3 reasons startups fail (HINT: It’s not cashflow)

Jun 04, 2021 - 7 min read
Joshua Ahn
editor-page-cover

While it is unclear who first said, “Learn from the mistakes of others, [because you] can’t live long enough to make them all yourself.” -Anonymous, the words have been repeated often enough to suggest a universal truth. According to various sources, including Startup Genome and Failory, the percentage for failing startups range between 90% to 92%. Regardless of the exact statistics for failing startups, the main takeaway is: building a startup is a risky venture. Yet, despite the odds, startup creation ramps up to 137,000 per day, according to statistical research conducted by Global Entrepreneurship Monitor (GEM).

The sheer surplus of startup successes and failures per year provides us with a clearer picture of what qualities and challenges ultimately caused startups to fail. Despite the variance of stories, common themes of failure provide insight for new and existing entrepreneurs to prioritize when considering their startup growth.

What should your startup focus on to maintain its rhythm and avoid failure? Consider these top 3 reasons startups fail when triaging your startup’s priorities:



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Lacking Market Need

According to CB Insights and multiple sources, the number one reason startups fail (41%) is a lack of market need. I recently listened to a TEDtalk by Bill Gross, founder of Idealab, who helped start over 125 companies. Throughout his work, he’s seen the ups and downs of hundreds of companies and summarized their reasons for success into five separate categories. Of those five categories, he listed “Idea” and “Timing” as two determinants of startup success.

Idea

The idea of a product must solve a real problem and fill a hole in the market while setting up the foundation for the company to build on. Flexibility, as markets change, gives this category less prioritization than timing, but the idea must start by solving a real problem. For example, Youtube began as a video dating website, but after seeing users upload other videos, the founders quickly shifted their idea to encompass all videos. Their initial idea for dating videos evolved into a more broad idea of any video. The majority of businesses start with great ideas but must quickly adapt to customer needs as the market changes. Here are some questions to ask yourself and an honest third party when considering your idea:

  1. What is the problem you are trying to solve?
  2. Is your solution a vitamin or painkiller? (vitamin refers to a supplement that doesn’t solve the problem, while a painkiller refers to a valuable solution to the problem.)
  3. Do people need your product?

Timing

Timing stood out as the number one determinant of success. For example, companies such as Airbnb successfully created a product during the 2008 economic housing crisis, where hosts were more willing to extend their rooms and homes for side income. Similarly, Uber filled a market space where drivers were ready to make extra cash on the side.

It’s difficult to time the market, but here are some strategies you can use to evaluate your company’s market need.

  • Stay updated with national and international news
  • Keep an eye on your competitors and market share
  • Take note of trends successful businesses are following and how your product can ride the same wave


Lacking Team Skillsets

Great ideas without a strong team decrease a startup’s potential for growth and create more uncertainty for investors. This rule applies to scaling your startup as your team starts to grow in number and roles. Therefore, it’s essential to address any issues in your team before taking steps towards growing your startup. While the right team can help solve any problems, wrong teams will create the initial issues. Here are some suggestions for filling that gap in your team and setting up your startup for success.

Upskill and reskill your team

While your startup grows, prioritize your team’s skills. Upskilling helps your team stay up to date with their current skills, while reskilling may fill in any gaps of knowledge your product may need to scale. Tools such as Educative Teams help provide your team with various in-demand courses developed by professionals in their topic. In addition, your team’s progress can be tracked through certifications, and learning paths are customizable to your team’s needs.

Onboarding new team members

Before you start hiring new team members, highlight the problem or missing skills within your team. It’s challenging to find a team member who perfectly aligns with all your qualifications. For example, a recent conversation with a friend revealed that their expectations for their new job at Stripe changed after they realized they needed to learn a new language. Unfortunately, they weren’t given any specific tools or courses, which added to the stress of learning a new language. Have a streamlined process for filling in any knowledge gaps during the onboarding phase to improve efficiency and help your new hire feel prepared for their new position.


Lacking Competitive Edge

Thousands of startups are generated every year, so what gives your product a competitive edge and win over competitors? About 20% of startups fail from losing to their competitors, but what are symptoms of lacking competitive edge? Once your startup starts to ramp up its product, larger companies will take notice and start to chip away at your market share, because your initial success gives other companies validation of your work. While your product may have been the first in the market, its success also places it at risk of drawing the attention of the bigger competition. Here are some symptoms that your startup is losing its competitive edge:

Burnout

Managing a team through the early stages of your startup requires a significant investment in time, resources, and energy. As time progresses, it becomes increasingly difficult to maintain the same vigor your team had. First, keep a reflective mindset to assess your health and enthusiasm. If you start to feel burnout or a decrease in drive, your team likely feels the same way. Then, find ways to support your team past the stages of early growth to maintain your company’s competitive edge.

Reduced customer engagement

Customer-centrism should produce innovative and new features to draw a wider audience and maintain the interest of existing customers. Positive and negative feedback should drive your startup’s direction in delivering new features to retain existing customers. A lack of customer engagement shows a lack of interest or investment that can stem from your customers looking for other solutions. Find ways to effectively and efficiently respond to your customer’s feedback and always look for ways to mold your product to its audience. Predictable and consistent solutions to negative feedback builds loyalty and trust within your customers to beat out your competition.


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Wrapping up

In reality, cashflow is a symptom of failing to meet your market, build your team, and beat your competition. Successfully understanding your market helps draw new customers and provides your company with future stability. Ask yourself difficult questions to face the reality of how essential your product is and seek advice from trusted third parties to avoid letting optimism cloud your judgment. Building your team drives the success or failure of your startup.

As your startup grows in size, finding tools to upskill and onboard new hires provide long-term security and efficiency at the minor expense of early time and monetary investments. At Educative, we desire to support your journey to success by providing customized solutions to your team’s needs.

Finally, maintaining a competitive edge in your market requires avoiding the risk of burnout and consistent response to your customer feedback. Building and maintaining a startup is no easy task, but having a clear idea for symptoms and reasons of startup failure helps to navigate your company in meeting your goals.

Happy learning!


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WRITTEN BYJoshua Ahn

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