Why Startups Fail? | Exploring How Founders Avoid the Worst
Many entrepreneurs and investors have opinions on this subject, but few offer data-driven insights. Our goal is to identify and share clear learnings on this subject when businesses must take action.
According to the Bureau of Labor Statistics, in 2020, the U.S. Internal Revenue Service received more than 4.4 million applications for new businesses. In the second, third, and fourth quarters, the business formation has topped every quarter since 2005. Although COVID-19 has shuttered almost 30% of small businesses, it is simultaneously responsible for the 21st century’s greatest surge in entrepreneurship.
According to BLS data, nearly a fifth of new businesses shut down in their first year. Even with venture backing, staggering three-quarters of startups fail, according to research by Shikhar Ghosh of Harvard Business School. However, fear of failure shouldn't prevent anyone from starting a business.
The business is more likely to succeed when founders solve significant problems and avoid preventable failures. In this spirit, we will delve into why startups fail (i.e., shut down permanently) and how they overcome these failures.
WHY DO STARTUPS FAIL?
It doesn’t matter whether a startup is funded by a company with billions of dollars in the bank or one that has never raised money before. Startups are more likely to fold than succeed.
The good news is that we know why many startup businesses fail, and we can learn from their mistakes.
Here are some of the top reasons why startups fail:
1. Right Opportunity, Wrong Resources
A broad set of stakeholders—employees, strategic partners, and investors—all can play a role in a venture’s downfall.
Venture capital firms look for founders with the right stuff—resilience, passion, experience leading startup teams, and so forth. But even when such rare talent captains a new venture, there are other parties whose contributions are crucial to it.
2. Wrong Opportunity, Right Resources
Before entrepreneurs begin to build a product, lean startup guru Steve Blank insists, they must complete a phase called “customer discovery”—a round of interviews with prospective customers.
Those interviews probe for strong, unmet customer needs—problems worth pursuing.
This is a crucial step that most startups skip. They fail to validate the demand for a matching product, its price point, and the appeal of the concept. Nor do they perform MVP tests on their products before launching and instead rush to launch a fully functional product.
3. Entrepreneurs’ Lack of Industry Experience
Entrepreneurs’ lack of industry experience can be particularly problematic when large, lumpy resource commitments are required.
For example, an entrepreneur might think he or she can afford to use a professional team for most tasks (product development, marketing, business strategy, and execution), but if that increases the total cost too much and raises questions about the viability of the product, then those resources are needed elsewhere. Without a deeper understanding of the market – something that only comes with years of experience–it’s hard for an inexperienced founder to estimate how best to allocate their company’s limited capital efficiently.
The pressure is compounded by investors' preference for one chunk of capital at a time rather than investing in a business as a whole. This can result in startups stalling if they fail to perform, and a poor performance may scare potential investors off.
4. False Starts
Entrepreneurs who claim to embrace the lean startup canon sometimes fail to implement many of its tenets.
Specifically, they launch MVPs and iterate on them after getting feedback. By putting an MVP out there and testing how customers respond, founders are supposed to avoid squandering time and money, building and marketing a product that no one wants.
Entrepreneurs who neglect to research customer needs before commencing their engineering efforts will often find themselves wasting valuable time and capital on MVPs that are likely to miss their mark. These are false starts.
5. If You Fail To Plan, You're Planning To Fail
Having a business plan is recommended for small businesses, and most people know that. But just because you have one doesn’t mean it’s a good one.
A business plan is a summary of the company’s goals and strategies. It should include specific details about how the company will launch its product, how it will produce and market its product, and how much it expects to earn over a set period of time. A business plan can be weak if it does not address important details such as cost estimates, timelines for production, marketing strategies and financial projections.
6. Failure To Learn From Mistakes
In a startup environment, mistakes, miscalculations, and failures are inevitable. One of the most common reasons for startup failure is a lack of adjustment in response to mistakes and missteps.
Persistence is crucial for startups, but if adjustments to a better way of doing things are not made along the way, a startup may persist itself out of business. Persistence only works if the business model is sound and the right decisions are made along the way.
HOW TO TURN FAILURE INTO SUCCESS?
The Lean Startup Pivot
What's a pivot? Taken from Eric Ries' book The Lean Startup, a pivot is a:
Structured course correction designed to test a new fundamental hypothesis about the product, strategy, and engine of growth.
Here's how Steve Blank describes it:
“Pivoting” is when you change a fundamental part of the business model. It can be as simple as recognizing that your product was priced incorrectly. It can be more complex if you find that your target customer or users need to change or the feature set is wrong, or you need to “repackage” a monolithic product into a family of products, or you chose the wrong sales channel or your customer acquisition programs were ineffective.
In simpler terms: A pivot is adjusting your current approach to a problem.
How Do You Pivot?
During a pivot, founders should build the plane as they fly it. The team must learn from mistakes, iterate, and adapt quickly — before the money runs out. Presumably, founders who invest in identifying and mitigating future risks have better odds of not only pivoting but surviving the process.
Most Common Pivot Strategies:
Used by Startup Founders
- Update/ Improve business plan (59.3%)
- Improve existing product (40.7%)
- Launch New Product (39.5%)
- Rebrand (22.1 %)
- Change team (16.3%)
- Secure additional funds (12.8%)
- Other (5.8%)
Unlock Startup Success at Prodcrew
If you're in the process of scaling a tech startup, you can reduce your likelihood of failure by surrounding yourself with the right people. We are a team of techvengers who solve real problems for our partners and end-users. We work with multiple early-stage and growing startups to help them reach the product-market fit faster and expand without hassle. We also enable our enterprise partners to increase product development velocity and reduce development costs by providing a consistent and exclusive pool of resources. Transparency and open communications are our top priorities and the first rule of engagement.
Over the years, Prodcrew has helped multiple startups raise millions of dollars in funding by creating products their users love.
In the startup world, nine out of ten startups are destined to fail. Addressing your startup’s shortcomings and challenges is the only way to success.