Building a Startup is not as easy as it looks. Even though having a good business idea and good products, many startups get failed.
Let’s talk about why Startup fails so that you can avoid failure. It is essential to know the reasons why 90% of startups get failed in their first five years.
Here are the Top 9 Reasons Why a Startup Fails-
1. Running Out of Cash
It is the first biggest top reason for Startup failure. Most startups could not survive because there is no money left to move further.
As an entrepreneur, you should know how much cash is required to run a startup smoothly and carry the Startup to a milestone where you are making a sustainable income or can raise the funding from investors.
As a CEO of the Startup, this is your job to conserve cash. Therefore, you must know when and where to spend and when not. For example- In the early stage of the Startup, while the core product is being developed, there is no point in spending money on hiring sales and Marketing people. Instead, you need to first finish the product to the level where it really meets the market need.
So, make a solid budget plan to avoid this. Try to acquire a few regular customers who are ready to pay you and focus on raising the funding at the earliest possible to give sustainable growth to the Startup. Your focus should be on acquiring more customers and retaining them.
Hundreds of Startups failed due to lack of cash and inability to raise the Follow-on funding round.
2. No Market Demand for Your Product
It is the second biggest reason for a startup to fail. Cardback, a Delhi-based Startup, was a payment recommendation platform that helps credit, debit, prepaid cardholders save decent bucks every time they pay.
It was a great startup with a great idea. But despite raising $170K funding, the Startup shut down in April 2017 due to the lack of demand in the market.
So, you should perform market research well and try your MVP before launching your full & final product in the market.
3. No Idea Validation-
Most entrepreneurs just start the startup without even validating their startup idea. It is the biggest mistake they make, and it becomes the reason for their startup failure. You should always validate your business idea.
4. Excessive Cash Burning-
Finomena, a Bengaluru-based Fintech Startup, failed and shut down its operations in Aug 2017 due to a high cash burn rate and lack of funding.
High cash burn is another biggest reason for Startup failure. Some startups burn the cash by providing excessive discounts to customers, some spend money on unnecessary marketing, and some spend on luxuries.
As an entrepreneur, you should be very careful while spending money on your startup.
5. Weak Team & Poor Leadership
It is another reason that causes Startups to fail. If a Startup has a weak Management team, then Startup tends to be shut down.
Management Team is the pillar of any startup, and only a strong team can lead a startup to success.
When the management team is not capable enough and there are incompetent people in your team, you will fail.
It’s utmost necessary that you have the people who have the skills and attitude required to build your products & services successfully.
You need a core team that shares your vision and has the skills to succeed.
6. Got Outcompeted- Intense Competition
It is very much possible that you get hit by the big players in your field who have massive funding to destroy the competitors. So despite having good products/services and business models, most of the startups are buried by the competitors.
To avoid this, you need to focus on creating your own market positioning with your USP.
7. Lack of Innovation
Many of the Founders try to copy successful Startups and companies. They think if they are successful, then they can also do this. Unfortunately, most Indian entrepreneurs are playing this copycat game.
However, there is nothing wrong with this approach because It’s not necessary that you start with a unique idea only. But the point is that you should constantly evolve your product or services.
You should create your USP and give your customers enough reason why they should buy from you rather than your competitors. Focus on innovation builds your R&D team, rather than just copying the things that your competitors or other startups are doing.
8. Not Enough Marketing-
Most new entrepreneurs think that their products or services are just fantastic and very affordable, so people will come and buy them. They think that people will recommend them, and they will get a customer with word-of-mouth publicity.
Therefore, they ignore the marketing part. Either they do not invest any money in marketing, or if they do, that is not enough to reach out to the right people.
Please understand this and keep this always in mind, no matter how good your product or services are; you need marketing to reach out to the people. Your investment in marketing is directly proportionate to the revenue you will generate. Don’t ever rely on word-of-mouth publicity.
Therefore, no marketing means no revenue. That’s it.
I am not saying that you should start burning huge amounts of money on Paid Ads. You can start with little money, and you can do this with some organic methods as well. But the point is that you have to focus on marketing.
9. No Reinvestment into the Startup-
It was one of the biggest reasons for the failure of my initial startups. I was in massive debt and had almost no money to run the family, so whatever I was making in my startups, I was not investing back in them. And that’s why there was no growth in the business.
Most entrepreneurs make this mistake; when they start making money rather than investing back in their business, they use the huge part of the revenue or profit for their personal use, they start spending and buying luxury things. They start buying stuff like expensive phones, watches, MAC Book, Cars; they start throwing destination parties to their teammates, going on luxury vacations, etc.
Please don’t make this mistake. Please understand that you need cash to grow your business at the beginning of your startup. Therefore, you need to conserve some money and should at least reinvest 60-70% of the money back into your business growth in your initial years. This percentage can be decided based on various factors, but you should reinvest back into your business to provide sustainable growth to your startup.
Above are a few of the reasons for startup failure. I have included this part just to let you know the significant reasons why a Startup failed so that you can avoid them.