Startups trade a risky path to becoming unicorn firms like Uber, Airbnb, Slack, Stripe and Docker. But only 1% of startups reach unicorn status. Others fail. Here’s how to tackle the #1 reason for 50% of startup failures.
Why do startups fail? If they are so prone to failure, why set up one? Are startup failures different from regular business failures? These questions may agitate your mind as you read this article headline.
To answer these questions, I reviewed the data on startup failures. I also explained why startups are different from other new businesses and why the startup process is risky but rewarding.
Are startup failures higher than traditional business failures?
Nine in every ten startups fail. But to see startup failures in the same context as general business failures is misleading. The reason is that startups are distinct from traditional new businesses. So startups’ failure rate differs from that of other new firms.
According to statistics from the US Bureau of Labor, two in ten new businesses fail in the first year of operation. The failure rate increases to about 50% by the end of the 5th year. So, the baseline failure rate for traditional new businesses is lower than that of startups.
How are startups different from other new businesses?
Startups are new businesses in the earliest stages of development. But they are highly innovative as they make and test assumptions about potential products, services, markets and new technologies. Unfortunately, these assumptions could be wrong and may result in startup failures.
Startups seek to disrupt their industry, scale up fast, and dominate the market. Unlike small businesses, startups get funding from venture capitalists and angel investors. In exchange, they give a part of their equity.
The above characteristics make the startup process a business experiment. The experiment may succeed, but there is a higher risk of failure. The startup failure rate is higher because startups also carry other business risks such as finance, cash flow, operations, and market. But the reward for one successful startup offsets nine unsuccessful investments. Examples of today’s unicorn companies that were once startups include Uber, Airbnb, Stripe and Pinterest.
Traditional new businesses rely on established business models that work from day one. They generate revenue from inception but may also take bank loans to fund their operations. But they do not need significant investments and time to develop the business.
What is the #1 reason for startup failures?
Startup founders aim to make business breakthroughs. So, they seek to confirm their assumptions in real business situations.
Business assumptions are usually about the products or services and their value to customers. Startups also make assumptions about markets and competition. Unfortunately, most business assumptions are products of flawed and untested parameters. The unrealistic business assumptions lead to market mistakes, the one reason for over 50% of startup failures.
What are the market mistakes that lead to startup failures?
Market mistakes include a lack of product-market fit, no value added, competition, market size and growth-related problems. These mistakes are fatal to startup success and contribute to over 50% of startup failures.
Lack of Product-market Fit.
Startups may assume that their products will be a hit with customers, but they may end up a big flop. Market failure may occur because customers’ demands change, and substitute products could alter the market for any products at short notice.
A startup can achieve product-market fit by identifying a problem in a market and providing needed solutions. A product-market fit means your product is growing fast and you are acquiring customers at a low cost. To tackle the problem of no product-market fit,
- Stay close to your customers and understand their needs.
- Please keep track of your customers’ changing needs and preferences and provide products to meet them.
- Seek customers’ unbiased opinions of your product or brand.
- Learn from feedback; apply lessons learned and track results (lean startup).
Competition
Entrepreneurs always expect competition, which remains a primary reason for startup failures. Competition for supremacy over innovative products is dynamic. Competitors seek to put you out of business if your products or services are in high demand. They will copy and sell your products or services cheaper.
Competitors will attract your employees with better offers to steal your trade secrets. Big players in your industry will apply economies of scale to under-price your products and put you out of business. To tackle this problem,
- Be clear about the value your business provides and how it differs from your competitors.
- Avoid the mass market where the competition is stiff. Identify an underserved group where customers will feel your impact.
- Know your customers’ needs, preferences and, if possible, their buying habits.
- Explore opportunities for partnerships and strategic alliances.
- To remain relevant and competitive, keep innovating.
No Value Added
Loyalty to your business or brand comes from the value customers derive from your products or services. Innovative startups develop products or services that address their customers’ needs. Customers will return to the existing solution if your product fails to provide the desired value. To address the problem,
- Develop products or services that solve customers’ problems.
- Customers need change. To create the value they want, keep innovating.
Growth
Fast growth is always on the agenda of startup founders. But startups need to pay more attention to their capabilities and the market size of their products. When startups envision a non-existent market, they scale up in anticipation of demands. Thus, the startup may lose focus and fail. So,
- Focus on solving the single problem you identified in your niche market.
- Develop and refine the technology or process that enables you to solve the problem.
- Develop a strategy or channel that makes your products available in your single but well-defined market.
The Final Words
As innovative new businesses, startups have a very high risk of failure. The more they innovate, the more the risk of failure increases.
Startups fail due to marketing mistakes, some of which are fatal. This article suggested ways to tackle fatal marketing mistakes that lead to over 50 % of startup failures.
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