Start-ups have been the hyped-up success story of the former decade, with a few new companies not just hitting it big, but changing the face of business development. But for every successful start-up, countless others fail, sometimes mysteriously and often unobserved. No one goes into business expecting to fail, yet a good number of new start-ups do. In an effort to understand what causes failures, listed below are the top five reasons for why start-ups tend to fail.
1. Market Problems
A major reason why new businesses fail is that they run into the problem of there being little or no market for the product that they have built. Here are some common indications:1. There is not a convincing enough value proposition to cause the buyer to actually commit to procuring. Good sales reps will tell you that to get an order in today’s tough circumstances, you have to find buyers that have their “hair on fire” or are “in thrilling pain”.
2. The market timing is not right. You could be ahead of your market by a few years and the public may not be ready for your specific resolution at this step.
3. Luckily you may have had the funding to last through the early stages, but the market size of people that need your services and have funds to come to you is simply not large enough.
2. Business Model Failure
One of the most common causes of failure in the start-up world is that entrepreneurs are too optimistic about how easy it will be to acquire customers. They assume that, because they will build an interesting web site, product, or service, that clienteles will beat a path to their door. That may happen with the first few customers but, after that, it quickly becomes an expensive task to attract and win customers if you do not have a proper business model in place.
The Capital Efficiency “Rule”
If you would like to have a capital efficient business, it is believed to be important to recover the cost of acquiring your customers in less than 12 months. Wireless carriers and banks break this rule, but they have the luxury of access to cheap capital.
3. Poor Management Team
An incredibly common problem that causes start-ups to fail is a weak management team. A good management team will be smart enough to avoid Reasons 2, 4, and 5 in the business. Weak administration teams make errors in multiple regions:
1. They are frequently weak on strategy, building a product that no one wants to buy as they failed to do enough work to validate the ideas before and during development.
2. They are usually poor at execution which leads to issues with the product not getting built correctly or on time. The go-to-market execution will be poorly instigated.
4. Running out of Cash
A fourth major reason that start-ups fail is that they run out of cash. A key job of the CEO is to understand how much cash is left and whether that will carry the company to a milestone that can lead to successful financing or to cash flow positive.
5. Product Problems
Another reason that new businesses fail is that they miss the mark in developing a product that meets the market’s need. This can either be due to simple execution or it can be a far more strategic problem, which is a failure to achieve Product/Market fit. Most of the time, the first product that a start-up brings to market won’t meet the market need. In the best cases, it will take a few revisions to get the product/market fit right. In the worst cases, the product will be way off base and a complete re-think is obligatory.
Some start-ups prosper, yet so many fail. And, it is failure that teaches us the best lessons. There are many other reasons start-ups fail, but these five came up as most common when inquiring the founders and team members involved in the start-up ecosystem. Should your start-up fail, it’s worth spending some time to understand what went wrong and learn from your mistakes to make it the next time.
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