Having a good idea is not the sole major element in establishing a successful business. Startups looking for investment focus on becoming the next Airbnb or Uber. However, in today’s competitive market, the reality is that you need to focus on more factors other than the idea. As a founder, you should consider the stories of failed startups to learn from their mistakes and avoid coming across the same issues they did.
If you pay closer attention to the reasons we are about to discuss, you will understand how each of those can take your startup down. So, failure in one element causes a chain reaction and ruins your whole business, leading it to a complete shutdown. On the other hand, if you put a lot of effort into understanding the main driving forces for the success of your startup, it will most likely be prosperous. Let’s see what those reasons are and what you can do to prevent them.
Good idea, bad model
For over a quarter of failed startups pointed to a weak business model as a primary reason for their shutdown. No matter how brilliant the idea is, you should be able to present it thoroughly to the potential investors. While thinking about what startups to invest in, investors pay attention to the business model as the face of your company. In fact, it is one of the essential aspects of every startup, and here is why.
As the founder, you should have the answers to questions like “What value will my startup bring to the society?”, “What are the costs and benefits?”, “Will the market entry be successful and with high demand?” In other words, the business model is a plan for successful business operations identifying the sources of revenue, target market, a product introduced, and financial projections.
In order to avoid presenting a non-comprehensive business model to your startup’s potential investors, create a checklist and make sure to include the following nine components in it:
- Target Market
- Value proposition
- Distribution channel
- Customer Relationship
- Revenue Streams
- Key Activities
- Key Resources
- Key Partnership
- Cost Structure
Not enough funding
Funding is the starting point for startups. 24% of startups failed because of the scarcity of cash, and 13% were unable to establish their startup right from the start. Even if your business model is compliant with all of the factors mentioned above, without sufficient cash flow, you will have to shut it down. Startups with low investment struggle throughout the fierce competition in the market. Updating the product to keep up with market trends would be impossible without proper funding.
Now, let’s see what the channels of financing are and what exactly startups can do to attract investors.
When choosing what startups to invest in, investors carefully observe the business plan. Startups with low investment may typically be the result of a weak business plan, not depicting every minor detail essential for investors to ensure a prosperous future for it. Another factor of insufficient funding is not being able to find opportunities and present your ideas, thus not making partnerships with your potential investors. To resolve this issue, you may think of joining a startup incubator or accelerator. Most of these networks provide free resources for your startups, such as office space, consulting, and so on. In other words, incubators or accelerators offer you the necessities which are essential for the first stage of your startup. As your startup grows more extensive, you may apply for credit, which will ensure your startup’s financial stability.
Another way of funding your startup is through venture capital investors. These are professionals who are willing to invest their money in established startups with proper business models. Take into consideration that venture capitals look for significant opportunities when choosing what startups to invest in. Try to show them the potential of high returns on their investment and that your team can earn those returns. Include an accurate description of where your business is headed and what are your potential growth factors in the market. Venture capitalists will evaluate and make investment decisions accordingly.
No market demand
Before putting your startup ideas into work, there are several crucial factors you need to take into account. Prior to entering the market, you need to consider whether there is a need for your product. Every business starts with a great idea; however, with the market entry, most of them fail because of the lack of demand. Often, entrepreneurs focus on the concept of the business or the product so much they forget it is not something the market really needs. According to the Small Business Kit, almost half of the startups fail because they do not fit the needs of customers. So, before you start a business, make sure the concept meets a need and doesn’t present something which will not be worth spending money on. If you are not sure whether you meet market demand, here are some factors you can consider.
First of all, put yourself in customers’ shoes. If you are considering purchasing something from the business, what are the alternatives? Has there been something similar to your product in the market, and what was its performance?
Secondly, focus group interviews can be beneficial before market entry. During this test, you can find out whether your idea is going to work well in the market, what are the expectations of customers, and what can be done to increase the demand. This is one of the common practices you can use to identify and evaluate customers’ needs as well as avoid further market failure due to lack of demand.
