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Common Causes of Startup Failure and How To Prevent Them

Hearing a success story about a startup might motivate you to build one — after all, if they can do it, why can’t you? But the cold reality is that 50% of small businesses fail in the first four years following their conception. CB Insights analyzed 101 post-mortem essays of startup founders and came up with 20 reasons why their startups failed, with “no market need” leading the results at 42%.

So here are some of the main reasons that start-ups fail.

Common Causes of Startup Failure and How To Prevent Them

Lack of product-market fit

Developing products or tackling problems that don’t address consumers’ needs or solve their pain points is cited as the most common reason startups fail. Creating something people don’t need and want ultimately lead startups to their doom. There’s a reason Steve Jobs’ lesson, “A lot of times, people don’t know what they want until you show it to them.” landed in Forbes’ Five Dangerous Lessons to Learn From Steve Jobs.

Lesson #1: Direct your startup at developing products and tackling problems that will solve a market need and address consumers’ pain points. There’s no use in monetizing your products if not enough research has been done to prove that you have enough market for them.

Inability to market product

It’s no secret that marketing is a very important determinant in the success of a business. There were startups that offered great products but never caught on with people because they failed to give it the marketing support it needed to establish their brand. With the number of competition in the market probably promoting the same thing, it’s important to market your products in a way that would make consumers go for your product and not look for other options.

Lesson #2: It is not enough that a business survives on a market of existing customers. For a business to thrive, it is important to keep expanding your market and converting audiences to customers. If you have the budget, get professional help. If you don’t, there are a lot of low-cost options available to market your startup. You don’t need billboard ads or TV commercials to promote your business. All you need is a solid marketing strategy to give your business the proper exposure.

Competition is tough

With the number of startups being built on every industry every year, the statistic that only 50% of them survive after four years is not surprising. It doesn’t help that with everything that’s already been developed, it’s hard to come up with fresh ideas that will differentiate businesses from their competitors.

Lesson #3: Find something that no other businesses are doing, or find existing ideas and innovate them. Successful businesses survive longer than the rest of their competitors because they banked on an idea that no one else has thought about.

Hiring the wrong team

For a startup to be successful, it needs to have a leader that will motivate his members and has a clear vision for the direction the company is taking. It also needs members that are willing to fulfill that vision and have interest in the product/idea. If a company lacks or has none of both, the business will suffer.

Lesson #4: Don’t risk hiring the wrong members for your team just because you’re in a hurry to release your product. Carefully screen your members and assure first that they’re interested in the company’s vision and the products you’re developing before letting them work for you.

Inability to raise sufficient funds

Most founders build startups with the notion that if they have an amazing idea, a lot of people would immediately want to invest in it. However, there are cases when a product/feature is really good but founders still can’t get a venture capital to start with. If this problem isn’t solved at the early stages of the startup, the idea might never get materialized at all.

Lesson # 5: Don’t rely solely on venture capital to finance your startup. Find other ways to raise funding other than getting it from investors. Crowdfunding or raising small amounts of money from a large number of people (usually the internet), bootstrapping or building your startup from personal finances or the operating revenues of your new business, and getting a traditional small business loan are only some of them.

Having the wrong business model

Another mistake that has caused the downfall of plenty of powerful companies is failing to find the right business model or not adapting it according to the ever-evolving market.

Kodak, a former giant photo firm whose original business model was based on film photography, met its demise when it failed to adapt to the new trend in the market – digital photography. Soon, the photography industry became overtaken by brands like Canon and Sony and film photography eventually became obsolete. Kodak tried to catch up, but by then, they still had too much ground to cover and the market was already crowded. It was their fear of change and the risk of cannibalizing their still powerful business that hindered them from moving forward.

Lesson #6: Anticipate change. Just because your business succeeded for the first few years, doesn’t mean it would stay that way forever. It’s the 21st century. With the rate at which technology is evolving, businesses have to always assess if their business models are still working in order to keep up. Embrace new technologies and strive for innovation. People are always just waiting for the new thing to arrive in the market.  Think about your competitors. Don’t obsess over them but also don’t ignore them. If you don’t keep up, you will lag behind and risk losing everything you’ve built from the start.

Disregarding customer input

One of the reasons startups fail is because they ignore customers. Some tend to be too focused on developing their products and services that they forget to consider what their customers have to say about it. Because of this, they fail to adapt to their customer’s needs and end up creating products no one wants.

Lesson #7: Don’t do your business blindly. Pay attention to your customers and actively seek for their feedback. After all, the goal is to get them to buy from you. Customer feedback will provide you with insights that you can use to improve your products and services and enhance their customer experience.

Conclusion

The most common misconception about startup failures is that startups fail because the business ran out of cash. However, according to Steve Hogan — owner of startup turnaround shop Tech-Rx — running out of cash is only a symptom of another issue. Unfortunately, most of the time it’s the only one most founders notice. There are a lot of factors leading to this, that’s why it’s important for founders to keep close track of the progress of their business to avoid it from reaching that point.

Building and maintaining a startup is a tedious process, but don’t let the stats discourage you. Instead, use these reasons as a guide on what to avoid next time. A good entrepreneur can identify risks and take the proper steps and precautions to avoid his business from perishing. What other reasons that cause startups to fail can you think of?

Image: Photospin

Author Bio:

Lois Sapare is an editor at Scoopfed. She is a former student journalist with a bachelor’s degree in Information Technology. When she’s not writing content on a variety of topics, you can find her watching psych thriller films or keeping up with the latest buzz in the tech world. You can find her on Twitter.

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