Why Startups Fail

Start-up culture is growing rapidly in India with start-ups coming up all over the country.

Bangalore, New Delhi and Mumbai remain the key start-up hubs but other areas like Hyderabad, Chennai, Pune, etc. are not too far behind.

There are a lot of positives but the fact remains that 80 per cent start-ups fail in the first three years.

It's harsh but a fact.

There are multiple reasons why a start-up fails and after going through much of the web, I came up with a list of 10 major reasons that lead to the downfall of a start-up:

1.      Lack of Focus:-

It’s necessary for stakeholders to be focused on their plans. In this ever-changing world any business cannot afford to lose its focus, let alone the new start-ups. It is common for start-ups to not to earn any profit in first 2-3 years, in some cases this period goes well beyond 10 years as well but still the valuation rises rapidly day by day. But these potential based valuations fall even more rapidly if there is any adverse situation or news in the market. That’s why it becomes necessary for stakeholder to keep an eye on every movement in the market. One has to understand that it is not only their concept and business models that matter in the game of valuation but also the overall macro-economic conditions. For example, Flipkart and Snapdeal were valued very high, but as soon as amazon started pumping the money in Indian online retail business, their valuation gone down very rapidly. It should not be surprising if either or both of them get liquidated or merged with each other or Amazon very soon because they won’t have sufficient funds to compete with a giant like amazon.

2.      One more day rule:-

Recently I was listening to the podcast “We study billionaire” where Indian Multimillionaire Manish Pabrai was being interviewed. My take away from that podcast was this “One more day rule”. It’s necessary for a start-up to not to lose hope in hard times. In such times, its important to not to think about very long term but to only focus on “How to survive for one more day”. What actually happens in some of the cases is that the stakeholders’ starts analyzing for very long term and then they don’t find themselves in situation where they can perform the way they want to and then they give up. If you have started something, you have got to believe in it and try to take it as farther as you can.

3.      Needless acquisitions:-

In some of the recent start-up failures like “Ask Me” it has been observed that as soon as they get the funding they start making the acquisition and expansion planning rather than focusing on their strength and core business. Generally, this happens due to three major reasons

•  They want to buy the competitors before they grow further to maintain a monopoly on the market
• They want to expand themselves geographically. So they buy the similar business existing in other geographical areas.
• They want to diversify the business by entering into new market.

There is nothing wrong in either of the strategy but the fact is before carrying anyone else’s burden you have to be strong enough to carry yours. Expansion is the need of the hour but that is not the only thing to focus on. In fact, the first focus should be on the product and the quality of service, and then when the time comes and the funding is there one can go out and look for the expansion. Because it’s not the size of the market but the quality of the service that will help you survive initially. Paytm has become a household name these days but somehow they are making a mistake by entering in to new market very quickly. If we talk about the services provided by Paytm, they are majorly in following markets

• Wallet and payment banks- With competitors like Airtel / Freecharge/ Amazon and entire banking industry
• Events booking- With competitors like Bookmyshow/ Ticketnew and other small players
• Flight booking- With competitors like Makemytrip/ Cleartrip/ Goibibo etc.
• Hotel booking- With competitors like Oyo Rooms/ Makemytrip/ AirBNB
• Online Retail- With competitors like Amazon/ Snapdeal/ Flipart and other specific market focused players like Groffers/ BigBasket
• Recharges- With competitors like Freecharge/ Airtel/ Vodafone and local recharge shops
• BusBookings- With competitors like Redbus/ Mybus etc.

This list goes on and on and Paytm is spreading its wings everywhere. From an investors point of view it is important to see that who the competitors are and how quickly the start-up would be able to adapt itself to compete with them. At the moment, everything is going right for Paytm but it is only a matter of months before things start falling apart. Any person with a bit of market knowledge can imagine how tough it would be compete with companies like AirBNB, Amazon, Entire Banking Industry/ Airtel/ Bookmyshow and other giants like them.

4.      Weak technology

As we discussed above, it is necessary to focus on the product, quality of the service and after sales facility at first before thinking about anything else. Some of the start-ups rose very quickly to reach the billion $ valuation figure but they started focusing on other stuffs like expansion/ international markets/ acquisitions/ New product line etc.

Recently there was a huge demand for online wallets after announcement of demonetization by Prime Minister Narendra Modi. Companies like freecharge/ Paytm etc. sensed the opportunity and hopped on very quickly onto it. But there were major improvements to be made in technology to support this kind of demand. Users of online payment wallet repeatedly complained about the cases where amount gets deducted from their account but does not get credited in the receivers account. During December I went on trip to Jaipur and bought some items for 2000 Rs. from a store which was accepting the Paytm payment. The balance got deducted from my account but did not reach in the account of store. I waited for more than an hour but that didn’t happen. The store manager wouldn’t let me go with item unless he saw the message of receipt on his number. In the end, I had to make another payment to the account of store with a belief that previous paid amount would be refunded back to me, but it didn’t happen. The result was, the store got 4k instead of 2k from me as the amount got credited in stores account later on (based on an email reply from Paytm). Now obviously I wouldn’t go back to Jaipur to get the money back from them because they didn’t transfer the money to me when I spoke to them over the phone, and even if do what it won’t be able to prove it to them that I should get refunded. This example was to show that why it is necessary to protect the interest of the users and improve your services before thinking about anything else. One more interesting fact was that an Paytm did not have any number at which it could be contacted at that moment, so the only way to communicate with them was through E-mail and I got the reply of that E-Mail after 2 days. So this also shows that along with the product your after sales support should also be there to help users sort the problem in real time. 

