From my experience, startups are extremely tough to run, especially in their early stages. They face a plethora of market challenges that could take them down within the first year of operation. It takes a whole lot of perseverance and stubbornness to turn a vision into a reality, and most of them sadly end up going down the drain.
I am Ofir Bar, an investor in tech startups for 20 good years now, so I’ve seen quite a few success stories in my career. I will share some main reasons why startups fail these days. Maybe that will give you an insight into what you need to do right, in order to avoid the same fate.
What are the chances of startups failing?
Statistically speaking, 90% of all startups fail. I think this staggering piece of information is quite depressing. That’s why it is of utmost importance to understand what they fail, and what their creators do wrong. This number is global on average, meaning that location or government policy is not the main driving force here.
With that in mind, the situation in the United States seems extra dire. Americans are no longer interested in entrepreneurship. Recent data shows that entrepreneurship is near a 40-year low.
1. Lack of market demand for product/service
Sometimes we fail because of over-projection of market demand. When implementing business ideas, we always have a vision of an ideal, sometimes utopic market demand that we will be feeding with the product or service developed. However, from what I’ve seen over the years, most innovators are off track. Either the market is not ready for their product/service, they have ample competition or there is no market for it at all. Within a year without proper market demand, a startup is bound to fail.
2. Lack of funds
Sometimes you can’t find the right way to reach the market immediately, but you are sure the demand exists and will build in time. Would you hold on to your innovative business idea? My bet is that the answer is ‘yes’. However, a lack of funds to sustain the startup in its formative years without returns may be a hindrance. Moreover, we often don’t tend to realize when we are deep in the financial mud, seeing it as an obstacle we can overcome when it is much more complex than that.
The solution is simple - be prepared. Raise enough funds according not to an optimistic projection, but rather a pessimistic one. If you need to raise more funds throughout the process, do it ahead of time and don’t wait until the last moment.
3. Product problems
I have seen this happen to many entrepreneurs - they have the product in mind, but they don’t make enough effort to cross every T and dot every I in the process of design. When they release their baby to the tech world, the glitches and bugs are discovered, leading to failure.
No one can promise you that your creation is going to be perfect, and you know what? It probably won’t be at first. However, you must make every effort possible in order to bring it to the market as ‘ready’ as you can. You can also fix and improve along the way, but don’t ignore or undermine issues that pop up.
4. Poor management team
Innovation and business management are two different things. We must keep this in mind as it is one of the less talked about causes of failure amongst startups in the first year. A majority of innovators think that they have business skills simply because they can develop a product. My take is that if they lack a proper management team, the startup idea won’t go far in the market.
The business world is very vicious, and that’s why I advise entrepreneurs to get the right people to lead their teams. It might be hard for you to let someone else in and give them power, but you will probably need someone to help you with your weaknesses, and that is just something you must realize - the sooner the better.
5. Pricing issues
Startups also fail because they do not know how to price their products right. Again, it is important that we understand the market dynamics to succeed as entrepreneurs. Only that way can we develop a sustainable and reasonable pricing strategy, for the longer term. Lack of the right pricing will either result in losses or an unproductive business environment. If you find yourself having problems with that, I recommend the usage startup incubators, especially in the earlier phases.
Finishing off with a touch of optimism
The bottom line here is that you don’t have to fail. You don’t have to be part of the sad statistics. Simply work on these factors, learn from others’ mistakes, believe in yourself and you’ll get far.