Today, it has become so easy to begin your own startup. The heck, even I think of doing that. Unfortunately, many entrepreneurs have forgotten the risky side of this funny business.
Of course, a company needs time to grow, but many fail not long after they’ve opened their doors. In this article, I will walk you through the rates of startup failure in the startup world, and also point out what were these businesses doing wrong. We’ll also see that attracting investors, or getting into a combinator, does not necessarily mean that your startup is going to be a success.
What are the main reasons startups fail?
- Single founder startups are a no-no. There aren’t that many startups that have only one founder. What’s the problem with that? you may ask. A single founder won’t be capable of dealing on his own with all the issues that might occur. Also, not being able to convince a friend to be your business partner raises some questions, too. In the startup world, it’s best to partner with a few people, so that you’ll be able to exchange thoughts, experiences, thus reducing one’s chances of failure.
- Your startup should differentiate itself from the others, and solve a problem. Most startups are pretty much similar to others. Even if the idea is good, it also needs to meet a few characteristics: be better than the ones before it, bring a different value to the customers, target different people. Find your value proposition. The startup world is filled with amazing ideas, but they lack in solving a problem. Think about what people are complaining about, and figure some way to fix this.
- Stiffnes. Along the way, your startup might encounter a few different changes to the initial plan and vision. You have to be prepared for new ideas that come up. If your initial plan changes completely, that’s definitely not a good sign. Ask your customers or users for feedback on your product.
- Lack of strategy. George Deeb says in an article for Forbes, in which he talks about why startups fail, that “entrepreneurs are typically so focused on building their product, that they don’t think far enough ahead to their go-to-market strategy, and how that will help them achieve a proof-of-concept to attract growth capital“.
- Lack of monetization. Ramli John states that “The “Jerry McGuire” business principle” is: no customers= no money= no business. Monetization is what most entrepreneurs tend to forget about. The money that comes from your customers is what will keep your business alive, not what comes from investors. Define your revenue model, even though you won’t implement it right from the beginning.
- Small niche. Startup founders think that it’s easier to choose a niche, so that they will be able to avoid competition. They think that this is a safer path for them. But the thing is, being afraid of failure is not going to bring success, only a big idea will.
- Location matters. Cities have started to become startup hubs. It’s easier for a startup to grow, and attract investors in a city where you can find all the resources you can think of, from experts, to incubators. It’s also much easier to meet with them in person, and ask for their advice. You are definitely not alone in the startup world, so it’s important to learn from serial entrepreneurs, so that you avoid failing.
- A team that is not motivated, and does not have the best members . If you want a hard working team, you need to make sure they are motivated enough to help you succeed. You can’t build a business without an army behind you, as small at it may be. Also, the team you hire needs to consist of the most awesome people out there, who are willing to give the best they can.
- Running out of money. Spending too much, too soon is a mistake most entrepreneurs do. You want to make sure you have a solid business model, before you hire more people, or spend it on advertising, or even increase their salaries.
- Don’t listen to their instinct. I think that this is some great advice, which comes from Michael Lazerow. To quote him, ask yourself this: “When was the last time someone told you that they shouldn’t have listened to their gut?“.
- Failure to communicate better. As an entrepreneur, you should be able to communicate as clear as possible what your startup does, and use a language that the customer understands as well. Your message should be clear, concise and compelling.
- Lack of personal development. It’s inevitable not to get in contact with people, especially when you’re an entrepreneur. Most of them forget how important social skills are, and how far they can take you.
Of course, I did not list all the possible reasons a startup might fail, only the ones I thought were most important. Do you have any other reasons to add to the list? Please leave them in the comments. Now, let’s move on and see what the actual numbers say.
To begin this depressing part of the article, first take a look at Funders and Founders infographic. It’s kind of a downer, right?
Michael Hennigan from Finfacts says in an article that about 90% of US tech startups end up in failure, including those which were able to be funded by venture capitalists, or those that weren’t able to raise money from external sources. While VCs claim your startup is nothing without their money, statistics say the exact opposite, and that is: 3 out of 4 startups backed by VCs fail.
Failure can also have more than one meaning. When a startup fails without the investors getting their money back, the rate of failure goes up to 40% in the USA. But if failure is defined as not being able to make revenue, than the rate is close to 95%.
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According to Statistic Brain, at the beginning of 2014, numbers looked like this: after 4 years, 58% of finance insurance and real estate businesses succeed, and information based businesses have the lowest chances at 37%. By the tenth year, 71% of the businesses will have failed.
Even though in 1994 there were less startups, almost all of them managed to survive. But in the long term, the percentage is approximately the same. According to CBinsights, in 2013, 79% of the deaths were startups that were in the Internet sector, followed by mobile and telecommunications with 15%. An interesting thing CBinsights noticed is that there isn’t any particular industry in which startups fail more than in others. As sub industries, social, marketplace, and advertising, sales and marketing are on the first 3 places.
Ben Casselman, chief writer at FiveThirtyEight, noted: “Startup rates tend to be higher in the service sector than in capital-intensive industries like manufacturing, so the shift toward a service economy would, on its own, tend to increase entrepreneurship in the economy as a whole”.
Is it pointless to begin your own startup?
That being said, you might ask yourself now: why should I even bother to begin my own startup, when odds are definitely not in my favor, or for that mater, in nobody’s favor?
I could see your point here, but at least now you know what to expect. And what’s more important is that you need to thrive to anticipate what will most likely make your startup fail. Due to the lack of knowledge, experience, or research, many entrepreneurs don’t know what to expect when launching a new business.
What would your advice be for entrepreneurs that want to join the startup world?