company.

• Execution: “Your most unhappy customers are your greatest source of learning.”

Products that are not conveyed clearly to the customers often fail even if they have the potential to be successful. Execution is the key to anything. Startups launch products in the market without trying it out properly first. This creates a huge gap in the execution process.

A well executed project means half work done already. In order to make sure that the product is successful in the market, the product should be tested in the market first to see the reactions of the consumers. Any negative reaction should be analyzed and corrected before launching it in the market.

• Pricing & Costs: “Price is what you pay. Value is what you get.”

In a study, nearly 18% companies cited reason for failure is lack of profitability. Calculating a price which is high enough to cover costs but low enough to attract customers is difficult. Startups may put a price which the customers may think is not worth the product which creates another problem.

To overcome such issues, proper forecasting should be done. Breakeven analysis should be done to know the breakeven point. The industry price for the product should be taken into account. The product should have a USP which the customers are willing to pay for.

We, at LFS, aim to guide startup founders understand the importance of these factors and how performing them correctly can create a sustainable business.