Top 6 reasons why digital startups fail

A few months ago, I wrote an article on global trends of failed startups, and guess what, last week I stumbled upon one ex-founder of a failed startup company who has now gone back to his full time job and doing quite well in his new role as a business head.

The pace at which new startups are coming up is less bizarre compared to if you see the pace at which they get shut down.

Question is, why?

Since 2011, 70% of the companies having raised less than $5M overall are dead. Statistics like these can scare the hell out of any young, aspiring entrepreneur. We all read those beautifully written PR stories around few people receiving millions of dollars of funding by VC firms or angel investors, what we miss out on is the list of companies who failed after receiving those funding.

Last year, CB Insights shared below list of top 20 reasons for startup failure which were based on the post mortem done with 100 failed startup founders.

Top reasons startups fail

Top reasons startups fail

 

Let me expand some of these and add some more from my side based on my startup consulting experience:

Single Founder Startups

Let me rephrase the above statement, single “active” founder startup. Incidentally, I’ve worked with couple of them in my career, being a single startup founder is one of the most difficult things in life. Does the destiny sympathizes with these heroes or lady luck favors them? Not really, in fact, it is even more harsh for a single founder to take off their dream. Though there are some nice plus in this situation for e.g. decision making is much faster as the startup is almost like a sole proprietor firm, but considering the single founder cannot be an expert in every single aspect of the business, it sometimes takes a lot more than it should. And sometimes, it may lead to business fatal decision making.

Focused on Niche

If your startup business model targeting a very small segment of audience, you might want to re-look at your business strategy. A lot of founders pick up ideas focussed at a niche audience in order to avoid the competition and carve a stronghold in that segment. But this can be suicidal as it will increase your marketing cost of audience acquisition and if your idea is not strong enough and/or your product experience is weak, a bigger player might just gobble up your segment as well despite yours being a unique idea.

If you make anything good, you’re going to have competitors, so you may as well face that. You can only avoid competition by avoiding good ideas. ~ Paul Graham ( Y Combinator )

Bad Hiring

Also read: How to hire for your bootstrap startup?

One of the most obvious and perhaps the most important reason as to why a lot of startups fail is ‘PEOPLE’. Today, every single early stage startup is going through the worst nightmare of hiring the right people for their idea. There is no doubt that startups need people with a different set of skill sets and more importantly attitude. Needless to say, you cannot filter these people using any job portal. At times, startups end up hiring people in a hurry to get the ball rolling, especially when the investor pressure is high to deliver and scale up. This can also happen when startups hire people based on their background and not the skills they are actually looking for. Result is quite obvious, wrong people get on the bus that leads to project delays and eventually, product failure.

Too longer proof of concept

Also read: 6 Stages of a Startup

Call it a personality issue but some startup founders get themselves into a zone when they spend just too much time in building their product prototype for the proof of concept. It could be because the pandora box of ideas within the parent idea becomes just too much to handle and they just don’t know what to test within their MVP, but this causes massive delay to the project launch and at times so much so that it leads to losing the first mover advantage in the market.

Poor Marketing

This is typical to all B2B startups who raise funding based on their unique product idea which looks really fancy on the presentation, but it is equally difficult to engage audience on that concept. More often than not, there is no clear strategy to build brand as B2B companies focus on customer acquisition without thinking about future growth. Net new customer acquisition becomes increasingly difficult and after a point and lack of repeat business or up-sell starts hitting the bottom lines.

In Fighting

With so much of blood and sweat being put into building a startup, they are extremely prone to ego-battles within the founding team. Once that happen, Decision making becomes increasingly difficult on key issues, positive energies starts to disappear and the balance sheet starts reflecting the reality. This reaches a point where founders can’t see eye to eye and the startup failure becomes increasingly imminent.

How to foolproof your digital startup hiring strategy?

I am convinced that nothing we do is more important than hiring and developing people. At the end of the day you bet on people, not on strategies.