Premature scaling is one of the trickiest problems you will face during your startup operations. It seems like everything occurs within the ordinary course of business; you hire new people, grow larger, you get funded more. Yet the problem is whether you grow at the right time. Let’s take a closer look to understand what exactly premature scaling means. Premature scaling of a startup means scaling your team, overdeveloping your product, or customer acquisition strategies without firstly getting product/market fit. As the name itself recalls, product/market fit is making sure you are in a good market with a product that fits customers’ needs. According to the Startup Genome Project, almost 70% of startups scale-up too early, and fail.
Premature scaling is one of the most common factors for startups to perform worse. There are five elements that need to grow over time and in tune with each other, and those are as follows: Customer, product, team, business model, and financials. Scaling up too early in one of these elements may result in failure of the whole business. A possible solution to avoid such problems is not spending too much on customer acquisition before the market/product fit is reached. Otherwise, there will be premature scaling in customer acquisition. In order not to have premature scaling of product, do not add extra features and overdevelop your product without knowing whether or not there is a need for that.
Although having a great team is the key to success, make sure you do not hire too many people and allocate a major part of your budget to their salaries. At the initial stage, you certainly do not need CFOs and other managers, instead hire engineers, marketers, developers, or other specialists depending on your business.
Surprisingly, startups with low investment tend to use their funds more reasonably than the ones with high investment. The reason behind this is that having too much money founders tend to spend it on development or hiring more people, which we already know is not very good for the initial stage. Last but not least, your business model should not focus on profit maximization right from the start. Focus on budgeting, planning, and customer acquisition, only after which take a closer look to lower the costs and maximize profit. With the right steps, your business will be on the right path, thus ensuring your sustainable financial as well as economic growth.
Lack of teamwork
Mark Suster, an American entrepreneur, and venture capitalist, once said: “Individuals don’t build great companies, teams do.” Balanced cooperation is one of the most crucial success factors for the startup. There is a misconception that a founder can make it all by himself without a need for a team. According to one of the founders of Y Combinator, Paul Graham, there are three essential elements for building a successful startup. These elements include a great team, meeting customers’ needs, and spending money effectively.
The best solution you can provide to this issue is hiring people from different spheres essential for startup development: designer, engineer, and marketer. If you want to build a successful startup, do not be a one-person team. Founders usually think that hiring extra people will be an additional financial burden for them. However, if you choose the right people for your team, in the long run, they will increase your profits and help you with business-related issues.
For that reason, consider how much do startups pay for their employees while building your financial projections. According to PayScale data, an average employee for a startup is paid approximately $98,000 per year, varying from $53,000 to $175,000 depending on the position and job responsibilities. Overall, think about the long term advantages team members will bring to your startup. Shared responsibilities and specialized professionals will help you to build a successful company!
Poor Marketing and Sales
A famous marketing professor at Northwestern University, Philip Kotler, defines marketing as the art of exploring, creating, and delivering values to the customers. Too often, the startup team focuses on product development so much, and they forget that it is only half of the job. You may build incredibly smart technology products but not be able to market so that customers understand what the value of this item is.
The problem can certainly be solved using the internet. Digital marketing is one of the most popular and most extensive marketing channels in the world. People use phones, computers, and other gadgets daily to connect to the world. So, the best way to reach your potential customers is via the internet. Research by Smart HQ shows that 51% of customers find email marketing as the most effective channel while contacting them. But what is even more interesting is that 72% say they will respond to the email, which includes personalized messages. If you choose email marketing as the primary channel to reach your customers, it is even more important to track their further needs. For that, you can use Google Analytics to see the behavioral aspects of your audience, what channels they’ve used to reach your webpage, which keywords are delivering traffic to your website, etc. Overall, if your company fails to do proper marketing, no one will know about your product and the value it brings.
If you think about how many startups succeed and what exactly is their key to success, you will find many similarities among them. There are basic requirements such as an accurate business model, great teamwork, along with the other factors, which are the driving force for success. Before launching your startup, think of current market trends, is there really a demand for your product? In case there is no or just a little demand, you will be less likely to succeed in today’s highly competitive market.
All in all, you can not think of a single factor leading to a complete shutdown of a startup. Instead, it is a combination of several actions that distract them from the right path. So, make sure you are aware of market needs, and do a preliminary market research for your product, develop a comprehensive business model, which will ensure sufficient funding from the investors, gather a healthy and professional team to help you with all the market challenges, and ensure the balanced development of your startup.