Reasons for Startup Failures

🔍Insights

Kinnary Nensee, Apoorva Bajj

Apr 4, 2023 — 6 min read

Reasons for Startup Failures

Young companies that are founded on the idea of developing a unique product or service and making it irresistible and irreplaceable to their customers are called startups.

Many startups, within, their industries, are termed disruptors. This is because startups are rooted in innovation and aim to remedy existing deficiencies of products already in the market or create entirely new categories of products or services. They disrupt existing ways of thinking and doing business for the industry they belong to.

Types of Startups
Common Types of Industry-related Startup Businesses
Reasons Why Most Startups Fail
Conclusion

Types of Startups

Within the scope of various industries, there are usually five different types of startups.

Small Business Startups – Self-starters With Small Teams

A small business startup is usually a solo or partnership business with a small team. Their growth is slow, if at all and their framework is similar to a mom-and-pop store. They are usually self-funded and under no pressure to scale at speed. Their team is close-knit, almost like a family.

Buyable Startups – Built To Be Bought Out

Startups that begin with the idea of being bought out are usually associated with software and technology. The concept is for small teams to build a business from ground zero and sell it to a bigger player within their industry. Giants like Amazon and Apple are always in the news for buying small startup businesses. Mergers and acquisitions are a common occurrence in this space.

Scalable Startups – Seeking Capital

Most consumer and business apps are excellent examples of scalable startups. The initial work is to create and build a buzz and from there it’s a snowball effect of acquiring new customers. This kind of start-up raises capital from external sources – angel investors, venture capitalists, business partners, etc. This money goes towards supporting growth initiatives and building a strong base of customers. Eventually, this will grab the attention of someone who is either willing to fund them for a speedy scale-up or buy them out.

Offshoot Startups – Branch-offs From Bigger Corporations

This type of offshoot startup from a bigger company is usually an effort to enter a new market or disrupt a smaller competitor. It is not a company built from the ground up. Acting independently of its parent company, this start-up can experiment without too much scrutiny.

Startups that are specifically designed for charity or socially enhancing work usually scale up for philanthropy. They function with the help of grants and donations.

Common Types of Industry-related Startup Businesses

Contrary to common thought, startup businesses are not always tech related. Opportunities to start and scale up non-tech businesses are many and varied.

The founder/founders' capability, business type, model, scalability, and industry are all crucial factors that influence how a start-up business starts its operations and grows.

Reasons Why Most Startups Fail

Globally, almost 90% of all start-up businesses fail. 10% of this number fail within the first year. The most common period for startup failures is within the first two to five years. This number seems to be approximately the same across all industries.

The reasons for failure are many and varied depending on the specific industry. There are, however, some common reasons that affect all startups regardless of their business model, industry, or size.

Lack of Innovation

One of the most common reasons for start-up failure is a lack of innovation. Most businesses try to emulate and replicate global successes rather than create their models. Innovation in business helps to stand out, beat the competition, and increase productivity. Some guidelines can help startups avoid piggybacking on the success of others.

Proper research and understanding of the needs of the local market
Hire talent that has the technical expertise and a drive for innovation
Plan for long-term sustenance before venturing into trending ideas
Find the right resources to power a start-up

Lack of Funds

There is no doubt about it. Insufficient funds are a roadblock to growth and scalability. To transform an idea into a business, financial resources are essential. Once the funds are procured, the immediate need is a scalable and profitable business model. From there on, there might be a consistent need to raise follow-up funds to grow. If these needs are not met, then disaster strikes. How to avoid this?

Build an effective business plan and a revenue model
The focus on revenue and profits needs to be equal to the one on product and service
Available funds have to be spent judiciously

Product Market Fit

What happens when the start-up business tries to sell a product or service that consumers don’t need? Simple – They won’t buy. While it is great to develop and offer a unique product or service, it is equally important to understand if there is an existing need for it. Some steps to ensure this is as below –

An in-depth understanding of customers and if they need the product or service
Finding new customers via word-of-mouth before spending on devising expensive marketing plans

Gaps in Leadership

Startups are driven by the vision and ideology of their founders and core team members. It is one thing to have a great idea and quite another to turn it into a functional reality. The leadership has to drive the company with clarity of thought and action, strength, and conviction from the first day of operations. What are the ways to do it right?

Delegate to someone who can do it better
Study and practice leadership
Get training and mentoring to assume such a role

Why do Startups fail?

Lack of Agility and Adaptation

A know-it-all attitude is the fastest way to the failure of a start-up business. As a new setup, it can have various challenges and teething issues. This is where agility and adaptation play a large role. It can bring a competitive advantage to a start-up.

Learn continuously
Have a fluid workforce
Engage in research and development
Exchange ideas

Business Model Failure

Building an impressive website, and indulging in large marketing spends for a good product are great smokescreens and most new entrepreneurs are convinced that these are enough. The behind-the-curtain reality is harsh and unforgiving. Customer acquisition and customer retention demand huge investments. Start-up businesses need a strong and foolproof business model to sustain and record profit. Here are some questions that need to be answered –

Is there a scalable plan to acquire customers?
Can those customers be monetized?
Will the customer give us revenue that is higher than his acquisition rate?

Incorrect Hiring

Easily solvable, isn’t it? Not really. Most entrepreneurs are blind-sided by the difficulty in hiring the right talent and competency. The reasons?

Cost cutting by hiring mediocre talent results in mediocrity in all functions across the business
Inability to hire experts or experienced employees due to cash constraints or other reasons
Hiring people who do not share the same vision

The steps to correct such a scenario are simple and easily implemented

Chalk out the hiring process with care
Create alternate working methods like free-lance, contractual, or on a project basis with expert professionals
Make a strict hiring process by giving candidates real issues to solve

There are also issues like ignoring customers, regulatory and legal challenges, heavy competition, lack of passion or burnout, disharmony among the founders, investors, and team members, internal power struggles, etc.

Conclusion

A startup business that succeeds pays equal attention to most of these issues and will struggle through challenges and objections. The leader of such a business is a student who is continuously learning, a leader who communicates with clarity, and a worker who understands the need for collaboration and togetherness.

FAQs

What are the types of startups?

There are five types of startups which are listed below-

Small Business Startups
Buyable Startups
Scalable Startups
Offshoot Startups
Social Startups

What are the major reasons behind the failure of a startup?