Every company is unique.
And every failed company is as unique as the individuals who founded it.
Though most failed startups share some commonalities, pinning their lack of success on any one thing is unrealistic. Certain intangibles like a clarity of vision, the temperament of founders, and timing all influence the success of a startup.
According to the U.S. Bureau of Labor Statistics, only 50 percent of businesses make it to their fifth year. While the odds aren't as bad as that "8 out of 10 rumor" would have you believe, they're still not great.
The good news?
As a tech startup, you actually have an advantage other companies don't—transparency.
In the tech community, founders typically publish articles detailing their failures. Do a quick Google search for "Why my startup failed," and you'll find no shortage of essays.
Since learning from the business mistakes of others can significantly shorten the learning curve, and may help prevent future startup mishaps, we thought we'd assemble the common reasons that startups fail into one post.
Here, we'll discuss why every startup doesn't become an Instagram (or an insta-success), the most common reasons for failure and how to tilt the odds in your favor. Because no one actually wants to "fail fast," right?
Let's get started:
Why Startups Fail and How to Avoid These 7 Common Mishaps
1. Bad Product Market Fit
It's Business 101, right? Listen to what the market is asking for and deliver.
While no entrepreneur would deny this sage advice, a surprising number actually have trouble executing. According to a CBI Insights report, 42 percent of failed startups surveyed attributed their failure to bad market fit.
Are you solving a problem? It's at this point that smart entrepreneurs build MVPs and test their offerings.
Yet, the question remains: why do some companies move forward with products/solutions that have no market fit?
Reasons that startups do not find their product market fit:
- They were so blinded by their love for the product that they ignored contradictory data.
- They didn't drive enough traffic to prove the idea adequately.
- They miscalculated the share of the market they needed to be viable.
- They didn't communicate the value proposition clearly enough.
- They are ahead of the market by a few years.
As you can see, perfectly determining market fit isn't always easy. As such, the best thing an early entrepreneur can do is test, test, test. When you think you've proven a market need, go back and test some more!
Looking for more tech-centric startup resources? Check out The Silicon Valley Startup Guide, and find the best meetups, VCs, coworking spaces, and more for tech startups in the Bay Area.
2. Poor Business Model
Failure can often be the result of either a poorly structured business or unfortunate shortsightedness. Without taking into account things like customer lifetime value, or the cost per acquisition, a founder doesn't really know what they are getting into
But even when a startup does master the basics, there is still room for strategic error. As startup Tutorspree noted in their post-mortem post:
“Although we achieved a lot with Tutorspree, we failed to create a scalable business…Tutorspree didn’t scale because we were single channel dependent and that channel shifted on us radically and suddenly... In March 2013, Google cut the ground from under us and reduced our traffic by 80% overnight. Though we could not be 100 percent certain, the timing strongly indicated that we had been caught in the latest Panda algorithm update.”
After putting all their eggs in the SEO basket, Tutorspree scrambled to strengthen others channels of customer acquisition. Ultimately, it just wasn't enough.
The Lesson: Stay diversified and always challenge what's working.
3. Getting Out-Hustled
As a startup, you always want to be first to market. However, if you've noticed something the market really needs, chances are you're not the only one. Though that may seem like bad news, it's actually a good sign. Having competition validates that you are producing something worthwhile.
However, there's a fine balance between ignoring the competition and becoming obsessed. The smartest founders use the competition as fuel to work harder, faster, and smarter. At the end of the day, it doesn't matter who had the idea first—what matters is who best executed it.
Wesabe talked about this in their post-mortem post:
“Between the worse data aggregation method, and the much higher amount of work Wesabe made you do, it was far easier to have a good experience on Mint, and that good experience came far more quickly.”
In the scenario above, Wesabe was too slow to anticipate what the market wanted. Had they been on top of things, they may have implemented some of the user-friendly features employed by Mint and not fallen so far behind. When faced with highly similar tech products, the customer will almost always choose the one with the easier user experience.
4. Bad Pricing
The biggest error startups make when it comes to pricing is assuming that price alone drives sales. However, it's not always the case. You know what drives sales? A sales and marketing team that knows how to communicate the value of what you're really offering. Which is why filling those roles with the right individuals is so important.
