By Catherine Li
First-time entrepreneurs—inspired to launch their startups—often encounter both the complex challenges and exciting experiences of creating a company completely from scratch. This feeling of purpose and being a part of “the next big thing” can explain why talented people are willing to sacrifice their time and money, all for building a new startup. Plus the ability to manage tasks with near complete freedom and the feeling of bettering someone’s life.
Of course, business books would often romanticize all of the success stories, just to sell well. But survivorship bias sometimes creates a picture that is all too pretty. Instead, we should also analyze the stories of failure and remember that in reality, the majority of startups often crash-land in the first three years since creation. When the fantasy wears off, reality hits. Rather, smart entrepreneurs should study exactly why startups fail, identify the problem, and then develop a solution.
Statistics of Startup Failures
Breaking down the statistics, about only a third of the startups achieve ten years with every fifth failing during the first year.
Even more, some of the worst startup failure rates for new businesses include that in 2019, the overall startup failure rate was approximately 90%. The worst failure rates typically account for projects in transportation, insurance, finance, retail, real estate, and construction.
However, statistics should never dictate the ability to have your say. Many of the things we find essential today were often thought of as nothing in the past. Making something valuable out of nothing is always a challenging journey, but rewarding.
The nature of startup today— in comparison to 10 or even 20 years ago—is now rooted in gaining brand recognition and growing market share at all costs. For example, the number of apps in app stores has steadily increased now while barriers to entry have decreased. This means that getting started today can be much easier than in the past, but it is tough to gain enough attention and stay afloat for long. This is where analyzing past startup failures can be beneficial. While the reasons why startups fail are multifold, I’ve broken down the reasons to two main categories: marketing and team.
Lack of Adequate Market Research
Many of the common problems that arise between the product and the customers—such as user-unfriendly product, poor product timing, pricing issues, etc.—are all a result of poor marketing research. One of the biggest problems with startups, in which 42% of startup founders were affected by, was the lack of a market demand.
For example, the meal kit startup Kettlebell Kitchen, which provided meal kits for specific diets, closed shop in November of 2019, having had no competitive advantage in the already saturated meal kit delivery market, along with rivals like HelloFresh and BlueApron.
Another example is Vreal, a VR platform for video game streamers, fell victim to premature expansion since the actual VR market was developing at a slower rate than expected.
All too often founders rely completely on their own idea and opinion and disregard the actual circumstances of the existing market. The importance of market research should not be overlooked or otherwise, it can lead to a disability to solve market needs and a high rate of startup failures.
How to Avoid
Product market fit requires a good/service that consumers are willing to pay and use for solving a problem. Typically then, establishing a new business should begin with an extensive research process—ideally long before thinking about the actual product itself. Try setting up a landing page to promote early access to your product, and get a measure of the engagement.
It’s important to realize that while products may fit the market, it is common to lack proper marketing for the good. Companies either sell their products in a way that doesn’t draw attention, or don’t understand what consumers are looking for. You can have the best product in the world, but if no one knows about it and all the wrong features are pushed, it still would not sell. Startup founders often neglect the importance of marketing being so captivated by their product.
How to Avoid
The most important thing to realize is that regardless of what industry your business operates in, you are always in the marketing business. The sooner you realize it, the higher chance of success you will have.
Problems with Pivoting: Pivot Went Bad/Failure to Pivot
In startups, particularly within the tech ones, there are two contradicting concepts that have to be kept in mind: focus and the ability to pivot. The most challenging thing is to do them simultaneously and keep your balance. It’s important to focus on the main goal of your venture, and not get distracted by any secondary functions, and finally deliver on what you’ve promised to your target audience and investors. It’s not rare when startups make a complete restart with new ideas, and the basic concept almost always changes in one way or another affected by the current realities of the market.
For instance, the Inboard Technology company that began as a Kickstarter project offering the development of electric skateboards failed to pivot to scooters, while one of the most successful pivots was Youtube, where the company started as a video-dating service but became a major platform for generalized online videos.
How to avoid
To stay focused on the main idea of your venture, create a clear but realistic goal with a good 12-month, 2-year, 5-year, and 10-year plan.
But also, avoid over-focusing on the goal at the expense of adaptability. Always keep in mind that plans change, and you should too.
This usually occurs when entrepreneurs attempt to cut expenses by forgoing the UI/UX design stage. Successfully products can’t manage without the design phase, even if some products can be programmed without it. Always working on developing flexible methodologies, and to prepare for any situation.
How to avoid
Always ensure that your product is properly designed first, but avoid going overboard with too many distractions that cut off vital functions.
Sometimes a team-member just isn't up for this particular project, however much expertise a team-member has. People that are startup-savvy have an advantage for startups. As well, they might lack vital quality to make the venture successful. The more progressed the project becomes, the more acute it feels.
How to avoid
To avoid, the best way is to hire experienced professionals that match all aspects of your business. For startups in the tech industry, another option you could consider is using an external software development company with extensive startup-building experience
It is often the team dynamic that kills seed-stage companies with multiple founders. The pressure of creating a startup can overwhelm relationships. Founders always need to maintain strong communication with each other to avoid any misunderstanding or conflicts.
How to avoid
Never forget about working with your team, or the importance of team alignment. Make sure every person understands what it’s all about. Most team-members will change with time and it is normal, whether they are laid-off or decide to go away. Just ensure that each new employee understands and agrees on the company’s goals and values.
Even if you are using the benefits of extended teams, as many other startup founders use now, it is still important to align your team around the main goals. The majority of the people in today’s global economy are distributed ones. Of course, it is still important to maintain communication and transparency no matter where your team members are.
Even though a project may have lasted for several years, workers may face the devastating problem of burn out, which is when after several years of dedication people do not feel as though they can give the same amount of energy to the project. As the founder of a failed startup Blurtt said, “the problem with burnout is that you become hopeless and you lose every aspect of your creativity. I’d go to work feeling tired and exhausted. I was burning the candle at both ends”.
How to avoid
A solution to burn out is hiring talented and creative people throughout the project’s timeline and carefully directing the life-work balance, which may be difficult but it is essential when building a startup.
Lack of Passion
Lack of passion emerges within a startup when the entrepreneur has lost their motivation during the process of creating their business and does not know why they even started one in the first place.
How to avoid
To successfully navigate through this dilemma, you have to have a clear insight on why you started your business. Whether it’s for the money, experience, or to change the world for the better, pinpoint the real reason for your startup. Note that if you are creating a business and are going to sell it later, only a well-run business will attract buyers.
Lastly, financial issues rarely ruin startups, but rather the consequences concerning bad marketing or an unfit team.
It’s not simply the shortage of money that is the cause of why startups fail. They find themselves out of cash when their costs surpass their income. This happens as a result of loss of investors’ interest, which stems from a failure from a marketing perspective, or managerial troubles.
While in hindsight, these problems seem clear; in reality, it is often challenging. There are multiple reasons why startups fail, but breaking it down, it comes to marketing and your team involved. Failure can come from disregarding important values, and can be fixed. Startups still continue to encourage innovation however, and with substantial determination and planning, it is more than feasible for your product to change the world.
Are you interested in creating your own startup, but don’t know where to start? MassLight can help! Pitch your idea to us today and learn more about how we can help startups through our Build for Equity program!