Top 6 reasons why digital startups fail

why 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.

RIP Reports – Worldwide Failed startup trends

failed-start-up-business

Let me start this post by making a simple statement. By the time I would finish writing this post, according to latest startup trends, around 11,000 new startup business would get added to this world. Must be wondering how I found that number?

According to a massive research startup study done by Global Entrepreneurship Monitor– around 472 million entrepreneurs worldwide attempting to start 305 million companies, approximately 100 million new businesses (or one third) will open each year around the world.

reynoldsInterestingly, Dr. Paul D. Reynolds, Director, Research Institute, Global Entrepreneurship Center also says,

” The developing countries of Asia and Latin America are far ahead of Europe in starting new businesses, according to a recent survey of global entrepreneurial activity. But few start-ups have the potential to make an impact on jobs and growth, and a negligible number benefit from venture capital, with the vast majority reliant on informal funding. The 2002 annual survey by the Global Entrepreneurship Monitor (GEM) was carried out across 37 countries representing 92% of world GDP. It finds that 286 million people, 12% of the workforce in these countries, are engaged in starting or running a new business, implying a global figure of about 460 million. “We were quite shocked by how high the index is in the developing countries,” admits Paul Reynolds, the GEM project co-ordinator. “Only now do we have a fuller understanding that half of the people in many developing countries are doing it out of necessity because they cannot find work, and that is what drives the rate up so high.” 

Every now and then we keep seeing these lists on buzzfeed or twitter around “17 coolest startups that can change your life” (like this one) and I’m sure a lot of you feel wow about the whole concept of startups. But let me spoil your party, most of these startup companies typically die around ~20 months after their last financing round and after having raised $1.3 million.

Failed startup Companies By Sectorfinal

  • 55% of failed startups raised $1M or less, and almost 70% companies died having raised less than $5M overall.  Not a big surprise. Companies at the earliest stages are the most vulnerable due to limited financial runway, immature products and businesses and general uncertainty about whether the market needs what they’ve built.
  • In each year since 2010, 70% of all dead tech companies have been in the internet sector. This is hardly a surprise as within tech, a majority of funding and deals has gone to the internet sector and so it would follow that the sector would have the largest proportion of dead companies.  The % of companies dying within the internet sector has stayed relatively range bound over the last several years as well.

On his many failed experiments, Thomas Edison once said,

I have learned fifty thousand ways it cannot be done and therefore I am fifty thousand times nearer the final successful experiment.

Well, it seems a lot of our modern day entrepreneurs have taken that quote to their hearts.

The rate at which startups are failing is quite incredible. Media, quite literally has made the whole idea of startup funeral extremely cool. It is hilarious (even bizarre) that the failed entrepreneur wants to grab the same attention like a war hero. The irony however, is that the media (especially the social media) is happily obliging to do it. Public post mortem of a failed Startup seems to have become a general startup trends in the business circles. A lot of professionals find it intellectually stimulating to visit the #RIP sessions of the startups. 

Dead_startup_Funding_Raised

 

Dead_startups_Time_Since_Funding

According to CB Insights report:

  • While the dead companies on our list raised $11.3M on average, the median funding raised which is a better measure in this case was $1.3M.
  • the average company dies ~20 months from its last funding round in the absence of additional funding or acquirers.

But the question which is bugging me continuously is,

Why do so many startups fail? 

Typically, there could be hundreds of possible reasons for a failed startup like:

  • lack of strong value proposition
  • high risk low return business model
  • longer sales cycles
  • non scalable, non profitable business

and many, many more. You could actually read about reasons of startup failure all around the web.

startups_failed_industry_Rankings

 

According to CB Insights startup trends,

“Death is not specific to a particular type of sector or industry. In fact, the companies on our dataset represent a fairly diverse set of subindustries.”

Interestingly, in the following Ted Talk, Clara Brenner, Co-Founder of Tumml talked about why a lot of social startups face such high failure rates.

She has mentioned about the importance of seed funding & how it needs to be utilized in a startup.

Also, the relevance of Impact Investors to Urban Innovation startups can be co-related with the importance of finding the right investor that matches your company’s vision. 

Finding a right investor for a startup is nothing short of doing matrimony match making. A lot of the startups fail even after getting several rounds of seed funding because the investor does not show enough trust or faith in the founding team’s vision.