~ Lawrence Bossidy (Former COO of GE and author)

I wish I could’ve mailed the above quote in 70 font size, Arial Bold Face to all the Digital Marketing companies ( especially Agencies & Publishers ). Needless to say that building your startup hiring strategy is a never ending Everest climb for all organisations ( digital or non digital ).

Though bigger digital brands find it slightly easy to attract the right talent, retaining the talent becomes a bigger pain for them as well.

Ask any HR specialist or recruiter, they would say the trend is nothing different from other industries. People are looking to match the pace of their career growth with the rising costs. An average salary increase of 12% is completely disconnected with rising inflationary conditions. This will build a spiral effect, people who are not satisfied with their financial conditions will always be the first ones to look out for better jobs & opportunities.

In an interview (watch the video) given by Mark Zuckerberg, he made a profound statement, I quote:

The best people I’ve hired in my life were those who didn’t have much of engineering experience ~ Mark Zuckerberg

Startup Hiring Strategy isn’t just about hiring the best people with skills or for that matter who are stable in their careers, it is also about getting those who have a strong & relevant point of view about what you believe in, even if they do not have the experience or qualification from reputed engineering colleges.

I also believe, that in every industry, people have their own set of challenges due to which they show unstable tendency at work places. Of course, there will always be few individuals who do not fall in line despite a lot of effort by the management, but in general, people hate updating their resumes every year.

Also Read : Why Job Hopping is no longer a stigma globally?

As a business owner ( especially a start up owner ), attrition is something I should always keep at the back of my mind as one of the challenges which could hamper my growth story. Often start ups do not factor attrition while giving projections to their investors, which I believe is a massive error. The sooner they’ll accept the lack of permanence in the employee-employer relationship, the better it will be for their future enterprise. Once the degree of attrition is understood & acknowledged in any industry, you can then plan your resources a lot better.

The question is, as a business owner, how can you deal with this kind of situation?

Team Composition

First, make hiring a continuous process and not just restricted till the desired roles are filled. Managers should always be on a lookout for quality resources with value added skills for the team. For instance, do not hire resources of same nature & type, hire people with differentiated skill sets which will add value in long term. People love to be in a team where they can learn from each other. Collaborative learning is possible when you have people with different skill-sets.

Long term hiring

Second, do not hire people for solving your short term problems. For instance, if your key Account Manager decides to leave, it is bound to hit your operations & would also create uncertainty at client’s end, but your new hiring should not be to fill the immediate gap, instead it should attract people who are looking for a challenge in their careers to put their skill to test. Employees who join start ups from big companies usually carry a lot of baggage of their esteemed employer. At times it can be fatal for team dynamics.

Performance linked remuneration

Third, hiring people on performance linked remuneration, incentives & contracts could be another option. If you build your digital company’s team dynamics this way, employees would be exactly aware of what they are chasing, what team is chasing & how they can work towards it in a logical yet innovative way, Managers KRA would be to maximise potential of each individual who is working as a part of this contract.The best part, build substantial amount of incentives ( both monetary & non monetary ) which would drive morale among the senior & junior level employees.

The last point needs an Industry buy-in, but we are witnessing this trend already in few small to mid size digital-IT & digital-Infra companies where other than the sales force, revenue support functions like account management/ client servicing & customer support have been connected to measurable performance linked metrics.

The contracts are time bound but readily renewable subject to agreement by both parties (employee & employer). It offers a very flexible working relationship to individuals where everything remains constant except that employees are free to move out after the contract period is over.

One of the main challenges any digital startup company will face is poaching from upcoming start ups. Actually the poor demand-supply ratio of quality resources has made it absolutely imperative for any company  to desperately hold on to their trained resources.

Today recruiters are under severe pressures to find quality talent for their clients. No start up has any time to waste on training semi skilled employees. They have a running train of profitability & projections to catch up without which they would not get their next round of funding from the investor.

So think of it, time bound, performance linked contracts isn’t a bad option in digital business, it may also prove to be a win-win for the individual & start up clients & agencies in the long term.