Launching a startup is ridiculously exciting. Not only do you get a chance to control your destiny and build an effective team, but if you’re lucky and you work hard, you could turn it into a “unicorn”—a billion-dollar enterprise.
Of course, most of you reading this know that the odds of your business becoming a tech unicorn are slim, even if you have a great idea in place. That’s because more than half of all startups fail within the first five years of operation.
Understanding the reasons why startups fail can help you avoid such a fate. So what are the driving factors that lead to startup failure?
Lack of Market Need
One of the most common causes of startup failure is a simple lack of market need. Economic systems rely on supply and demand. With a startup, you may be supplying a product or service, but if there is no demand for it, it’s not going to sell. You can have a great product, fair pricing, and the best customer service in the world—but it doesn’t matter if people have no need for your product.
The best way to prevent this from occurring is through market research. Before getting too deep into startup development, it’s important to research your target demographics and confirm their desire for a product like yours.
Poor Customer Experience
Another incredibly common motivator for failure is poor customer experience all-around. Not to be mistaken for customer service, customer experience refers to the overall experiences a customer has with the brand. It includes their first impressions, their experiences when using the core product or service, and their interactions with customer service.
If the usability of your product or service is poor, if your customer service is insufficient, or if other experiences are lackluster, your customers aren’t going to stick around. That’s why customer experience should be one of your top priorities for strategic development.
Running Out of Capital
Many business owners launch startups with the intention of running lean—relying on minimal resources to preserve the business for as long as possible. But even the leanest businesses need money to keep running. If you run out of capital prematurely, the business can’t sustain itself—no matter how good the business model is.
This is usually a problem with businesses that are self-funded or those that are utilizing a minimalistic approach. The solution is to start generating consistent revenue faster or to work with angel investors or venture capitalists to get more funding.
The Wrong Team
Sometimes, it’s a team issue. Your startup relies on a team of connected, experienced professionals collaborating to make your vision a reality. If there are members of your team who are inexperienced, or if they’re unwilling to put in sufficient effort, or worse, if they sabotage your efforts, your business isn’t going anywhere.
Too many startups hire quickly and with reckless abandon. But in many cases, it’s better to take your time and make sure you get the right people for your team.
Good businesses tend to get a lot of attention. If it looks like you’re making good money and dominating the market, it’s only a matter of time before another ambitious entrepreneur steps in to try and get a piece of the pie. If another startup competes with yours directly and they have a significant edge—such as offering a lower price, being more available, or offering better customer support—they’re inclined to undermine your startup’s operation.
Fortunately, there are many ways to improve your competitiveness, such by lowering prices, targeting a different demographic, or pivoting entirely.
Pricing and Cost Issues
The basis for a startup’s continuing operation is its underlying economics. If you want to continue existing, you need to make money—ideally more money than you’re spending on things like employee salaries and raw materials.
Many startups fail because they can’t manage things like pricing and cost. If they charge too much, customers leave. If they don’t charge enough, they don’t make a significant enough profit. If costs get out of hand, the company will collapse. The only real solution is careful financial planning and management.
No Real Business Model
It’s incredible how many startups get launched without a proper business model. They have a great strategy for getting attention or earning downloads, shares, and engagements, but there’s no real way to make money.
Before starting a business, you need to have a business plan. And no matter what your product or service is, there needs to be some way to monetize it. It’s possible for this model to evolve over time, but without a model, the business will inevitably fail.
At a certain point, your startup could become so popular that it’s self-sustaining. But most startups, especially young ones, heavily rely on marketing to increase their visibility. If a startup straight-up refuses to invest in marketing and advertising, it’s probably going to fail. If it doesn’t invest in the right strategies, it’s probably going to fail. If it invests too much in the wrong type of strategy, it’s probably going to fail.
Marketing is hard to get right, but it requires a decent investment and a solid strategy to direct its efforts. Working with a professional marketing agency is often the best solution.
Sometimes, a startup just gets the timing wrong. If the product is too new, and audiences aren’t ready for it, it’s not going to make much of a splash. If you’re too late to a saturated industry, you’re going to blend in as white noise.
Timing is incredibly tricky, and unfortunately, there’s not much you can do to correct this potential issue. Market research and competitive research can help you determine the state of the market, but no matter what, there’s going to be a little luck involved.
A Loss of Focus
Some startups don’t explode in a burst of fire; they gradually wither away. Over time, an entrepreneur may become disillusioned with the business, or they may become motivated by new goals and different ideas. It could also be a problem that an entrepreneur is unable to clarify their vision, making it impossible for the business to achieve a focused goal.
In either case, there is no focus for the business, and the business declines as a result.
The greatest strength of a startup can also be its greatest weakness: the collaborative power of the team. Startups rely on an entrepreneur, a team of employees, investors, mentors, and other professionals and authorities to coordinate its actions. If these people can’t agree, or if they’re constantly undermining each other, the business can’t possibly survive.
Setting a coordinated, mutually agreeable vision from the beginning can mitigate this.
A Pivot Gone Wrong
Startups sometimes pivot; when faced with a sudden market change, new competitor, or other issue, the startup transforms to become a different kind of business altogether. This can be a powerful, life-saving move—but it can also go terribly wrong.
If you pivot too quickly or without a proper plan, you could end up exacerbating the problems that already exist, rather than solving them.
In rarer cases, startups fail because of legal issues. There may be standing lawsuits against the business, copyright infringement claims, or an issue where the startup is directly breaking the law. The only solution here is proactive legal planning; otherwise, you may run out of money fighting the issue in court.
As you can see, there are dozens of ways that startups can fail, so it’s tough to stop all these potential modes of failure at once. However, with the right level of planning, research, and self-awareness, you can identify the weaknesses and threats that are most likely to impact your business and root them out.