With that said, it's important to think carefully about pricing upfront. Price too low and you'll go out of business from bad margins. Price too high and you'll go out of business because you don't have enough customers.
Here are some factors to evaluate:
- Your Costs: Rent, shipping, packaging, marketing—include these costs in your estimates.
- Your Revenue Target: How much money do you ultimately want to make?
- Your Customer: What is the market willing and able to pay for?
- Your Competition: How much are competitors charging? Can you justify charging more?
Ultimately, pricing should continually be reevaluated throughout the lifetime of a business. As you learn more about what the market values, you may need to lower or raise prices accordingly. Check out this article for more information on pricing.
5. Getting Distracted
The funny thing about distraction? Startup founders don't always recognize when it's happening. And that is because nearly every activity on the agenda is arguably important.
Product development, legal, payroll, networking—it's a lot for anyone to handle. Which is why not trying to do everything yourself is paramount. Unfortunately, with few resources at your disposal, it can sometimes feel like there is no other alternative.
The solution is to focus on what really matters—sales.
Once you have an MVP, your most important objective is to drive sales. This is where coworking comes in handy. You'll have someone else to pay the utilities, troubleshoot photocopiers, and keep the coffee pot full. Meanwhile, you can focus on acquiring customers and courting investors. Once you have enough capital, it's a matter of systematizing processes and delegating.
6. Poor Hiring Decisions
When your team is small, each position takes on exceptional importance. Beyond securing a CTO, to match technology to business goals, you'll undoubtedly hire other key players (i.e. sales, web development). Poor hiring decisions can refer to failing to fulfill needed positions entirely or failing to hire the right people.
Undoubtedly, it takes a special kind of person to work at a startup. Someone who genuinely enjoys having a large degree of variety, responsibility, and autonomy in a job. In essence, someone who is an entrepreneur at heart, yet committed to being part of a team.
With this in mind, it's no wonder founders report difficulty with hiring. Ben Yoskovitz of Instigator Blog, recommends hiring based on the following:
- Previous startup experience
- Previous small business experience
- Personal projects
- Foreign experience
- Social media presence
- Two years of experience
- Founder aspirations
- Creativity in applications
Where do you find these mavericks? Beyond advertising on traditional job boards, consider situating yourself in a coworking space specifically geared toward tech startups. Here you'll likely find developers, designers, project managers, and marketers working side by side. Additionally, the connections to the broader tech community you make in a tech coworking space, will provide you with leads on potential employees.
7. Not Managing Your Runway
Just because you raised a Series A round last year, doesn't mean you're in the clear. Though a few million may sound like a lot, it can drain pretty quickly if you're not careful managing it. Factor in things like product development, team salaries, and office space and that Series A begins to look a lot less impressive.
In those first few years, continued growth is vital. While Facebook can afford to drop time and money on ideas outside of their scope, newly funded startups need to focus. Yes, even profitable companies run out of capital.
Arguably, the biggest areas to curb spending are:
- Careless marketing (with no ROI measures in place)
- Unnecessary product improvements
- Cumbersome office leases
- Inefficient hiring practice
Even if you do a great job managing all of the above, you may still need more cash. Translation: learn to love fundraising.
Need help getting your pitch down? Check out our guide the 12 Things You Should Know About Raising A Seed Round.
Tilt the Odds in Your Favor
According to the Kauffman Institute, anywhere from 125 to 250 companies founded in the United States each year reach $100 million in revenues.
How can your startup become part of this group?
At a minimum, sidestep the mistakes mentioned in this article. However, to really tilt the odds in your favor, you'll want to do one thing in particular—surround yourself with the right people. Work alongside the best, become the best.
At RocketSpace, you'll find a talented community of founders, mentors, and investors to work alongside. With stringent vetting in place, we only admit startups who are building minimum viable products and scaling intelligently. Essentially, we're here to help our startups avoid as many of the aforementioned mistakes as possible.
Looking for more startup advice? Skip the hours of researching, and download our free eBook: The Silicon Valley Startup Guide, to learn more about Silicon Valley's top tech events, meetups, VCs, and more.