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The Most Common Reasons Startups Fail

Before diving into your own startup, consider first these common mistakes that have cost entrepreneurs their businesses time and again.

The Most Common Reasons Startups Fail
[Photo: Flickr user Sonny Abesamis]

Founders blame investors, investors blame CEOs, CEOs blame research and development (R&D), R&D say the product is fine, the market just doesn’t get it, and marketing people blame it all on the recession.

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Some startups succeed, yet so many fail, and it’s failure that teaches us the best lessons. What are the main reasons why startups fail? In a survey carried out by tech blog ArcticStartup and CoFounder magazine, more than 100 startup entrepreneurs share their experiences and lessons learned.

1. The Team Doesn’t Have What It Takes To Succeed

A startup’s biggest challenge is getting the team right, according to 37% of the founders surveyed. Having enough diversity for a variety of skills that are needed to succeed from day one is essential. Not less important is trusting your team and giving them control over their responsibility areas.

There’s a reason why all the top investors and incubators place such heavy emphasis on the team. Ideas change, products pivot, markets can take unexpected turns, but people are what hold everything together. A great team is not just about selecting a group of smart people; it’s about complementing each other’s strengths and mitigating each other’s weaknesses.

As a founder, you must attract and retain the right people to build the technology, understand your industry, and scale your company.

2. The Idea Is Not Serving The Market Need

Sometimes the market simply isn’t there yet. Of the surveyed entrepreneurs, 20% said their startup failed most likely because of the product market fit. The biggest mistakes startups make are not talking to enough prospects before diving in and not understanding the target market, which might result in focusing on multiple ideas rather than one main idea.

Consumers are highly resistant to change and biased against trying a new product. Founders tend to believe their product is great since they’re always the first to try new products themselves. But mainstream consumers might not always understand why or how to use the new products. In this instance, startup entrepreneurs might think the market should change to fit their vision, but this thinking ignores the market realities.

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3. Running Out Of Cash Too Fast

Cash isn’t everything when it comes to starting a business, but when you run out of it, there’s not much that can help, according to 13% of the surveyed startup founders. Google and Facebook can afford taking risks on their cash by dedicating a fraction of it to crazy ideas, but small startups can rarely afford this.

Many businesses that fail aren’t insolvent or even unprofitable, they just run out of cash. Once you have a viable business model, managing your cash flow is the single most important thing you can do. It doesn’t matter how much cash you raise, without revenue generation you will eventually run dry. The biggest mistake to be made is carelessly spending money on features that are not needed or spending your marketing budget with no control on measuring what you are getting back.

4. Not Being Able To Support Growth

Things could go smoothly for a while, that is until you decide to scale up. Ten percent of respondents said their startup failed because of the growth problems.

When you’ve built a business model that works only up to a certain size, your model can’t sustain growth. Sometimes you must change your model sooner than expected. The founders who are not flexible, who are stuck in their own stubbornness, and who don’t think ahead, will end up being their own downfall even if the startup was successful.

5. Poor Allocation Of Resources And Money

Where startups often fail is not having a proper plan in place about how many people they need to hire, when is the right time, and which teams should be invested in at the first stage.

Startups that run out of resources also usually do so because the founders don’t want to give up a piece of the pie, the budgets were not planned properly, the burn rate was too high, or it just took longer to raise the first round than initially expected.

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6. Not Realizing The Competition In The Market

How often have we heard, focus on your own thing instead of getting distracted by the competition? This does not mean, though, that you should ignore the competition.

Where startups go wrong is believing they are the only ones with the great idea and going out there without proper competitor research. Ignoring the competition is a recipe for disaster in 19% of startup failures.

As Peter Thiel suggests, ask yourself what you’re doing that no one else is doing. Or if someone is not doing it well enough, what are you doing differently to win the market?

7. Ignoring Customers

The tricky question has always been whether entrepreneurs should open up shop for testing or spend a few more months making it perfect. First talk to your customers and then develop your product according to your market need. That’s where many startups go wrong.

When you don’t validate your market aggressively enough, you can’t build a good product. Without measuring, trusting the numbers, tracking, validating, and optimizing the data you get from your clients, it’s not possible to create a viable product in high demand.

There are many other reasons startups fail, but these seven came up as most common when questioning the founders and team members involved with the startup ecosystem. Should your startup fail, it’s worth spending some time to understand what went wrong and learn from your mistakes to make it next time.

About the author

Triin Linamagi is the co-founder & brand strategist at Bahoui and contributor at CoFounder. Previously, Triin helped to set up several technology startups, being responsible for business operations, marketing and product development.

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