5.      Inconsistent Strategy/ Internal problems

Some of the start-ups have been thrashed by the market because their strategy was not consistent over the time. What has happened in some of the cases was, the investors/founders lost faith in the initial ideas and started making different strategies without even planning for it and in contradiction to the earlier ones. In some extreme cases, the original business ideas have also been completely dropped and the companies have started to focus on other models, which of course is a recipe for disaster. This can also be exemplified by company’s advertisement policies/ pace of expansion etc. Like in some cases, company initially made a strategy of investing only 10-15 % of its funds on advertisement and then they got influenced by other businesses and started investing more and hiring celebrities, and hence lost their way out.

6.      Cash Crunch

This is probably the biggest reason of shut down start-ups throughout the world. I recently read a book called “The Hard Thing About Hard Things” by Ben Horowitz. In this book, the author has shared his experience of starting an IT company, making it a billion $ company and eventually selling it. More than once, the author has emphasized the fact that how his company was being valued at half a billion $ but still he was not able to see the future because although the company had assets and potential but it didn’t have cash to manage the operations. As per the book, there was a situation where the company was valued in millions but there were funds only to manage operations for a week, this meant the company could go bankrupt in a week. That’s where the greatest of minds crack down and give up, because they cannot handle this imparity between the external valuation and internal issues and in hara-kiri they get merged with other players at significantly low values or go bankrupt. In reality the stakeholders aren’t happy as they look or as it’s seems to the world because they know the issues that no one else knows. In such situations the stakeholders must follow the “One More Day Rule.

7.      Single Investor

This is not necessarily the problem in all the cases but in some of the cases it has proved to be fatal. Let me tell you why single investor is an issue.

What happens is that the founders have a specific strategy in their mind and they think differently than others. It’s like a mother knowing her baby more than anyone else in the entire universe because she was one who gave birth to him/her and brought her up. Sometimes, the investors do not agree to the ideas of founders because they see things from financial perspectives and they don’t know the product as much as the founders. If there is only a single investor then the founders are not as independent to work as per their strategy as they would be in other cases. If there are multiple investors then any strategy is decided based on votes taking everyone’s wisdom in consideration, whereas in case of single investor the control lies with him and founders, and that generally leads to conflict. So in case of single investor there can be 2 situations 1.) Founder work as per the investor 2.) Founders resist. Both the scenarios are adverse to the business because in first scenario the output will not be as desired and in second scenario there will be no output at all due to conflicts. This example should be sufficient to understand why having a single investor sinks the boat of the business. Obviously, this does not include the case where the founder itself is the investor. Housing.com is the perfect example of these conflict between founders and investors.

8.      Risk assessment

Some start-ups do everything right, but they don’t assess the potential threats adequately. Along with guys focusing on work there should be a team looking out for potential threats to mitigate them at earlier stages. Kodak is a perfect example for this. Kodak did not assess the potential risk properly when the digital camera’s came in fashion. They were focused on working with their old school method and thought that they could conquer the issue by increasing quality of their product and reducing the sales prices. It took mere 2 years for a well-established company like Kodak to fall down from the sky to the earth. Another example could be of Nokia, where they resisted the change in their operating system. Nokia once had 95% of the market share of mobile industry which now is even less than even 2 %. because they couldn’t assess the risk of Android capturing the entire non-Apple market.

So, we have discussed about the reasons that leads to the failure of start-ups. Apart from these, there are certain reasons which cannot be controlled and leads to collapses of start-ups.

9.      Bigger and more efficient competitors

They say there is an Ace for every queen in the deck of cards. It’s so obvious that a company should always be prepared to compete with bigger players all the time. But sometimes the resources are not sufficient to compete. Once I was listening to a radio show where they were telling the story about the founder of Amazon.com Jeff Bezos. Jeff Bezos went to a small local online retail company, which was doing well and asked them to sell their business to him. The founder of that online retail company out-rightly rejected his offer. Jeff warned him that he should accept the offer because if he does not then Amazon will keep on selling that product in at losses until his business goes bankrupt and then Amazon will buy that business at merciful valuation. The founder of that business still resisted and amazon did what Bezos promised and ultimately bought the business for almost nothing.

Discount wars are nothing but the fight for survival. These days all the online retail companies are selling at losses to compete with each other and also hoping that they will survive till the end. But sometimes situation gets out of control and leads to closure of start-ups. 

10.  Government Policies

I don’t need to explain much about how government policies affect the businesses. It can make or break a business in matter of hours. The demonetization step taken by the government made Paytm/ Freecharge a household name and on the other hand it led the real estate businesses to bleed.

There could be multiple other reasons for failure of start-ups but majorly the business have collapsed due to above mentioned reasons.

In the end, let us take a look at the 5 biggest start-ups shut down of 2016

Ask Me

In august, AskMe shut down. It was funded by Malaysia based Aastro Holdings. This led to unemployment of more than 4000 employees. It was one of the biggest startup shut down, with 300 Million $ VC funds.

Peppertap

After Grofers and Big Basket, it was the biggest grocery start-up. It was funded 53 Million $ before it made a sudden announcement of shut down in April-2016. Mindless spending to acquire customers and uncontrolled marketing budget was stated as the primary reason for the failure of a promising consumer-centric start-up.

TinyOwl

In May this year, food ordering app TinyOwl decided to shut down its operation across 11 cities in one go. Except Mumbai, they ceased their operations all over the country.

FranklyMe

The idea was great, and the execution was smooth: A video micro-blogging portal with an aim to become India’s first video only social network. They raised $600k seed funding from Matrix partners, and then an undisclosed amount from undisclosed investors as Series A funding. .

Fashionara

Fashionara, a fashion startup which was considered as promising as Freecultr and Zovi, finally closed their shop in May this year.